The Forex Fortunate 5%
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Forex Fortunate 5% " Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it." Warren Buffett
Caveat Emptor
The financial markets industry attracts its share of dishonest and devious people, and the Forex sector has its quota of charlatans. Please be mindful of this when assessing brokers, signal services, and the various others who populate the Forex world. Some people are easily misled, deceived and cheated, especially traders who are inexperienced, unrealistic, and lacking a suitable temperament. Forex blogs and reviewers report various signal scams, including falsification of performance results, sending different signals to the same client base, and various other tricks. We encourage you to beware, and undertake thorough research before signing with any Forex service providers.
Gambler or Trader?
Probably the most serious impediment to profitable Forex trading is an inappropriate attitude. Forex often appeals to inveterate gamblers who seldom resist the urge to place a bet in the forlorn hope of satisfying their “big win” craving. How do we recognise a penchant for gambling? Overtrading with excessive margin is probable a certain indicator. One of the most astute traders we know was a chronic gambler and is now a wealthy Financier. He has related several times that what eventually made him a profitable Forex trader were the lessons learned to overcome his problem gambling. Those capable of being honest with themselves will recognise any signs of ludomania. If you have a gambling problem please seek professional help, and avoid Forex trading.
Some claim any financial instrument trading is a form of gambling since it involves taking a risk in hope of reward. What is the difference between gambling and professional trading? Professional traders have a highly developed sense of discernment. They employ prudent risk/reward assessment, usually erring on the side of caution, and identify multiple confirmation signals before entering the market; for them each trade is a probable profit making opportunity. Odds For and Against The Forex is arguably the most authentic zero sum game on earth. Why do the odds greatly favour those who divide so such of the Forex game spoils? Because they are playing against traders who are hugely disadvantaged by there own attitudes and behaviour. It is a matter of statistical probability. You have a much improved chance when the odds are in your favour, and that may simply mean not being one of the traders with the odds unquestionably against them. Adept traders enter the market when they have determined the odds strongly favour them, and not merely marginally so. They put their money at risk only when they have a high probability of making a profit. Losses are certain to occur. Professional traders minimise them by employing loss mitigating management methods and self-discipline. Gamblers have insufficient control to do this, and are thus eating their own odds, actually betting to lose.
Telling Statistics
It is said 5% of Forex Traders take 95% of the profits. Another noteworthy statistic is the claim that approximately 90% of Self Directed Forex traders lose their opening account balance within 90 days. We hear remarks that such losses are a trader’s tuition fees. Doubtless it may help to teach some valuable lessons, unfortunately most repeat the errors, and their habitual losses predictably become the spoils divided by the fortunate 5%. These numbers may be somewhat distorted and exaggerated, yet they convey telling facts. An extremely low percentage of Forex traders share an extremely high percentage of the profits, and the preponderance of new Forex trading accounts are soon lost.
The vast majority of Forex traders attempting are totally unqualified to accomplish their profit goals. Perhaps they have thoroughly researched the subject, done several courses, opened trial and active accounts, however, in most instances they remain ill equipped to meet the Forex challenge. They usually lack the capital necessary for a reasonable chance of success, are easily lured by brokers offering extremely high leverage, habitually trade with perilously high margin, and lack the requisite self-control. Accordingly, the odds are comprehensively against them. The attitude of habitual Forex losers often has a common denominator. They take losses personally, believing the Forex should be subject to their trading decisions; they actually blame losses on the market. Professional traders see the market as their friend, the source of their livelihood.
The Fortunate 5%
The definitive Forex challenge is becoming one of the few taking most of the profits. We know and accept that losses and drawdowns are inevitable, even for the five percenters. The difference between them and those whose money they share is making considerably more profits than losses, and they achieve this by applying a superior Trader Intelligence. The 5% are dedicated to taking profits. An “if only” attitude does not prevail. There are no regrets or recriminations when a closed trade reverts in the direction they had traded. They understand that the market will constantly offer profit opportunity; it is not about one particular trade. These traders have an unshakeable conviction that their highly developed Trader IQs will consistently reveal profitable market entries and exits.
