Questions to Ask - Answers to Know by Sam Evans

 

As you know, there are a variety of markets and instruments available for individual and speculative traders to participate in worldwide, each with their very own unique traits and characteristics. Some prefer the equities markets, expansive in choice of stocks to trade and offering the potential for long-term growth and dividends for the longer duration portfolio investor. Then we have the Futures and Commodities arena, which allows a challenging blend of Intraday and Swing positions for the active trader to get involved with combined with a higher degree of leverage for those looking to really push the returns. Options are a fantastic way to hedge and protect profits in current market positions and if used wisely, also offer some of the lowest risk opportunities to profit in volatile markets with controlled losses from the very start. Finally we have Forex, the global currency exchange market and my own personal choice for longer term speculative trading. I meet many new and current traders who use Forex for their primary trading needs, as they recognize the advantages this market offers traders of all levels, but it is also vital to fully understand the pitfalls of this arena as well. If you are looking to participate in Forex trading anytime soon, or even if you are an experienced trader seeking a new challenge away from what you are currently involved with, I would recommend asking yourself the following questions before doing anything else.

What are the characteristics of the Forex Market? – Just like any other new challenge or endeavor, if you are currently considering putting your hard earned capital at risk, you should make sure, well in advance, that you have a very clear idea of the Forex market itself before you do a thing. I doubt anyone reading this article would even consider the idea of opening up any new business before knowing anything about the business they are entering in the first place, but when it comes down to trading, for some reason, logic tends to get left behind from time-to-time. So let's cover the basics right now. Rather than simply buying or selling variable amount of shares or Futures contracts, in Forex we are physically exchanging one currency for another in the hope of profiting from the appreciation of one of the currencies as the other devalues simultaneously. To fully realize the potential of this dynamic, Forex trades are typically executed in standard lots sizes beginning with $100,000 positions. For example, if I buy 1 standard lot of EURUSD, it means that I am exchanging $100,000 US Dollars for the equivalent amount of Euros. I will then hold onto those Euros for a set period of time until their value increases, allowing me to exchange or sell them back again for more US Dollars, seeing a profit in the process. Of course, the value of the Euros could have also gone down, hence, I would have lost money, but I would have protected myself well in advance with a stop loss order to control risk and manage the loss to just a small percentage of my capital.

As there is no central exchange in Forex, it is also unique in its nature as a truly 24 hour market, offering trading opportunities throughout the week from the Sunday open to the Friday close. Many traders are attracted to this feature as it allows exceptional trading opportunities around the clock, unlike the equities markets and their limitations to a set trading session open and close. And of course, there is the unparalleled leverage available to Forex traders, which offers incredible profit potential for a relatively small outlay, but this has its own variety of pros and cons which we need to understand as well, hence, bringing us to our next question.

What kind of capital can I expect to invest? – So we have to accept that no matter what kind of trading we are doing, it will take some amount of money to get started. Consistently profitable trading is really all about making a lump of money work for you – it should be the money which does the work, not the trader. If you wanted to become a pattern day trader in the equity markets, you would be required under the current SEC regulations to have at least $25,000 in your account with the ability to enjoy 4:1 leverage intraday and 2:1 overnight. This is not the case in Forex, however. For a start, we can open an account from as little as $25 and there is no rule on how many trades we are allowed to take. When it comes to leverage, some brokers will actually offer up to 400:1, although I would highly recommend sticking with no greater than 100:1 and be responsible for the start.

Using a typical 100:1 leverage means that a trader is permitted to take control of a $100,000 position with just $1000 dollars, exponentially increasing the overall profit and loss margin. Leverage, used in a responsible manner, is a powerful aspect of trading but as we know it also has its fair share of problems for those lacking the necessary skills of risk management and discipline. The degree of leverage any Forex trader is going to use is their choice. As well as the previously mentioned standard lots, we can also trade $10,000 mini lots and $1000 micro lots. The choice is yours, but always remember that you should only trade with money that you can afford to lose. Scared money is never safe money, so when you have proven to yourself that you can be consistent on a micro or mini size account, then step up to bigger position size, even if you had the capital available in the first place. The professional trader always focuses on the pip profit, not the dollar profit. 20 pips is not much in monetary terms on one mini lot, but it soon adds up when you are trading 15 standard lots...something to think about for sure.

How well do I know myself? – One of the biggest mistakes most novice traders make in the early stages of their career is that they pay way too much attention to things which are not very important to consistent trading results and in turn, tend to ignore the key elements which do eventually tip the scales in the direction of success. Without a shadow of a doubt, if you don't know yourself, then you will never truly know what it takes to become a consistently profitable market speculator. You see, it is not about the techniques as such, because there are many different trading strategies which have been proven to work over time. It is also not about the currency pairs we trade, or even the leverage we use. No, rather it is about how we as individual traders implement the trading plan and stick to a set of rules and guidelines which allow us to repeat the strategy over time and exploit the advantages of our "trading edge." The edge itself is completely useless without disciplined and patient execution and trade management.

Ask yourself these questions right now: "Do I get frustrated when I get something wrong?" "Do I like to take the odd gamble in life?" "Can I accept that trading should be methodical and routine, not random and exciting?" "Am I truly comfortable knowing that there will be times when I will have a series of losers and this just has to be accepted and embraced?" If you can answer yes to these questions, then you have a fighting shot of making Forex trading work. If you answered no, then don't worry about it. Trading does not come overnight and this is not a get-rich-quick scheme in the slightest. Take your time and learn your system and rules...this is the only thing that will allow you to truly learn about yourself – the most vital element in trading of all.

Take care and be well,

Sam Evans sevans@tradingacademy.com

 

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