You learn by doing. With forex trading, that doesn't suggest that you should unload your savings account and have at it. On the opposite, the foreign exchange market has very little mercy for careless beginners. On the other hand, you can't learn to swim without getting wet, so you do have to really trade currencies if you want to develop into a prosperous currency trader (if this doesn't make sense to you, now would be the best time to find something less difficult). But nowadays, thanks to micro lots, a couple of hundred bucks will be enough, as opposed to the couple of thousand (or more) that used to be required as minimal trading capital.
Now, even though you can usually be that lucky beginner, bear in mind that starting a GBP/USD position using 400:1 leverage is not the same as buying 100 Apple shares. Betting on the forex while using leverage is fast, dynamic and fluid. It can be extremely profitable, but also unprofitable and high-risk. More knowledgeable forex traders often take advantage of the mistakes of beginning traders, like placing stop losses and profit goals at apparent price points, or buying into short covering rallies. And because you essentially trade against one another on the forex just like in a poker match the losers pay the winners. The bank the casino as they say is only a go-between.
Extra: the truth is it is more complex, simply because banks also trade for their own account, something known as ‘proprietary trading'. However, this is being limited increasingly more by governments especially when followed by commercial banking functions. This because the financial crisis of 2008 demonstrated (again) how dangerous it can be when major banks regularly trade for their own account with their customers' money.
Is it feasible to make it big as a forex trader? Yes, certainly. Smart, talented traders can obtain a small fortune in a relative small amount of time, starting out with a relatively little trading capital. But you won't turn into one of them by jumping into the deep end green as grass and spending more money than you can manage to pay for to lose. So start small and grow big, instead of starting big and ending small.
Required Trading Capital
The amount of trading capital you will need to trade on the forex depends on your goal(s).
When you're a newbie and just want to try out regardless of whether currency trading is for you, you won't need more than $200. If you make use of that to open a micro account with a forex broker, you can trade in micro lot positions of 1,000 units (1pip = 10 dollar cent) and have a buffer of 2,000 pips. That would even be adequate for conventional money management (more about this later) and more than enough to let you to trade a while and learn from your errors.
If you want to honestly research whether you could survive off trading the forex, $200 in trading capital would be sufficient to test out if you have it in you to learn to trade profitably and routinely. A buffer of 2,000 pips at the lowest level would be enough for most methods to survive the swings. (obviously, the smaller your trading capital, the smaller your profits in absolute numbers; So don't assume that $200 to be producing enough cash flow after three months for you to quit your day job).
Numerous starting traders lose their first trading capital. There are many reasons for this. For one, finding a trading strategy that fits you takes time and money, as will understanding to protect your capital via adequate risk management. And then there are the numerous psychological pitfalls that occur with trading in a fast and fascinating financial market. You will have to learn to deal with the dissatisfaction of seeing once promising positions tank, from time to time one after the other. You'll have to obtain the discipline needed to put a stop to on your own when your mental side is counseling you to place on more risk to quickly get rid of earlier losses. Not everybody has what it takes a figuring out, rational character, particularly under fire to become a productive forex trader.
It is important to recognize beforehand that learning to become a persistently lucrative trader will take time, money and a bit of perseverance . So don't jump into the deep end right away with money you can't lose, nor should you stop trying when your first try fails and you lose your first $200.
Obviously you are unable to live off trading the forex with a trading capital of $200. However really, as a starting trader, it will do you very little good contemplating about the quantity of trading capital you'd have to have to survive as a full-time trader.
A question that, as it stands, has no simple solution, because it is dependent on a number of elements, such as what trading method you make use of, how much your monthly income should be and how much you'd need in your trading account to make you feel comfortable about your trading buffer.
Consequently, you should first take the time to find out if you can turn a profit at all, over a extended period of time.
So get started with a trading capital of between $200 $1,000, trade in moderate lot sizes and be certain to protect your risk when opening each position (by setting a stop loss) and by giving yourself some time to study from your (inevitable) errors.