Trader IQ
Most Forex traders have above average intelligence; nonetheless, the statistical evidence suggests an alarmingly high percentage have below average Trader IQs. Joining the Fortunate 5% requires a high Trader IQ.
To begin, make a earnest effort to analyse your trading. Traders give myriad reasons why their losses are not their fault. The capacity to generate plausible excuses and believable justification is not indicative of a high Trader IQ. Intelligent practitioners of the Forex trading art accept responsibility, exercise discipline, learn and practice patience and detachment. Intelligent Forex traders are willing and able to risk a reasonable capital sum, establish achievable profit goals, eliminate impulsive trades, and avoid excessive risk. Unless you are able to make a genuine commitment to achieving these goals you are wasting your time and money. Irrespective of the professional Signal Service you use, or the trades you select, without a sufficiently high Trading IQ you are on a fools errand.
Glimpses of the Forex World
The Internet is replete with data for those seeking information on the technical and fundamental factors that impact the Forex, education and training, broker choices, and signal services. An good resource list for Forex service providers is available at http://www.forexontop.com.
Magnitude
On 17th of September 2008 CLS Bank settled 1,554,166 Forex payment instructions with a gross value of US$ 8.6 trillion. Huge numbers, though of course leveraged to varying degrees. Many quote $2 trillion as the nominal daily Forex volume, though it now seems to have surpassed $4 trillion.
Brokers
Impulsive, self-destructive traders fuel the profits of online Forex brokers. Those of us who have witnessed the introduction and proliferation of retail Forex trading have seen numerous churn and burn shops come and go, and some remain and continue to grow. Those interested in pertinent facts may want to review the Refco story - http://www.reuters.com/article/idUSN0732847120080807Most
Forex brokers receive good and bad reviews. A broker may score high ratings on some sites, and far lower on another. There are sites where no broker rates over 50%, supposed review web sites that are owned by brokers, and the inevitable fake reviews generated by selfinterested parties. Sound confusing, that is exactly what the retail brokerage market has become, and the Caveat Emptor warning must be heeded. Conflicting reviews and scams apart, the real issue is how to make a relatively informed choice when choosing a Forex broker. A good place to start is your Internet search engine. Incidentally, there are sites purporting to answer this question that describe the exact features of particular firms, and conveniently provide links to them. The fact is, we cannot know how a broker will deal with us until we have opened an active account. Many make the error of thinking brokers with the highest Internet profile will provide the best service and attention. Substantial advertising budgets are not necessarily indicative of a brokers ethics or efficiency. Even big brand associations can lead the unwary astray. Market Maker brokers may trade against your position. Stop hunting price spikes, perstistent data glitches, unfilled orders/slippage, and suddenly widening spreads during high liquidity sessions, are a few of the practices used by such predators. Brokers who claim to have no intervening trading desks may also engage in sharp practices in the dedicated pursuit of your money. First and foremost make a concerted effort to verify the broker is legitimately connected to the Forex, and is reputable. Treat reviews with a degree of circumspection: some use reviews to denigrate each other. You can usually spot a real review. As a general rule we prefer ECN brokers, though we stress there are ethical alternatives.
Trading Platforms
Most Forex platforms will successfully process you order with a varying degrees of sophistication. At any given time a few become popular and tend to be dominant. Where possible familiarise yourself with the broker’s trading platform, with the explicit understanding that trial trading is not a facsimile of the real thing. It is merely an opportunity to understand the particular Order Management System’s processes and protocols. The goal of trial account platform practice is becoming comfortable and confident when executing your orders, before risking your funds with live platform trades. Trades are often incorrectly entered because of careless keystrokes, and lack of attention to basic trade execution procedures. Always check your trade before you place it instrument, amount, and order.
