What You Need to Know Before Entering the World of Forex Trading

What You Need to Know Before Entering the World of Forex Trading

Apr 20 • Forex Trading Articles • 30523 Views • 37 Comments on What You Need to Know Before Entering the World of Forex Trading

forex trading managmentForex trading management is a very complicated system. Knowing your way around Forex trading can be tricky. A keen understanding of how to earn in forex trading is needed to be a successful trader. If you know how to manage your assets well, you may be successful without even losing money in your entire experience. You need a lot of experience and knowledge to succeed in this field.

However, a lot of amateur traders don’t know how to manage their assets and are barely or completely unaware of the tricks beneath forex trading. Often, they go to war unprepared and eventually, they lose and when they do, they usually give in to their emotions. When they lose a trade, primitive instincts are what we hear, not the logical, more objective plans that will profit us more. Knowing that you need to manage your emotions is different from knowing how to manage your emotions and implementing this knowledge when trading. This is the main reason why a lot of beginners fail in forex.

This article will cover topics which will act as a guide to those who want to learn more about the basic concepts of Forex money management. It will help those who are interested to succeed without a broker. This will also teach you tricks on how to be unattached to your emotions and only focus on logic, not on greed and hope. By knowing how to manage your emotions in forex trading, you will be able to work your way to the top by using your logic and critical thinking. Trading with an effective price action strategy not only makes us profit, it also enables us to be confident on what we are doing.

Is there a specific amount of money to risk?

forex trading riskThis is the most common question of neophyte traders. People ask if there is a specific percentage of their money that should be used solely on forex trading. Financial capability varies from person to person, so no one can really answer these types of questions. The question should be, “How much money do you have that isn’t necessary for your daily life and that can be literally thrown away?”

A lot of traders have been risking and wasting an awful lot of cash in the market. Some are lucky enough to gain some profit in their first try, but don’t make it the second or third time around. This is why you shouldn’t be wasting your precious bucks on something that you are not fully knowledgeable about. You should not be throwing away money that is essential for your daily life. Your funds should be entirely disposable and that its sole purpose is only for leisure. When you start investing with “unimportant” money, then you will not be very concerned when you lose it. This is where emotional attachment goes in and we will discuss more about it below.

Next, when deciding about how much you want to invest, you should be thinking in terms of dollars, or in the currency of your country, not in pips which is 1/100 of a percent. A lot of people are misled into thinking that pips should be the basis in calculating profits and losses. This should not be the case because when comparing profits and losses between two different currencies, you may risk equal amounts of pips, but a significant amount of cash is involved. This results to position sizing.  You will learn more about it later

In any given trade, it is better if you are flexible on how much you are going to risk. This is goes against what most experts say. You just have to set a constant amount in all of the trades instead of setting a risk percentage. Also, since you are trading “unimportant” money, you are confident on whatever results you get in this kind of setup.

Risk Reward

Risk RewardRisk reward is the reason why you can earn a lot of money in forex trading. The concept behind risk reward is why a lot of veterans are awfully rich. This concept is almost close to perfect that, when mastered, you can start trading and never ever lose a single cent in the long run. Risk reward can also give you profit when you properly execute it. However, this concept is very tricky; this is why you really need to practice patiently to be able for it to work.

Sadly, a lot of traders disregard the proper approach to risk reward which makes them think that it does not really work. Traders usually give more importance about the probable earnings than the probable risks. You should first critically think about the best place on where to logically put your stop loss. Afterwards, this is where you calculate the probable risk on your trade setup. After you have done all the things mentioned above, that is the time that you should calculate your probable earnings according to how much money you risked. So if you invested $100, with proper management, you should gain at least twice the amount you risked which is $200. Now if you can make at least twice the amount you invested in consecutive trades, you will be able to make up for the money you lose along the way with a decent profit. Having a success rate of 1:2 can still make you profit even after suffering more losses. When thinking about how risk reward works, it is like the Holy Grail of the world of forex trading.

Position sizing

forex stop lossA lot of traders do not fully comprehend this very important principle. If you want to gain huge profits, you need to fully understand the simple concept of what position sizing is. Position sizing enables you to risk a constant amount regardless of the trading strategy you use, or wherever you placed your stop loss at. A lot of amateurs firmly believe that if you have a wide stop loss distance, you will risk losing a lot of money, and that if you have a small stop loss distance, you will be losing a small amount of money.

Contrary to their belief, you can set your position size to where your stop loss is at. First and foremost, you need to strategically determine your stop loss distance according to your trading strategy. You should never decide the position size before having your stop loss distance. After calculating the best stop and position size, you then calculate the amount of lots you are going to trade to preserve the risk amount you considered. This is the proper way of preserving your risk on any trade. This is an easy, but vital concept in managing your trades properly.

Never try to guess what the market will “probably” do.

forex guessTrying to predict what would happen to the trading market will be like gambling in a casino. You are like playing a slot machine, hoping that you win the jackpot knowing that the slot machine is loaded in favor of the casino. Trying to guess what might happen next only provides you with false hope. Oftentimes, this is one of the reasons why amateurs and even some experienced traders flop. They keep on second-guessing what the market will do, thinking that they would profit, but what can happen is the other way around. Instead of devising an effective strategy, they keep on trying to anticipate where the price would go.