Choosing The Right Forex Broker
Trading currencies is an active form of forecasting. Even traders with a trading horizon of weeks or perhaps months regularly check and modify their positions, expanding some while winding others down, opening positions on other currency pairs , etc. So you'll most probably interact more with the trading platform offered / used by your forex broker than with the online trading providers you use to make investments in stock.
Because you'll most probably use it more intensively, the look & feel of the trading program is crucial, as is the excellent quality of the customer help offered by the broker. Is there only email / live chat, or also telephone support? 24/5 or 24/7? And how customer friendly are the customer help associates? These might seem unimportant points now, but wait till you have a issue opening your account, or anything went wrong with a withdrawal. These things come up, it's how your broker works with them that makes the huge difference.
If you use an Apple laptop or computer, make certain the trading software program the broker offers works with iOS. Even if it doesn't, there are techniques around it, but it's a lot more hassle-free if the broker also gives a web trader (which is java based).
Another thing to think about is the managing financial authority. A broker that is controlled by the British FSA or German BaFin instills a little more guarantee than one controlled by the financial watchdog of Panama or Mauritius (if regulated at all). An unregulated broker isn't immediately a terrible broker, but it's definitely an advantage when the broker is regulated by an impartial financial authority of a country with a wonderful name in the financial community.
On forexbonus.xyz you can find a evaluation of the most valuable brokers.
Demo Account Or Real Account?
The answer to this question is easy: you need the two of those. There is simply one main distinction between a demo account and a real account: money. The demo account only utilizes play money, whereas the real account is for trading with real money.
It's not possible to learn to trade viably entirely through trading on a demo account. That has almost everything to do with the psychological part of trading. How do you react under stress, what do you do when the position turns against you when it was so near to the profit target you had placed in moments just before? Do you close the position right away? And when the value is close to your stop loss? Do you shift the stop loss? How do you start your trading day after having been stopped out for three days back to back on a lot more than 70% of your positions, when usually only 30% of your trades are losers?
These are only a few of the situations you will deal with as a trader. Situations you will experience very differently when it entails actual money as opposed to play money. Just as you can't learn to surf on sand, or play poker with matches (except each match is valued at $100) you can't become a lucrative forex trader by trading for play money either.
That being said, a demo account can unquestionably help you get the hang of a completely new trading system, or to test out fresh trading techniques. When testing a new strategy, the fact that you're not trading for actual money is a big advantage, because it enables you to test a system under perfect conditions, without any stress clouding your reasoning.
Opening Your First Position
Ok, given you have not done so already, let's just open our first position right this moment. Select a broker to your liking on www.forexbonus.xyz and open a demo account. Or, if you would like to start off a little more considerable right away, open a real account and put in something like $200.
Now, suppose you think the price of the euro is going to drop against the dollar. Maybe there's been some unfavorable news about German employment, after which you looked at the EUR/USD candlestick chart and saw a clear downtrending pattern.
You sign in to your broker's trading platform, be it from your desktop, via the web trader, or through a mobile app on your smartphone or tablet, you look for the currency pair EUR/USD and click ‘sell'. Next, you'll have to designate your sell order and that's important, because it allows you to limit your risk and figure out a profit target.
The rate of the EUR/USD can quickly travel 100 pips in either course on any given day (remember, a pip is the smallest feasible price change, in this case the fourth number behind the comma). Now, due to the fact you don't want to get any awful surprises, you're putting in a stop loss.
At the moment, the EUR/USD is at $1,4215. After researching the candlestick chart earlier, you came to the conclusion that should the pair break $1,4250, possibilities are that it would increase further. You put your stop loss therefore at $1,4260. So should the EUR/USD reach a price of $1,4260, your position would be immediately closed, putting your maximum potential reduction at 45 pips. How much money that is, will depend on on the size of the position.
Because you have no experience yet trading the forex, you choose to open only one micro lot position (1,000 units, 1 pip is 10 dollar cent). Your maximum loss in this situation would be 45 x 10 dollar cent + spread of 3 pips = $4,8.
Using 400:1 leverage, you'd need a minimum of $2,5 in your account to open up one micro lot position of 1,000 units. The price could then switch 25 pips against your position before it would be closed down automatically.