Charts
The chart is an essential trading aid. It displays the market’s past, present, and possibly hints at its future. Technical Tools Studies that once cost large sums are now freely available on the charts provided by most brokers. Each of these trading tools may be useful, however, in most instances covering a chart with a maze of overlays and studies serves no useful purpose. Again, it is a matter of research and personal preference. Quotes When you execute a Forex trade you are effectively buying the base currency, the first one in the cross, and selling the quoted currency, the second in the cross. The currency pair or cross is the instrument you are trading. When you buy the instrument you pay the bid price: when you sell you pay the ask price. You do not have to delve too deeply to read stories of chart quotes and executed prices differing, especially in volatile markets. Stories are far from rare of the same trade being stopped out or not filled by one broker, yet not closed or filled by another. The issue of slippage is a matter between you and your broker.
A stock exchange quote emanates from a specific central source; the Forex is not a centralised market. A Forex dealer’s charts reflect a variety of price sources, and sometimes motivations. Accordingly, prices may vary, sometime quite significantly, because your broker’s third party charts display indicative price, not necessarily the broker's executable price. So-called live streaming Forex prices, provided by firms like Reuters, play a critical role in the Forex price discovery process. In a way these streaming prices are an aggregated indication of current Forex quotes. At source prices are often manually entered and thus subject to human error, and at several points of distribution they may be manipulated. Indicative prices signify or imply current Forex quotes and past fluctuations. Virtually all reputable charts will reflect the same trends and be quite closely aligned, nonetheless, they indicate a past bid/ask price, not necessarily a broker’s execution price, though they can be identical, or nearly so. The more sources used the greater the accuracy of the price EUR:USD and USD:JPY crosses are widely traded and reported, and tend to be closely aligned across charts. Similarly, quotes tend to be more accurate during the relevant sessions, e.g. the EUR, GBP and CHF during the London session, the JPY, AUD and NZD during the Asia/Pacific session. The Spread An obvious conclusion is that the lower the spread the lower the cost to trade. There are brokers who offer raw spreads and charge a fee, so it is not necessarily that simple. Some brokers offer fluctuating spreads, others fixed. Both appeal to traders for different reasons. The former because it may be a more transparent picture of current market liquidity and volatility, the latter because traders know what the spread will be, supposedly irrespective of liquidity and volatility.
Money Management
A sensible money management plan is essential for disciplined trading. Effective money management is the basis of Forex survival and profitability. Traders who do not take this requirement seriously probably have low Trader IQs and are merely gambling. Objectively review the discretionary components of your Money Management plan. • How much capital can you risk, and by risk we mean afford to lose? • What margin percentage of your usable account balance do you risk on each trade? • What leverage ratio do you apply to the margin? • How much profit do you expect to make? • Calculate your profit goal, as an annualised return on your account balance - is it realistic? Only about 2% of Forex traders achieve an annual return exceeding 100%, an extraordinary result by any rational expectations.
Capital
The funds you use to trade Forex are at considerable risk. The extent of your risk depends on your choices; i.e., the broker you choose and the trades you make. Only risk money you can afford to lose when trading Forex. That said, not having sufficient capital is a significant reason for such high self directed trader attrition rates. An under capitalised account dramatically reduces the probability of success, making it extremely difficult to implement prudent money management. This is an approximate guide for the recommended capital to open various Forex accounts. • Standard Account $50,000 to $100,000+ • Mini Account $5,000 to $20,000+ • Micro Account $1,000 to $5,000 Be patient. Rather than rushing to open an undercapitalised account wait and accumulate the maximum possible capital you can risk.
Equity
Adding the used margin to the available, or useable, margin determines account equity. When there are no open positions the Account Balance, Equity and Available Margin are the same.
