Forex trading, or trading the currency markets, is potentially the most profitable type of trading you can engage in. Yet it is amazing how many people enter foreign exchange trading without any clear idea how to proceed, and then lose money and give up. Without Forex trading strategies, you will be very unlikely to be successful.
Foreign exchange trading consists of buying and selling currency “pairs”. For instance, you might open a trade to buy the USD/EUR pair because you believe the US dollar will rise against the Euro. If it rises to the level you expect, you will close the trade with more Euros for your dollar than you bought, thus making a profit. However, you must set a “stop-loss” rate, that is, specify the exchange rate at which your trade will close automatically if you are wrong and the dollar falls instead of rising. That means you lose only your margin, or your investment amount, but no more.
This is an example of the most important of the Forex trading strategies, that of money management. This means, putting limits on the risks you take. Good money management is what separates the successful from the unsuccessful trader. One of the main rules of money management is always to put stops, or stop losses, on all your trades. Another rule, equally important, is that you never risk more than 1 percent of your total equity on any trade. That means that you can be wrong 20 times and still have 80 percent of your equity left.
In fact, understanding equity is extremely important in working out your Forex trading strategies. For example, if you have an account balance of $ 100,000 and have an open position of $ 10,000, your core equity is $ 90,000.
You must always calculate your 1 percent risk on your core equity, that is, the amount you have left after opening a position so your next trade would not exceed $ 900. For this reason, you are better to diversify your trades by trading in several different currencies, because by trading only one currency pair, you generate very few entry signals. So if you decide to trade EUR/USD and GBP/USD with a $ 10,000 (1 percent risk) position, it would be safe to trade $ 5,000 in each pair. This way, you will only be risking 0.5 percent on each pair.
There are many more Forex trading strategies which you can use to optimize your profits. The idea of strategy is to set discipline and limit risk, while placing you at the most advantageous position in the market. You can succeed in Forex, as long as you use the right strategies and make the right decisions.