With the fluctuations in the currency exchange rate, forex trading seems to be a very attractive market. Foreign exchange trading however demands a continuous monitoring and knowledge of exchange rates. A country’s exchange rate is dependent mainly on its economic conditions. However, inspite of the risk and time involvement required, trading in the forex market has many benefits of its own. The most important being: superior liquidity, 24 Hrs market, better execution and faster execution at the same time.
Flip side to forex trading is the fact that it’s not easy to make money in this market. Statistically it has been found that brokers believe ; around 90% of the traders lose, 5% end up at only break even while only 5% make a profit. It is very obvious from this that forex trading is definitely not an easy task.
There are reasons for the profits to only 5% of traders. A few of them are listed below;
- Education: This is an essential factor that governs success and profits. Most of the 5% profitable traders learn the various aspects of trading. A lot of this learning is done through experience. It is good to have a conservative approach towards the market else it could prove you wrong. Understanding the system is also an essential factor involved.
- Trading psychology: A winning trader has to understand and accept the fact that every trade has an upside and a downside. There is a risk of loss involved in everything and only this psychology will prove to be a good guideline while trading.
- Price behavior: This is one of the major aspects. Price behavior has to be understood and estimation comes with experience.
- Money management and goal: Capital preservation should always be kept in mind while taking risks. It is important to have money in your account if you want to trade and more so ever earn profits.
Trading in the forex market it not an easy task. It is a learning process each time one trades and experience is the best way to earn profits.
There are common assumptions that people make while trading in the forex market. Some traders have an opinion that there is a holy grail of trading. Something like a magic indicator that will make them rich in a very short period of time. In reality there is no such magic indicator. It is very essential to always follow money management goal. Whether one has a goal of capital preservation only or capital growth along with preservation is to be accounted for while taking decisions. Not considering money management goals can cause loses and failure in trading.
Underestimation or over estimation is another important factor that should be definetly avoided.
Golden rule: Always consider a risk reward ratio while making decisions. If you use a RR ratio of 1-2 (willing to make twice the amount risked in one trade) then you only need a system that is right around 50% to make money. If you use a RR ratio of 1-3 (willing to make three times the amount risked in one trade) then you will need a system that is right around 40% of the time to make money. So make sure to use a RR ratio below 1-1.
