Forex is different from trading stocks, but the benefits and risks are similar

The Forex markets are quite different from the stock markets largely because the price behavior of the Forex pairs is different and entails abrupt price swings. This means traders should utilize trading methods different from those that are used to trade or select stocks so that traders may fully realize the profit potential Forex offers while still minimizing risk.

Both Forex and stocks, however, are similar in that they develop repeatable price trends that give traders enormous profit opportunities for those traders with strong trading methods, disciplined trading mindsets and sound money management tactics.

One of the reasons Forex has gained in popularity is the concept of Leverage, which allows traders to take Forex positions with a much smaller account size than would be required for trading stocks, and because the margin requirements for Forex are smaller than they are for stocks. This increases the reward ratio for profitable trades, but it also increases the risk.

For example, most brokers offer at least 100:1 leverage, which is more than enough to generate significant profits while maintaining sound risk management. Other brokers will offer up to 400:1 leverage — but the risk reward ratio is not in the trader’s favor with this type of leverage.

Leverage, combined with reduced margin requirements and high profit potential are the real driving forces of the expanding Forex trading market.

When first learning to trade Forex, you should focus on the best Forex pairs for trading. By best, we mean those pairs that are widely traded, have the most liquid markets and have sufficient price movements (or, volatility) to be worth trading. The following pairs are consistently recommended as best for trading in the Forex markets for meeting these requirements:

- EUR/USD (Euro/US Dollar)

- GBP/USD (British Pound/US Dollar)

- USD/JPY (US Dollar/Japanese Yen)

- USD/CHF (US Dollar/Swiss Franc)

- USD/CAD (US Dollar/Canadian Dollar)

- AUS/USD (Australian Dollar/US Dollar)

By limiting yourself to these pairs you can: reduce the amount of time spent searching for potential trades; locate stronger and better trends developing among fewer pairs; and, make it easier to get into and out of a trade quickly.

You can go a step further, as well, and limit yourself to the two most liquid and widely traded pairs: EUR/USD and GBP/USD.

There are several different order types you should understand in order to trade Forex.

Market Order: This order type is used to enter or exit the market immediately at the current quoted price. If you want to buy you will be filled at the ask price; if you want to sell, you will be filled at the bid price.

Limit Order: This order type is used to buy or sell a pair at a predetermined price. A buy limit order will only be filled if the market trades at or below the limit price you determine. A sell limit order will only be filled if the market trades at or above the limit price.

Stop Order: This order type is used to buy or sell a pair at a predetermined price. A buy stop order will only be filled if the market trades at or above the stop price. A sell stop order will only be filled if the market trades at or below the stop price.

Here’s a classic trade eventuality :

let’s assume the current bid/ask quote for the EUR/USD is 1.3802/05 and you would like to take a long position as you assume the EU Buck will gain on the Dollar.

We’ll also say that you are only purchasing one Standard Lot.

When you purchase this pair, you are actually buying 100,000 Euros for $138,050 US greenbacks. Using leverage, at 100:1, you would need to have an initial margin deposit of $1,381 for this trade to happen.

Let us then presume that the EU Dollar indeed gains on the Dollar and trades now at 1.3865/68 and you decide to sell and take your profits. You would sell you 1 Standard Lot at a profit of sixty pips ( 1.3865-1.3805 ).

When you sell this pair, you are selling 100,000 Euros for $138,650 US greenbacks. Since you purchased the 100,000 Euros for $138,050 and sold them for $138,650, you made a money profit of $600.

If on the other hand the Euro went down to 1.3775/78 and you sold at 1.3775, you would have a loss of thirty pips, or $300. ( $138,050-$137,750 ).

When using margin and leverage, it is important that you employ sound risk management rules to make sure that your account equity never falls below margin necessities – if it does, your position will be automatically liquidated and you may maintain a important loss.

Have I got to day trade forex is one of the most common questions asked about trading the foreign exchange markets. Day trading forex is very widespread but the general public can’t commit the time to day trading as it requires that you watch the markets on a to-the-minute basis. Another approach , however , is trade the forex on an end-of-day basis.

Trading from this premise will need significantly less time, impose less stress and provide profit potential no different than day trading. You will need to identify a good trading technique which is especially designed for end-of-day trading as many of the guidelines ruling day trading will not necessarily be applicable to end-of-day trading methods, or they will differ in unique ways.