Margin
Initial Margin is the amount put at risk to collateralise a trade and is expressed as a percentage of the trade’s total value. The initial, or used, margin is the security deducted from an account, and is often leveraged. Brokers usually aggregate initial margins to fund their own trading. What remains is the available, or usable, margin. This fluctuates with a trade’s value. When the remaining margin falls below the broker’s acceptable margin requirements open positions are liquidated by a margin call. Please carefully read broker’s margin policies, and ensure you fully understand the different margin terms, especially the margin call policies. Where a broker has a margin policy of 1% a leverage ratio of 100-1 is available, 2% equates to leverage of 50-1, 2.5% to 25-1, 5% to 20-1, and so on. We recommend Self Directed Trader margin of 1% to 5%, subject to the leverage chosen, positions open, and market conditions.
Leverage
One compelling reason for the rapid expansion of online Forex trading is the high leverage offered by many brokers. The National Futures Association defines Leverage as: “The ability to control large dollar amounts of a commodity with a comparatively small amount of capital.” Leverage is expressed as a ratio, e.g. 10-1, and is unquestionably an appealing notion. We open a $1,000 account with a Forex broker offering 100-1 leverage, and willing to instantly lend us $99,000. What a deal. Voila! We now have a $100,000 trading bank, and can make 100% return on our capital with only a $1,000 profit.
Sounds easy enough. Consider this, we will lose 100% of our capital with a $1,000 loss, and that may only take a handful of pips if we are silly enough to trade with preposterous margins and leverage. Trading in this manner dramatically increase the risk of loss, and is basically suicidal. Those using such strategies are known in some brokerage circles as wood ducks – easy prey. Leverage is a useful tool for those who know how and when to use it. That means judiciously, after you begin to consistently take trading profits. Think of leverage as a scalpel, not a chain saw. Most professional Forex traders use leverage between 2-1 and 5-1. Self Directed Traders may claim this is unrealistic for those with small accounts, and some may want to use leverage up to 20-1 in conjunction with a sensibly low margin. This is not totally unreasonable, however, we must also realise the smaller the capital the greater the need to protect it. When you have become a profitable, confident trader you may chose to review your Money Management Plan. Happy Trading Forex Signs ©2009 http://www.forexsigns.net/
Caveat Emptor
The financial markets industry attracts its share of dishonest and devious people, and the Forex sector has its quota of charlatans. Please be mindful of this when assessing brokers, signal services, and the various others who populate the Forex world. Some people are easily misled, deceived and cheated, especially traders who are inexperienced, unrealistic, and lacking a suitable temperament. Forex blogs and reviewers report various signal scams, including falsification of performance results, sending different signals to the same client base, and various other tricks. We encourage you to beware, and undertake thorough research before signing with any Forex service providers.
Gambler or Trader?
Probably the most serious impediment to profitable Forex trading is an inappropriate attitude. Forex often appeals to inveterate gamblers who seldom resist the urge to place a bet in the forlorn hope of satisfying their “big win” craving. How do we recognise a penchant for gambling? Overtrading with excessive margin is probable a certain indicator. One of the most astute traders we know was a chronic gambler and is now a wealthy Financier. He has related several times that what eventually made him a profitable Forex trader were the lessons learned to overcome his problem gambling. Those capable of being honest with themselves will recognise any signs of ludomania. If you have a gambling problem please seek professional help, and avoid Forex trading.
Some claim any financial instrument trading is a form of gambling since it involves taking a risk in hope of reward. What is the difference between gambling and professional trading? Professional traders have a highly developed sense of discernment. They employ prudent risk/reward assessment, usually erring on the side of caution, and identify multiple confirmation signals before entering the market; for them each trade is a probable profit making opportunity. Odds For and Against The Forex is arguably the most authentic zero sum game on earth. Why do the odds greatly favour those who divide so such of the Forex game spoils? Because they are playing against traders who are hugely disadvantaged by there own attitudes and behaviour. It is a matter of statistical probability. You have a much improved chance when the odds are in your favour, and that may simply mean not being one of the traders with the odds unquestionably against them. Adept traders enter the market when they have determined the odds strongly favour them, and not merely marginally so. They put their money at risk only when they have a high probability of making a profit. Losses are certain to occur. Professional traders minimise them by employing loss mitigating management methods and self-discipline. Gamblers have insufficient control to do this, and are thus eating their own odds, actually betting to lose.