However, in this case you elect to give your position a little more breathing room, so you hold $4,5. The spread, billed by the broker for opening the position, is taken off from your account right away, but profits will only be placed into your account the moment the position is closed.
Since you don't anticipate the EUR/USD to fall more than $1,4000, you put the profit target at $1,4005. As said, putting in a profit target is not as important as putting in a stop loss, but it can aid you plan your trade, stopping you from getting out too soon; or too late. Beginners are strongly suggested to put in a profit target in addition to a stop loss. Profit targets and stop losses are not just used by beginners though, many experienced traders also make use of them. Apart from behaving as a guard against emotional choices made during the trade, they're also very useful when for some factor (earthquake, internet down, being on a hot date) you can't close the position personally.
You're jeopardizing 45 pips to win 210 pips. Even if the trade would only be successful 25% of the time, you'd still convert a nice profit. Watch. You would lose 135 pips (3 x 45) and win 210 pips (1 x 210), for a gross profit of 75 pips. After deducting 4 x 3 pips for the spread, your net profit would turn out at 63 pips over 4 trades. Not terrible at all.
Pleased with the way you've build the trade, you hit ‘submit'/'open'/'Geronimooooo!' and the position is open. You're now legally a forex trader!
The benefits of money management is often undervalued by forex traders. A lot of time is dedicated to searching for and adjusting the ultimate trading strategy, but the issue of how best to handle the available trading capital is often overlooked. The same will go for the psychology guiding trading in the financial markets by the way. We will take a better look at this later on.
Money management or rather, the lack thereof is one of the most crucial reasons so many starting traders lose their trading capital quicker than they can say poopty peupty pants. They become frustrated and stop trading altogether. Trust me, jumping in the deep end straight away, depositing $2,000 and risking $200 per trade will get you no where fast.
Rule number 1: Survive
Whether you're a starting or seasoned trader, your most important objective is to stay in the game (well, your most important objective after making money that is). Losing trades are unavoidable, but when you go broke you rob yourself of the possibility to offset those losses with profitable trades.
It's therefore important to find out what percentage of your trades is lucrative and what your typical risk / reward ratio is per trade (how many pips do you risk to make x pips in profit). According to this you'd get an indicator of how much you can risk per trade and what your Expected Value (EV) per trade is.
Suppose 1 in 4 of your trades is profitable and you possess a risk / reward ratio per trade of 1:5, which means that on average you risk 1 pip to win 5 pips.
Let's also assume that, on average, you risk 40 pips per position, which, checking at your risk / reward ratio of 1:5, means you stand to gain 200 pips on your winning trades.
Because only 1 in 4 of your trades is profitable, you'll lose 3 x 40 pips, while winning 1 x 200 pips; on average. This would make your total profit 80 pips over 4 trades. After subtracting 4 x 3 pips for the spread your net profit would be 68 pips. Your Expected Value is consequently 68 / 4 = 17 pips per trade.
The great news is that you're trading strategy is EV+. The negative news…well there isn't really any negative news, as long as you recognize that the profitability of 1 in 4 trades is just an average; you can very easily do much worse over longer periods of time (or better). You should as a result have a healthy buffer in your trading money.
A good rule of thumb is to have at least 10 times the capital needed to create one winner. Following the above illustration, you would need a trading capital adequate for 40 trades. (because, on average, you will need to do 4 trades to generate one winner).
Now, certainly you won't know from the get go how many of your trades will be winners, so the wise thing to do would be to have sufficient capital for a minimum of about 40, 50 trades. Presuming each trade would be the volume of a micro lot position (1 pip = 10 dollar cent) and needed breathing room of about 50 pips, then a single trade
would need $5 in capital. (50 pips times 10 cent). So, to be able to have enough capital for 50 trades, you'd want 50 x $5 = $250.
Another, often used rule of thumb is to never risk more than 2,5% of your capital per trade. You don't need to follow this rule consistently that would mean you'd have to recalculate after every trade how many pips you can risk but it's smart to keep it in the back of your head.
What Is A Realistic Return On Investment
The question about a practical Return On Investment (ROI) for forex trading is regularly asked, but sadly it does not have a straightforward answer. Regularly, the number 35%( for annual ROI) comes up. But although this would not be a bad return on investment at all (the common return on investment on the stock market over a 30 year time period is anywhere between 8% 12% annually) it's entirely pulled out of a hat.
