Trading Forex (also known as foreign exchange trading) is an exciting way to make heaps of money, however with all business opportunities only some people are successful. Today there are many good trading systems being offered online, so why isn't every one making heaps of money. The answer is simple, there is more to trading than placing a trade. I have researched the different behaviour of those who have maintained a successful trading career and those who have similar trading systems but have not been able to sustain a trading business and have written down tips and strategies that will help you take your trading to the next level.
Foreign Exchange Online Trading Tip 1.
The Real Cost of Foreign Currency Exchange Trading.
All Brokers will advertise a "no commission" policy, however it is important to understand the costs of trading. The Brokers are there to make money and they want your business, accordingly they will try to attract you with their advertising.
The way the prices are quoted shows 2 prices, for example EUR/USD 1.3800/5. This means the bid price (what you get selling) is 1.3800 and the ask price (what you pay) is 1.3805. The difference between the two prices is known as the Spread and this is what the Brokers charge for every trade. Before signing up with a Broker I would check out what spreads he is offering.
The points to note are that the size of your account could affect the spread, for instance a full account trading lots of 100,000 will usually have a smaller spread than a mini account. The 2nd point is that different currency pairings also have different spreads. The more popular EUR/USD, and GBP/ USD often attract a smaller spread of 2 or 3 pips, other pairings might have a spread of 5 pips. 5 pips as a cost does not sound very high if you are trading a mini account with a pip being worth around $1 however if you are leveraging a full account your cost could be $40.00. per trade.
You will be tempted to enter 4 to 10 trades per day if you are looking at very short trading times. Multiply this out and your costs are $3,500 to $8,800 per month. The way to avoid this cost is to be more selective about your trades, in other words trade less often and remember if your stop loss is very close to your entry you run the risk of being stopped out (losing) your trade even if there is a small dip in the trend you are trading with before it goes your way.
If you place frequent trades always factor the spread into your accounting. An unexpected high deficit from your Broker will be an unpleasant surprise.
Foreign Exchange Online Trading Tip 2.
Using Leverage when Foreign currency exchange Trading.
Leverage is always expressed as a positive for the Forex trader and used correctly it can help you make large amounts of money, used incorrectly you can lose your capital very quickly.
Brokers will offer a wide range of leverage ranging from 3:1 to 400:1. When deciding on your Broker make sure you have arranged for leverage that you are comfortable with.
Basically the Broker gives you a loan to enable you to control a much larger trade than your capital. An example of leverage of 1:100 means you need $1000 to control $100,000. Your $1000 is called a margin and normally if the trade goes the wrong way the Broker will close the trade once your $1000 is lost. This is very important and you must understand what your specific Broker will do. The amount of your margin should be the maximum you can lose.
When using leverage the pip value is increased therefore the spread (cost of your trade) goes up as that is also measured in pips. Leverage totally changes the affect the price changes have on your account.
Leverage totally changes the affect the price changes have on your account.
Example: 100:1 leverage means 1% price change in the market means a 100% price change in your account.
Leverage must be understood before you use it.
No matter what system you use you will have losing trades, all successful traders do, however before you chose a system check below for a proven successful system.