Traders, especially those that are new to foreign exchange, should recognize that if you can’t earn money trading forex on an end-of-day basis you’ll not fare any better in a day trading environment. This is due to the time pressures wanted to make instant decisions on order entry, immediate placement of stop orders and profit targets – all of which are very stressed and demanding.

If you consider any of the 6 majoy pairs and look at long term charts of each pair, you’ll obviously be able to identify long-term trends which might have generated heavy profit over time . Day traders need to make fast, little profits ; end-of-day traders can have the patience to take longer, bigger profits.

So don’t believe that the only real way to trade foreign exchange is in a day trading environment. You can do as well or better trading foreign exchange on an end-of-day basis.

One of the questions I am frequently asked is what constitutes a good trading methodology. In this post, I’ll show you what most techniques look like ( and why they are bad ) and show you a simple way to evaluate a trading method.

If you take a detailed look at the majority of the so-called forex trading strategies and systems on the market, they constantly share identical lacks :

- They are incomplete. Too many courses teach hours of ‘in theory’ – but spend small to no time teaching a step-by-step plan to help trade.

- they don’t include risk management. This is the number one mistake most traders make – not handling risk in their trades. If the system or method you are considering doesn’t teach risk management consistent with their technique, you would do well to run away from it.

- They focus strictly on fundamental research. Methods that focus only on fundamental analysis are incredibly time consuming and subjective and require much deeper understanding of more complex economic and financial issues. If you don’t understand them, you will not succeed with such methods.

- They need you to’day trade’. Lots of the methods and systems I’ve seen require you to be in front of your personal computer nearly 24/7 to be in a position to ‘react’. Reality should tell you how most unlikely this is.

what is a’good’ method?

based mostly on the methods and systems I’ve seen over the last many years, I’ve created a simple 4-part measurement that I use to determine if a trading method is good for me :

- the strategy must be complete and teach the setup conditions, entry rules, initial stop rules and exit system rules while leaving no decision to chance.

- the strategy must teach and include express guiding principles for risk management and money management as per its methodology.

- The technique must utilise technical research, but it may not be a completely mechanical or mechanical system.

- the method must be practical in terms of time expended applying it : I favor strategies that only require 20-40 minutes a day.

The steps above have helped enormously in removing the ‘pretenders’ among trading techniques and focusing only on the ‘contenders’. Methods which provide thorough clarification of the simple way to apply, protect and trade the methods are the sole types you must use in your trading.

Foreign exchange traders have today a plethora of info from which to evaluate and select potential trades. These markets are moved by 2 first forces : fundamental forces ( balance of trade information, money supply, rates, financial and economic reports, for example. ) and Technical forces.

While many traders advocate elemental analysis-based trading, it should be debated that this style of trading is very tough particularly for folks who have little time to trade ( less than an hour a day ), or who are new to trading foreign exchange.

fundamental research traders tend to be ‘always on’ – or, day trading as it requires PRECISE timing to move with the markets. If you can’t get to your trading platform the minute a ’surprise’ report hits the newswire, you will be too far behind the action to reply to it.

that is due to the fact that the markets are always taking in new financial and economic information from around the planet – and they are continuously reacting to it to the minute.

Trading on fundamental analysis means understanding the underlying data is not important – what’s critical is the market’s reaction to that information. Remember that most basic information is ‘projected’ – the actual release of basic reports only acts to approve or change those projections. Therefore the ‘timing’ of fundamental criteria if of larger significance and leads to shorter term profits or loss due to the swing in market reaction.

Trading on Technical analysis , however , gives you maneuverability in the markets. Technical analysis is intended to reflect fundamental criteria in this market price – put simply, the market is doing the basic work for you. What you do is riding a trend based on the trend meeting certain standards ( known as conditions ).

Technical analysis will enable you to spot, confirm and enter a trend with sufficient time in the trend to generate profit potential. Technical Analysis will also identify, confirm and help you exit a trend which has completed. In every case, the action of the price in the currency exchange markets will dictate what moves you’ll make.

so, employing a good trading methodology based on technical analysis is a less demanding way to trade forex with far greater odds of success.