Telling Statistics
It is said 5% of Forex Traders take 95% of the profits. Another noteworthy statistic is the claim that approximately 90% of Self Directed Forex traders lose their opening account balance within 90 days. We hear remarks that such losses are a trader’s tuition fees. Doubtless it may help to teach some valuable lessons, unfortunately most repeat the errors, and their habitual losses predictably become the spoils divided by the fortunate 5%. These numbers may be somewhat distorted and exaggerated, yet they convey telling facts. An extremely low percentage of Forex traders share an extremely high percentage of the profits, and the preponderance of new Forex trading accounts are soon lost.
The vast majority of Forex traders attempting are totally unqualified to accomplish their profit goals. Perhaps they have thoroughly researched the subject, done several courses, opened trial and active accounts, however, in most instances they remain ill equipped to meet the Forex challenge. They usually lack the capital necessary for a reasonable chance of success, are easily lured by brokers offering extremely high leverage, habitually trade with perilously high margin, and lack the requisite self-control. Accordingly, the odds are comprehensively against them. The attitude of habitual Forex losers often has a common denominator. They take losses personally, believing the Forex should be subject to their trading decisions; they actually blame losses on the market. Professional traders see the market as their friend, the source of their livelihood.
The Fortunate 5%
The definitive Forex challenge is becoming one of the few taking most of the profits. We know and accept that losses and drawdowns are inevitable, even for the five percenters. The difference between them and those whose money they share is making considerably more profits than losses, and they achieve this by applying a superior Trader Intelligence. The 5% are dedicated to taking profits. An “if only” attitude does not prevail. There are no regrets or recriminations when a closed trade reverts in the direction they had traded. They understand that the market will constantly offer profit opportunity; it is not about one particular trade. These traders have an unshakeable conviction that their highly developed Trader IQs will consistently reveal profitable market entries and exits.
Trader IQ
Most Forex traders have above average intelligence; nonetheless, the statistical evidence suggests an alarmingly high percentage have below average Trader IQs. Joining the Fortunate 5% requires a high Trader IQ.
To begin, make a earnest effort to analyse your trading. Traders give myriad reasons why their losses are not their fault. The capacity to generate plausible excuses and believable justification is not indicative of a high Trader IQ. Intelligent practitioners of the Forex trading art accept responsibility, exercise discipline, learn and practice patience and detachment. Intelligent Forex traders are willing and able to risk a reasonable capital sum, establish achievable profit goals, eliminate impulsive trades, and avoid excessive risk. Unless you are able to make a genuine commitment to achieving these goals you are wasting your time and money. Irrespective of the professional Signal Service you use, or the trades you select, without a sufficiently high Trading IQ you are on a fools errand.
Glimpses of the Forex World
The Internet is replete with data for those seeking information on the technical and fundamental factors that impact the Forex, education and training, broker choices, and signal services. An good resource list for Forex service providers is available at http://www.forexontop.com.
Magnitude
On 17th of September 2008 CLS Bank settled 1,554,166 Forex payment instructions with a gross value of US$ 8.6 trillion. Huge numbers, though of course leveraged to varying degrees. Many quote $2 trillion as the nominal daily Forex volume, though it now seems to have surpassed $4 trillion.
