I remember when i first started forex trading 10 years ago, i was totally clueless. After 3 margin calls, i learned the hard way and wished that someone had given me some tips when i just started.
Forex trading is never about getting rich easily and fast. In fact, most people got their margin calls due to making critical mistakes on that assumption of quick riches. Whether are you just starting your forex trading journey or you are already trading but without success, these 3 tips will serve you well.
1) Proper Money Management
Imagine having a forex trading account of $200 and entering a position with a stop loss of $50. The currency pair moves against you and your position is wiped out (this is more common than you would like to imagine). A loss of $50 translates to -25%. With the remaining $150, you will need a successful trade of $50 profit to get back to your starting point.
Guess what, that is a performance of 33% ! Warren Buffett’s average annual performance works out to be around 20%. The disconnect of expectations is clear.
Always practice proper money management and aim to keep your maximum risk per trade to manageable levels such as 2%. This allows you to experience failed forex trades without a detrimental blow to your account balance. The experience gained will be invaluable and your account balance lives to fight another day!
2) Staying Out Of A Trade Can Be A Winning Position
The forex market will never climb or drop in a straight line. Often, the currency pair may experience consolidation and trade within a limited range. This has the potential of wiping out trades on both sides if you are not well positioned.
During times of elevated volatility, such as when a major situation developing ( for eg regional / global crisis ) or major economic data release ( for eg US Non-Farm Payroll ), the currency pair may fluctuate extensively between both sides of the trade. This is especially so if the development did not turn out as expected. Your stop loss may be triggered prematurely or worse, a margin call may happen if you are overexposed.
Not trading can hence be the best option at times. If you cannot resist the urge to trade constantly, try using a structured manner to approach this. Do you have a sound trading plan for this particular position that you are intending to open? If your answer seems like a 50 / 50 game of chance, you are probably better off not trading.
3) Trade Without Emotions
Now imagine a losing trade and you cut your losses prematurely only to watch it turn back up. Sounds familiar? How about a winning trade and you quickly take your profit only to watch it fly on without you on board.
If you can picture yourself doing the above, you are probably trading with emotions. This is not optimal as these emotions will likely cloud your judgement. It may turn winning trades to losing ones due to panic or send you on an obsessed streak of ill informed positions.
Always trade with a plan. When you enter a position, your forex planning should include a well defined stop loss and take profit.
The Bottom Line
Not all forex traders are destined to have a margin call. The tips above will help you stretch your account balance and allow you to gain invaluable experience from your successes and failures.
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