Forex Trading - A Basic OverviewForex trading is becoming more popular as time goes by. Perhaps you have heard of forex trading, or heard things such as "the dollar fell sharply against the yen". Not sure what all this means? The foreign currency exchange market (forex) is the largest market in the world. Much larger than the stock market! Some of the reasons for its popularity are that leverage allows maximum usage for your money, and there is very high liquidity. The forex market is also open 24 hours a day, although some hours are much better trading times than others. Forex is traded on margin. This means that you can control a large amount of money for a small bit of cash. With a 1% margin, $1000 in cash would leverage you one hundred thousand in the forex market trading. What this basically means is that your rate of return (or ROI) is going to be 100% for each percentage change upwards. Of course, this means that your loss would be equally as great if the market went against you. Forex trades are always done in pairs. You always purchase one currency at the same time as you sell another. While there are many pairs in the forex market, there are really four major currency pairs: USD/JPY, USD/GBP, GBP/USD and USD/CHF. These pairs see the most market activity. There are two types of forex traders, those that are technical traders, and those that are fundamental traders. Technical traders base their trades on a lot of different statistics and parameters. Viewing past patterns the currencies form will give a technical traders strategies on which pairs to buy or sell. Technical traders don't necessarily take news into consideration, and often don't trade during big news breaks. Fundamental traders work only with news. They have a calendar marked with big market news days, such as job numbers, consumer confidence, retail sales, etc. They then plan their strategy to buy and sell based on what those numbers are predicted to be. Common Mistakes In Forex TradingWhen you view the statistics of successful forex trading, it can be pretty depressing. Stats show that only 95% of forex traders are making any money. With so many trading forex, why is this? Here is a look at common mistakes newer (and some seasoned) forex traders make that cause them to lose money.
1. Get Rich Quick mentality. You have probably seen the late night infomercials about how easy and profitable it is to trade forex. Well, it is easy to actually trade, but difficult to trade well. Opening an funding an account can take as little as 24 hours and you can be up and trading. People will open up a broker account, fund it and start trading without knowing what they are doing.
A good course of study on the currency pairs and how they tend to work with each other is a must before you start any live trading. You must be educated in forex to trade profitably. You can't just go on gut feeling. Forex trading should be done for the long haul. You are going to have those months where you are not in the positive, but a good trader will have more positive months than negative ones
2. Trading for the wrong reasons. Yes, there is a high associated with making a huge profit from one trade. However, do not treat forex trading like a day at the race track. You should not trade for the excitement of trading. Not to mention that there is a lot of time to be spent just waiting for the correct trade to come along. Also, don't start forex trading because you think it only requires a few minutes a day to make money. Even if you are scalping the market (making small quick trades), it takes time for those trades to develop and some days are just bad days to be sitting there waiting.
3. Not using a stop loss. This is where emotion comes into play. You should have a clear exit strategy when you enter a trade. Decide how many pips you are looking for and what your loss limit will be. If it is 50 pips, set your stop loss so that you are automatically triggered out of the trade when tmany pips are lost. It is too easy for a novice trader to say "Well, it has to start coming back soon, I'll just wait a few more pips" and then end up getting a margin call because they are now down 250 pips waiting for the trade to turn around. Be disciplined and set those stop loss targets. There are always going to be new trades happening.
4. Jumping from strategy to strategy. Strategies take time to develop and time to personalize to your own trading style. That is why a demo account is important to practice. Once you have learned your strategy and how to adapt it to changing conditions - stick with it! New traders will sometimes bounce from one person's strategy to another, without giving any of them a chance to develop. One bad trade does not a bad strategy make.