Brokers
Impulsive, self-destructive traders fuel the profits of online Forex brokers. Those of us who have witnessed the introduction and proliferation of retail Forex trading have seen numerous churn and burn shops come and go, and some remain and continue to grow. Those interested in pertinent facts may want to review the Refco story - http://www.reuters.com/article/idUSN0732847120080807Most
Forex brokers receive good and bad reviews. A broker may score high ratings on some sites, and far lower on another. There are sites where no broker rates over 50%, supposed review web sites that are owned by brokers, and the inevitable fake reviews generated by selfinterested parties. Sound confusing, that is exactly what the retail brokerage market has become, and the Caveat Emptor warning must be heeded. Conflicting reviews and scams apart, the real issue is how to make a relatively informed choice when choosing a Forex broker. A good place to start is your Internet search engine. Incidentally, there are sites purporting to answer this question that describe the exact features of particular firms, and conveniently provide links to them. The fact is, we cannot know how a broker will deal with us until we have opened an active account. Many make the error of thinking brokers with the highest Internet profile will provide the best service and attention. Substantial advertising budgets are not necessarily indicative of a brokers ethics or efficiency. Even big brand associations can lead the unwary astray. Market Maker brokers may trade against your position. Stop hunting price spikes, perstistent data glitches, unfilled orders/slippage, and suddenly widening spreads during high liquidity sessions, are a few of the practices used by such predators. Brokers who claim to have no intervening trading desks may also engage in sharp practices in the dedicated pursuit of your money. First and foremost make a concerted effort to verify the broker is legitimately connected to the Forex, and is reputable. Treat reviews with a degree of circumspection: some use reviews to denigrate each other. You can usually spot a real review. As a general rule we prefer ECN brokers, though we stress there are ethical alternatives.
Trading Platforms
Most Forex platforms will successfully process you order with a varying degrees of sophistication. At any given time a few become popular and tend to be dominant. Where possible familiarise yourself with the broker’s trading platform, with the explicit understanding that trial trading is not a facsimile of the real thing. It is merely an opportunity to understand the particular Order Management System’s processes and protocols. The goal of trial account platform practice is becoming comfortable and confident when executing your orders, before risking your funds with live platform trades. Trades are often incorrectly entered because of careless keystrokes, and lack of attention to basic trade execution procedures. Always check your trade before you place it instrument, amount, and order.
Charts
The chart is an essential trading aid. It displays the market’s past, present, and possibly hints at its future. Technical Tools Studies that once cost large sums are now freely available on the charts provided by most brokers. Each of these trading tools may be useful, however, in most instances covering a chart with a maze of overlays and studies serves no useful purpose. Again, it is a matter of research and personal preference. Quotes When you execute a Forex trade you are effectively buying the base currency, the first one in the cross, and selling the quoted currency, the second in the cross. The currency pair or cross is the instrument you are trading. When you buy the instrument you pay the bid price: when you sell you pay the ask price. You do not have to delve too deeply to read stories of chart quotes and executed prices differing, especially in volatile markets. Stories are far from rare of the same trade being stopped out or not filled by one broker, yet not closed or filled by another. The issue of slippage is a matter between you and your broker.
A stock exchange quote emanates from a specific central source; the Forex is not a centralised market. A Forex dealer’s charts reflect a variety of price sources, and sometimes motivations. Accordingly, prices may vary, sometime quite significantly, because your broker’s third party charts display indicative price, not necessarily the broker's executable price. So-called live streaming Forex prices, provided by firms like Reuters, play a critical role in the Forex price discovery process. In a way these streaming prices are an aggregated indication of current Forex quotes. At source prices are often manually entered and thus subject to human error, and at several points of distribution they may be manipulated. Indicative prices signify or imply current Forex quotes and past fluctuations. Virtually all reputable charts will reflect the same trends and be quite closely aligned, nonetheless, they indicate a past bid/ask price, not necessarily a broker’s execution price, though they can be identical, or nearly so. The more sources used the greater the accuracy of the price EUR:USD and USD:JPY crosses are widely traded and reported, and tend to be closely aligned across charts. Similarly, quotes tend to be more accurate during the relevant sessions, e.g. the EUR, GBP and CHF during the London session, the JPY, AUD and NZD during the Asia/Pacific session. The Spread An obvious conclusion is that the lower the spread the lower the cost to trade. There are brokers who offer raw spreads and charge a fee, so it is not necessarily that simple. Some brokers offer fluctuating spreads, others fixed. Both appeal to traders for different reasons. The former because it may be a more transparent picture of current market liquidity and volatility, the latter because traders know what the spread will be, supposedly irrespective of liquidity and volatility.