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Did you know there are currently more than a hundred technical indicators that you can use when trading Forex? Most charting software programs and packages available will supply all these indicators to you – but the most unusual question is always : which ones should I use?

there is no sorcery in technical indicators in and of themselves as they each can tell you something about the market’s behavior at any given time. Nor is it true that any one indicator is much better than another.

What is prime to using technical indicators successfully is to choose just a couple of that complement one another and use them in an atypical manner along with powerful trading tactics.

Most trading strategies share the technical indicators they utilise for identifying potential trades – the secret to being successful with these indicators is to understand their application and their impact on the choice of trade.

The disposition for many newbie traders , however , is to over-complicate this process. They need to use too many indicators or patters, and they believe that success is reliant upon something being highly complex. Nothing may be futher from the truth – in truth, simple is better :

one. Using too many or the incorrect indicators is counterproductive, as the data that those indicators provide is counterintuitive and just plain fooling.

2. Using a few easy indicators in a uniquely powerful way can provide the

right information obligatory to make good trading choices.

3. With the right indicators and patterns, you will be much more likely to trade with discipline because you will be ready to understand an objective set of rules that the right indicators and patterns can supply.

briefly you are best of keeping it easy and using a smaller set of indicators to spot the absolute best trades – and avoid making ‘complexity’ a qualifier for judging whether a method will work or not. You will likely find that the faster the method, the more successful you will be with it.

If you need to become a Forex Trader, select one of these mindsets.

The Independent trader or the Dependent trader

Which type of trader you are will drastically affect the potential money you can make in the markets. In fact, it may well determine what the remainder of your life will look like, if it is how long you work for someone else, when and where you vacation, or where and how you live.

you may think that is’s an exaggeration, but the reality is those who take initiative can definitely affect the result of their lives ( and their trading ) versus those that let others determine the course of their lives for them.

it is critical to note that anything requiring little to no effort will produce limited, temporary or no results. Inversely, anything requiring you to think and act for yourself will produce lasting and lasting results.

Trading, whether forex, stocks, or other markets, particularly proves this true. Returning to the 2 kinds of traders, they illustrate very common mindsets – which one represents you?

The Dependent trader is looking for the easy way, wants to make a fast buck, or make it big – but never wants to put any effort into the process of achieving such things ( if such things even exist, and it should be contended that they do not ).

Dependent traders will follow the crowd, trade based on hot tips, seek out automated ‘millionaire-making’ trading programs, hear all the reports professionals and blindly place ‘can’t lose’ trades ( which do lose ), all with no plan, no thought and no understanding of what they’re doing.

Naturally they will become frustrated with their losses and mess ups and do the single thing they can think to do : they give up.

Dependent traders are the trading equivalent of lottery ticket buyers ; they know full well the chances stacked against them, but they believe anybody can get lucky, so why not them?

of course, Dependent traders exert small control over their lives and have little chance for finance success.

On the other end of the spectrum is the Independent trader. This trader wants to have control over their financial future and has learned ( or will learn ) how the markets work, which approaches to trading the markets truly work, and the easiest way to sanction themselves to trade without relying on others for advice or tips or stories.

An Independent trader understands and believes that only they can maximise their chances for success and only they can achieve their monetary and life dreams. They will search out and learn from others, educate themselves, learn from failure and attempt to accomplish bigger things.

It should be observed , however , that everyone has a little bit of the Dependent trader in them at some point. The difference being, the person on track to become Independent may take up with a mentor or lean on a reliable education source at the outset – but as their information grows, the Independent trader will start to apply what they’ve learned completely on their own.

The Dependent trader never will .

three straightforward steps to becoming an Independent Trader :

Step One : Create and execute a trading plan. Whether you want to day trade or trade at the end of hte day, or once a week – decide what fits BEST in your daily plan and then determine what sources form two and three below best align with your intention. Don’t try and apply day trading methodologies to end of day trading and vice versa, as you will probably discover they don’t and will not work.

Step Two : seek out 2-3 reputable education sources. We will provide some to you – but the goal is to spot one that you can understand and trust. Learn all you can from those sources. Then, learn how to use it on your own.

Step three : Learn from and test out multiple methods for trading. You are unlikely to be successful wihtout some foundation in trading methodologies, particularly when employing technical or basic indicators.

The steps above will require time and cash investment.You should consider them your trading education costs – it is way better to invest in yourself than to lose money too simply in the market.