The most common question we receive from new players in the Forex market is how can they be profitable in this volatile and often unpredictable markets? My answer is that when it comes to trade, there is no absolute certainty, but you should try and focus is the long-term performance of their accounts. Trying to make a fortune in currency trading in a couple of weeks or months the use of high leverage is a recipe for disaster and almost certainly will end up with zero in the capital account. Of being profitable in the long term it is much easier than a lot of traders are disappointed, but to enter into a cost effective way they have to first accept and follow some simple rules.
1. Excessive leverage is your worst enemy
The introduction of currency trading to retail customers in the last decade, has taken the concept of leverage (or margin) to a new level. Unfortunately this new level is not good for customers. To protect retail customers from U.S. authorities already moved and limit the influence of retail accounts to 50:1, which we think is still too high! Based on our experience of 11 years have identified a clear inverse relationship between leverage and performance of individual accounts. That is, the higher the leverage used, the lower average yield (Figure 1).
This relationship is no guarantee that if someone uses 1:1 leverage will certainly be profitable, but more importantly, shows that the offers above 1:100 is almost a certainty of negative statements. It also shows that the lower level of leverage (we recommend our customers to 1:20) that are much more likely to be profitable. And the reason why this relationship is so strong is the simple fact. And is not due to volatility. The Forex traders who complain of volatility should take a look at the markets. The major currency pairs average daily turnover is 1% per day, while in other financial markets day moving average of 5-10% are not a big surprise. What really amplifies the daily currency volatility is excessive leverage. No dealer and no system in the world can always be
do well and we all losing trades. Sometimes something unexpected happens, it comes out or they just have the wrong idea. This is a fact of life as soon as possible the merchants and the merchant accepts it, the better your chances of being profitable in the long term. At 1:500 leverage, incorrectly called a potential of only 0.2% smaller end the entire capital account in the blink of an eye. Think about it …
2. And his best friends are:
Once you have the enemy ugly form, it is good to know there are some good friends that can be used to guide a long-term profitable performance. Through our experience we have seen and tried lots of different complex strategies, fundamental techniques and technical analysis. What we propose here, however, is about simple rules of thumb to apply your forex trading.
Identify market opportunities
Halting the loss
The trend: Well contrary to what traders say the trend is still our best friend. Being trend
fans for a long time, we have thoroughly tested this theory and found that, on an equal footing, following the trend will produce positive results. The trick here is to be able to identify a trend or a reversal of a trend. Technical analysis is very clear and simple definition of a trend (2 consecutive upper / lower high / low) and investment patterns of the trend (head and shoulders, double or triple tops / etc background), while some significant moving averages are also very useful. Note that attempting to identify investment before it happens can be very painful and often will result in a considerable loss of capital.
Justification: There must be a reason you decide to go long or short. If this is fundamental to or technique (which prefer to use both) inclusion is good enough as long as there is a reason. Often retailers are moving into a position of boredom or just to feel the thrill of being long or short. This is also a recipe for disaster! Always buy or sell any pair of a reason that makes sense for you. You must remember that what creates trends, reversals or ranges is an underlying story and focus on news about this story is going to enforce or change history. For example, in 2010 we had three main stories. First came the Greek debt crisis that took EUR / USD from 1.5100 to 1.1900, then QE2 had a backup of EUR / USD 1.4300 and ultimately the Irish crisis that has crashed the pair back to 1.2900 in less than a month. Try to avoid trading if you have a view on the market.
Identify market opportunities, market opportunities are almost every day and be able to identify these opportunities can lead to very good results. Again we emphasize that markets often follow an important story. Whether it’s a major crisis, more QE or expected increases / decreases in interest rates that does not really matter as long as you know where they are concentrated. However, you should also realize that markets never move in straight lines and corrections can occur at any time. These corrections happen either by position in the market (overbought or oversold), or because of minor news, meet and cause a reverse movement of the underlying trend. Being able to identify market developments and trade in them must be very profitable in the long term.
Experience: The majority of new market entrants are eager to prove themselves in the short term. They have the illusion that it can be profitable and make a fortune in the coming months, but soon end up with a bad psychology that ultimately accelerates their pattern of losing. Because the currency is by its very nature a very dynamic market, based on their experience and learn from their mistakes and success is crucial. Experience will help you identify market opportunities and learn to react to unexpected market movements before it’s too late. Experience will teach you to see the market chances and realize that when it comes to trade there is no absolute certainty. Experience will help you manage your emotions in negotiation and know that a situation is never black or white, but more or less gray. Through experience you learn to focus on the long term and avoid extreme mental states such as euphoria, anger and disappointment can be very detrimental in the performance of your business.
Forex News: We always advise our clients gain a basic understanding of forex market and what influences the prices of different currency pairs before they start trading. market news is a big influence along with technical analysis. Therefore, it is very important to follow the market news and news of forthcoming that could influence prices in the face of the publication of actual data. Check the weekly calendar of events and expectations of the market is very useful. Also choosing a provider that has a package of good and reliable news will certainly help improve their business performance. Try to focus on the history of the main market and events affecting the story.
Discipline: The forex traders the most successful that I know are people known for their humility and discipline. In order to acquire the discipline must develop a negotiating strategy or plan and stick to it. This plan should be very specific about what instruments to trade, why buy or sell, what is your business purpose (reason), when and how often you trade and what is your stop-loss. Most importantly, your business plan should include a policy good money management. For this it is necessary to determine the amount of capital you have to deposit in your account and then determine how much risk you are willing to take on each trade. A common mistake among inexperienced traders are taking their early gains, while letting his losses run in hopes that the market will come back. To avoid this, the risk / reward ratio (percentage of average profit per transaction compared with the average loss per transaction) should ideally always positive. Finally, the discipline required to have an adequate record of their trade the past results in order to recognize past mistakes or deviations from your plan and avoid in the future.
Stop loss: How can you lose money be your friend? Oddly enough, the stop loss is probably your best friend in forex trading. Nobody likes losing money, but losing $ 5000 is much better than losing $ 10,000. In fact one of the biggest advantages of the Forex market is that you can have a stop loss almost guaranteed. To define its policy of “stop loss” suggests a more educated approach. In fact, this is the professional approach we use in our treasure. First, the levels of stop loss should be based on their net worth rather than its open position. You must then start from the long-term move toward shorter periods of time ie to stop the loss for the year, month and day. For example, someone goes public with a capital of $ 50,000, you must first decide what the worst is willing to accept his interpretation of annual trade. Assuming you can accept losing 30%, then it is easy to define the stop losses daily and monthly as well. Following that example, 30%, 10%, 3%, the monthly loss, daily unemployment will result in a loss of $ 15,000, $ 5,000, $ 1,500 is acceptable to the respective periods. Once you’ve set your stop loss levels THEN open position must be based on their stop-loss. This is very important and is again a common mistake among new entrants. Most new traders think your stop loss based on its open position (for example, are willing to lose 100 points in each operation). This is incorrect and should be avoided. Instead, the open position should be adjusted accordingly based on your daily / monthly / annual stop loss levels. All levels must strictly follow in order to achieve a profitable long-term performance. Moreover, placing the stop loss at the time of open trade is essential, as it will help build discipline and learn that sometimes they are wrong.