Money Management
A sensible money management plan is essential for disciplined trading. Effective money management is the basis of Forex survival and profitability. Traders who do not take this requirement seriously probably have low Trader IQs and are merely gambling. Objectively review the discretionary components of your Money Management plan. • How much capital can you risk, and by risk we mean afford to lose? • What margin percentage of your usable account balance do you risk on each trade? • What leverage ratio do you apply to the margin? • How much profit do you expect to make? • Calculate your profit goal, as an annualised return on your account balance - is it realistic? Only about 2% of Forex traders achieve an annual return exceeding 100%, an extraordinary result by any rational expectations.
Capital
The funds you use to trade Forex are at considerable risk. The extent of your risk depends on your choices; i.e., the broker you choose and the trades you make. Only risk money you can afford to lose when trading Forex. That said, not having sufficient capital is a significant reason for such high self directed trader attrition rates. An under capitalised account dramatically reduces the probability of success, making it extremely difficult to implement prudent money management. This is an approximate guide for the recommended capital to open various Forex accounts. • Standard Account $50,000 to $100,000+ • Mini Account $5,000 to $20,000+ • Micro Account $1,000 to $5,000 Be patient. Rather than rushing to open an undercapitalised account wait and accumulate the maximum possible capital you can risk.
Equity
Adding the used margin to the available, or useable, margin determines account equity. When there are no open positions the Account Balance, Equity and Available Margin are the same.
Margin
Initial Margin is the amount put at risk to collateralise a trade and is expressed as a percentage of the trade’s total value. The initial, or used, margin is the security deducted from an account, and is often leveraged. Brokers usually aggregate initial margins to fund their own trading. What remains is the available, or usable, margin. This fluctuates with a trade’s value. When the remaining margin falls below the broker’s acceptable margin requirements open positions are liquidated by a margin call. Please carefully read broker’s margin policies, and ensure you fully understand the different margin terms, especially the margin call policies. Where a broker has a margin policy of 1% a leverage ratio of 100-1 is available, 2% equates to leverage of 50-1, 2.5% to 25-1, 5% to 20-1, and so on. We recommend Self Directed Trader margin of 1% to 5%, subject to the leverage chosen, positions open, and market conditions.
Leverage
One compelling reason for the rapid expansion of online Forex trading is the high leverage offered by many brokers. The National Futures Association defines Leverage as: “The ability to control large dollar amounts of a commodity with a comparatively small amount of capital.” Leverage is expressed as a ratio, e.g. 10-1, and is unquestionably an appealing notion. We open a $1,000 account with a Forex broker offering 100-1 leverage, and willing to instantly lend us $99,000. What a deal. Voila! We now have a $100,000 trading bank, and can make 100% return on our capital with only a $1,000 profit.
Sounds easy enough. Consider this, we will lose 100% of our capital with a $1,000 loss, and that may only take a handful of pips if we are silly enough to trade with preposterous margins and leverage. Trading in this manner dramatically increase the risk of loss, and is basically suicidal. Those using such strategies are known in some brokerage circles as wood ducks – easy prey. Leverage is a useful tool for those who know how and when to use it. That means judiciously, after you begin to consistently take trading profits. Think of leverage as a scalpel, not a chain saw. Most professional Forex traders use leverage between 2-1 and 5-1. Self Directed Traders may claim this is unrealistic for those with small accounts, and some may want to use leverage up to 20-1 in conjunction with a sensibly low margin. This is not totally unreasonable, however, we must also realise the smaller the capital the greater the need to protect it. When you have become a profitable, confident trader you may chose to review your Money Management Plan. Happy Trading Forex Signs ©2009 http://www.forexsigns.net/