When you trade without an effective strategy and trade with what seems to be obvious, you are just dealing with instinct and emotions rather that thinking critically. You keep on “predicting” rather than “analyzing” what would happen to the price movement. Many people trade after losing just because they think that they can vindicate themselves and earn what they lost or more.

In that type of situation, it is obvious that traders only listen to their hypothalamus rather than their frontal lobe which is the part of the brain that can make us think, reason out, strategize, and understand complicated ideas. They give in to instincts hoping that they “might” win a trade without a plan. These are the times when it is clear who are the probable successful traders and the traders who are sure to go bankrupt.

How being knowledgeable in money management manages your emotions

forex emotionsAs humans, it is very hard to be emotionally stable when all your investments flop. Of course, if you invest on different trades without thinking of a strategic move beforehand, you would eventually lose all your assets. You will obviously be unhappy because you will have nothing left. Now, this is why everyone should manage their assets logically. It is very important to know money management to earn money.

Your emotions are dependent on how you manage your money. It can be stated as simple as this: if you gain money, instinctively you will be happy. It will ultimately be a win-win situation for you and your wallet. However, if you lose a lot of money, all your emotional problems will surface, and that will eventually destroy you. You will then be tempted to over-trade and use your “important” money, thinking that you can redeem yourself with a successful trade. However, you might over-think your redemption target and forget about how to strategically plan an effective trade. Thus, bad money management continues to destroy you.

This is just an example of what might happen when you don’t know the basics of forex trading. You really need to strategically plan on a strong groundwork which will boost your finances several notches higher.

Never pick a “favorite” trade

pick a forex tradeSometimes, a certain trade booms and gives an enormous amount of profit. Some trades show an obvious win and a perfect setup, but we shouldn’t fall into the trap. We need to understand that the market is dynamic and can instantly change in a blink of an eye. Anything can happen in the market and no specific trade is immune to the sudden changes in the market. Nothing is constant in the world of forex trading and that means that you can never be assured that a single trade will give you tons of money just by seeing that it has a “perfect” trading setup.

Rather that thinking that a single trade can make you rich, think of it in a way that more trades can make you rich. However, you need to control the amount of trades you are handling because you may still fail and lose money. You need to strategize and find the correct amount of trades and amount of cash that you will be using in the market. You should let the market do its thing and just lurk around and manage your assets even if a setup looks perfect.

Think critically and trade using the concepts of your chosen trading strategy. If you are a price action trader, then focus on the action of the prices in the market rather than just following your instincts and make a mess out of your perfectly planned trades.

Control yourself for you to profit.

control yourself in forexOne thing that traders often overlook is that the market doesn’t care about what would happen to you. The market does not care if you win or you lose. The market doesn’t even know that you are a trader and that you exist. Yet, a lot of traders let their emotions control them and make them be controlled by something that doesn’t even care about them.

Once you realize that you should not follow your instincts and just trust your perfectly planned forex trading strategy, you are well on your way to the top. What you need to do is trade according to what’s already laid out on your blueprints rather than giving in to your feelings of greed and hope. This way, it will keep you from feeling any form of revenge and greed that may attack you and consume you.

The traders who just follow what they planned are the people who excel and succeed in forex trading. When you handle high-probability price action setups, your emotions, and risks well, then you are already on your way to victory.

Tips on how to focus on your plans and ignore your emotions

9Knowing that you need to focus on your plans and follow your strategies is way different from knowing HOW to properly put your plans into action. Here are tips on following your plans and not to pay no attention to your emotions:

  • Ask yourself before any trade, “What am I doing?”, “Am I using a perfectly planned strategy or am I just thinking that I already planned one?”, “Am I just giving into my emotions?”, “Do I need to risk something?”, “Why am I doing this?” These are all questions to ask yourself if you think that you are already giving in to your emotions. You need to think deeply and be assured that you are going to war with your sword drawn and your armor ready. If you’ve done this, you are at risk of trading with your emotions attached to you.
  • If you are trading with a specific type of trading strategy, you need to be sure that you are following all the concepts of the strategy like your life depended on it. This way, you will be less attached to your emotions. Eventually, trading without emotions will become second nature to you. You will then be flexible to adjust to whatever the market does and react appropriately to the actions of the market.

Conquer your forex trading strategy

take action with forexYou will not be successful if you won’t utilize what you have planned. You need to carefully take your strategy into action to really profit from your trades. Knowing that the money you are using is entirely “leisure money” and that you have already mastered your strategy, you should be confident on what you are doing in the forex trading world. You should be able to profit a lot if you understand each and every step of the way and mastered it accordingly.

A lot of people become wealthy because of the proper implementation of their own well-thought out strategy. This means that if you rack your brains well enough, there is no way that you are going to lose an awful lot of money. Veterans know that amateurs trade way more than they need to and that is the reason why they usually lose. You should not trade if you don’t even have a reason to trade.

All the tips stated above will all be effective if you have a well-thought strategy and that if you know what to expect when you enter the market. You will never doubt if you are 100% confident in the plan that you are about to use in the market. In effect, conquering your chosen forex trading strategy will eventually pay off and reward you with huge sums of money.

By following all of the tips and tricks mentioned above, you are already a step closer to being victorious. You should always remember that you need to be detached to your emotions when trading, especially when you are already losing.

 

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