Annual ROI the value an investment brings in a given year is reliant on a number of factors, amongst them the chosen trading strategy, how much risk is concerned per trade and the frequency with which an initial investment is reinvested.
For example, a trend trader with a starting up capital of $250, who opens about ten positions annually of one micro lot each, and gets 500 pips per year, or a profit of $50, realizes a Return On Investment of 20% with his $250 initial investment. Should he double the rate of recurrence of his trades, he could also double his ROI. Certainly it's not constantly quite as easy as this to improve one's ROI, but occasionally all a trader lacks is time to trade more often. Another thing to take into account is that not every technique is ideal for every trader, nor does every trader have the same risk appetite, even if it would imply a (much) higher return on investment.
A scalper who carries out 100 trades per day and earns an average 0,5 pips per trade, would require 100 trades to make the same total of pips as the above described trend trader. But because the scalper is much more productive with his trading capital executing 100 trades daily instead of 10 annually he can very easily reach a much, much better ROI annually over his initial investment.
But when you're just starting out as a forex trader it's actually more significant to focus on your Expected Value (EV) per trade and making sure it's good (by closely keeping track of your risk / reward ratio) instead of thoughtlessly focussing on your possible annual ROI. That comes later.
Later, when you're regularly profitable on the forex, you can try and discover whether or not the ROI you're getting from your trading strategy positively compares to what other, regularly profitable traders are getting with the same trading strategy.
Automated Trading Yes Or No?
When talking about automatic trading, we should differentiate between two different forms:
1. Building your own Expert Advisor (a.k.a Forex Bot)
2. Buying an existing Expert Advisor
Your Own Expert Advisor
Every trading strategy can be programmed, although some are simpler to define in reliable parameters than others. If you have a little skills for programming, you could think about building your own expert advisor / forex bot.
The idea is to program the circumstances that have to be met to bring about the trade into your expert advisor (EA), after which the EA will take positions for you anytime those conditions are met. Or, when you don't want a completely automated system (fearing your amazing programming powers might result in a world ruled by robots) you could set up the EA up to simply alert you when the set-up is triggered.
Working with your own expert advisor can have several crucial advantages. One is that it will take feeling out of the equation; after all, positions will be induced only when specific, rationally pre-defined circumstances have been met. Another is that it clears the way for a much more logical approach of your trading strategy, making it less difficult to tweak it going onward. Lastly, using an professional advisor would allow you to take benefits of (many) more trading options, because the EA would keep track of the markets for you, either alerting you when a currency pair satisfies the pre-defined conditions, or opening a position straight up in such cases.
There is software readily available that can help you to build an EA, but as indicated out, some understanding for programming is needed.
Buying an Existing Expert Advisor / Forex Bot
Getting an EA that promises to work out of the box typically has only minimal value. Since you didn't develop the FX bot yourself, you will have no feeling for the actual parameters that establish the set-up, which raises the chance that the trading strategy isn't appropriate for you.
Where it is possible to modify the parameters of the EA you could perhaps adjust it enough to turn it into a lucrative trading strategy, but then again, when the EA is dependent on faulty premisses, you can tune all you want but you will never get a persistently profitable trading method.
The most interesting option for professional advisors therefore is still building one on your own (or having it built by a certified person) based on the parameters of a set-up that has verified itself to you.
5 Tips That Will Save You Money
The 5 tips outlined below are described throughout this site. That's because although they can't guarantee good results nothing ever can, otherwise everybody would be effective they can save you a lot of money.
Experience shows that many starting forex traders bleed money primarily because they fall short to follow the next five concepts:
Rule number 1 for every forex trader is to survive. Every trader has losing trades, but when you go out of cash you put yourself in a position where you can no longer have winning trades. As a result, before everything else you have to ensure you stay in the game. Many starting and / or persistently losing traders focus specifically on having a profitable trading technique. But even though a good trading technique is definitely crucial, using solid money management and having a logical, disciplined trading mindset will get you further at the end of the day.
