Currency trading professionals don’t have all the answers when it comes to predicting the direction of the markets. Even the most astute traders make mistakes, read market data incorrectly, or are caught off guard by the highly volatile financial markets. Currency trading is not for sissies. It is a rough and tough market that eats up $5 trillion in liquidity every single day, and reels new traders in at a rate of knots.
The sheer size of the Forex market is the main reason so many new traders are attracted to it on a daily basis. What the stats don’t readily indicate is that the outflow of existing traders is equally prolific. Many neophytes in the forex trading arena come in with lofty expectations. They soon realize that without a sound understanding of the currency trading markets and the technical and fundamental aspects of FX trading, failure is a foregone conclusion.
Everyone wants a piece of the action with currency trading
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This brings us to perhaps the most important point in Forex trading, or any trading activity at all: education. Without a sound understanding of how markets work, what to expect given certain economic data releases, and how to interpret charts, graphs, macroeconomic variables and the like, there is only one certainty: failure. Sure, it is possible to generate profits over the short-term, but the viability of a Forex trader’s career is directly proportional to his or her understanding of key market principles, interactions between financial assets and the greater economy, bankroll management, and intelligent trading.
Nowadays, the majority of seasoned currency traders are adept at stocks trading, commodity trading or indices trading. They often utilize their understanding of technical and fundamental factors to great advantage. Perhaps a lesser known fact is that most trading activity undertaken on major pairs results in a greater win ratio than otherwise thought. In other words, most people win more than 50% of the time, yet they’re losing money trading Forex – why is this?
It’s not about how many trades you win – it’s the size of the winning trades that matter
Let’s examine data provided by FX trading brokers between 2009/2010. On major currency pairs such as the NZD/USD, USD/JPY, EUR/USD, EUR/JPY, GBP/USD, GBP/JPY and the AUD/NZD, the ratio of winning trades exceeded 50% by a long margin. If trades ended with a profit for clients, why did those same clients end up losing money in currency trading? The reason is simple: the number of pips that currency traders earned on winning trades was far less than the number of pips they lost on losing trades. More succinctly: you could win 6 out of 10 trades and still come out in the red if your other 4 trades resulted in much bigger losses. So, Forex trading is definitely a numbers game and the numbers must be on your side for you to be in the black.
What other assets to Forex traders dabble in?
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Forex trading experts typically hedge their bets on a wide range of tradable assets. They realize that currencies are inherently volatile, despite literature to the contrary. Other financial assets such as commodities, indices, and stocks are popular with FX traders as well. It is possible to trade a wide range of financial assets with iforex cfd trading options. CFD trading is derivatives trading where the trader speculates on the future price of the underlying financial instrument. Leverage and margin are used with CFD trading to take out much larger positions than the available capital in a trader’s account. CFDs, contracts for difference, are lucrative investment options when traders read markets correctly.
Forex traders are advised to always use stop losses with all forms of FX trading online. These failsafe techniques will allow you to automatically exit the trade once a certain level of loss has been reached. It is not dissimilar to folding your hand in a game of poker. If you know that you’re losing a trade, don’t stay invested and allow your losses to mount – exit the trade and move on.
With CFD trading, there are ways to minimize losses, and maximize gains. These include rollover options. Many traders in Forex and CFD trading make the mistake of not allowing for significant profits to be generated, or allowing too many losses to rack up. It’s a fine line to walk, because greed can result in a winning trade going sour, or an acceptable loss becoming an abject failure. Use limit orders and stop loss with all trading to avoid becoming a losing Forex statistic.