Two rules of thumb for great money management are not to risk more than 2,5% of your trading capital per trade and making certain you have sufficient trading capital for a minimum of 40 trades when you are a rookie.
2.Always use a stop loss
The stop loss is perhaps the most effective weapon in your arsenal as a forex trader, just as the most effective weapon of the skilled poker player is the fold (if that means something to you). The stop loss enables you to predetermine your risk down to the pip, as a result ALWAYS use it!
There are really only benefits to putting in a stop loss. It makes you to think about when the trade you're about to put on would be deemed a failure. After you've opened the position you may talk yourself into staying in a trade going undesirable, using all kinds of illogical justifications. But if you've set a stop loss before opening the trade (when you were still thinking rationally) you'll always have that shining example, telling you that you'd be a weak, emotional fool if you stayed in the trade after the stop loss is brought on.
Establishing a stop loss also forces you to consider your profitable trades / losing trades ratio. Assume you want to risk 50 pips to win 100 pips, that would suggest you'd need a winning trade a minimum of 33% of the time to break even.
Does your trading strategy get you a profitable trade 33% of the time?
Another benefit of the stop loss is that you don't have to be scared that one terribly chosen trade will kill your whole account in case the trade goes terrible and for some good reason you're not in a position to close it by hand. So keep in mind to always put in a stop loss and never shift it further away after opening the trade.
Unless you are amazingly fortunate you can't anticipate to close 80% of your trades profitably or turn a $500 trading capital into a $10,000 trading capital in six months. A typical human being with those kind of anticipations you're merely setting yourself up for dissatisfaction, frustration and failure. (unless you're very, very lucky).
Try to look at things reasonably right from the start. Figure out an attainable percentage of winning trades contemplating your strategy and expertise. Ask yourself how much time you can spend on trading and studying. When you have a sharp view of your trading tools and issues, you will find it much simpler to work towards a profitable trading method.
For example, suppose you're a day trader with a trading technique where you risk, on average, 15 pips to win 30.
After doing about 200 trades, it ends up that 50% of your trades attained their profit target of 30 pips; the other 50% of the trades went sour and activated your stop loss. So you've won 100 x 30 pips = 3,000 pips and lost 100 x 15 pips = 1,500 pips, for a total revenue of 1.500 pips total. Total revenue, simply because you still have to subtract the spread, i.e. the transaction cost you pay your broker, remember? Let's say the spread is 2 pips per position, which means your 200 trades costed you 400 pips. Your net revenue then, was 1.100 pips over 200 trades, or 5.5 pips per trade.
Obviously data on 200 trades isn't enough yet to be of statistical importance, but at least it would give you a little something to work with: on average, each trade nets you 5,5 pips.
4. Interact with other traders
For beginning traders an usually ignored source of information is other traders. Of course, studying books about forex is vital. Books can provide you with a solid foundation in a short time, providing a foundation to build on. Training is another important factor to get the hang of things easily, but you'd be amazed to find out how often fellow traders can give you beneficial feedback about your trading strategy, or about alternate ways for putting on a particular trade. You should consequently become part of an online forex group and
think about starting a trading blog, so people can review on your strategy. Don't be uncomfortable because you're a beginner; remember that we all started out as beginners at some point, and many of the traders you'll meet on online trading forums are also just starting out.
5.Keep your emotions in check
This last tip is perhaps the most critical one. As previously said, trading on the forex is fascinating, fun and dynamic, but it's crucial not to get caught up because of this. Successful traders approach trading like a business, not a pastime. You use your trading capital to make business decisions; some will make you money, others will cost money, it's that straightforward. But as soon as you forget your rationality I promise you that the losses will build up pretty quickly.
I'm talking about those times that you do move your stop loss, because you just can't find yourself to take the hit. Or those occasions that you decide to get in right now, even though your trading plan tells you to wait, because you're so afraid to miss the trade, or maybe you're just bored. Those moments that you're so angry that you lost 10 trades in a row that you start trading with triple your normal risk, taking positions in currency pairs you typicallynever trade in.
Those are the times you lose in 30 minutes what it had taken you three weeks to accumulate.