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Forex: What the Gurus Don't Tell You
There is a lot of money to be made in Forex investing. What few people realize is that 90% of investors will lose money. Most of these are new investors who started ‘wrong.’ Forex is speculation. There are no hard fast rules. No guru can give investors an edge. There are no secrets. Forex trading is simple ‘math based’ speculation.
The Foundation of Forex Trading
Investors need three things to start trading in the Forex markets: Education, Strategy, Patience. The education is the hardest to find. Many of the books and short courses on the internet offer just enough education to get started, but not enough to avoid problems. The secret to success in the Forex world is not knowing how to trade, but when to stop trading.
A good trader learns three or four good strategies, and practice them using ‘training’ or ‘demo’ accounts for weeks until they start to ‘feel’ the patterns. However, do a good review of the different online broker houses. The demo accounts, and the actually trading accounts, are built on different platforms. Some strategies will stop working when the platform changes.
Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD
Understandig Forex Strategy
There is no ‘beginner’s strategy.’ A lot of courses and books treat scalping as a beginner’s strategy, suggesting that a trader can work ‘up to’ a real trading account. The purpose for this is to reduce the risk, in an effort to sell the services, and then promise big returns later.
This is not how the Forex market works. Most people have one strategy and trading system that works for them. There is no ‘best’ strategy. This is why it is important to study as many different strategies as possible. Experimentation is the key to finding the perfect one.
The most important thing that the gurus overlook is that investors will lose more trades than they make. The second fact the gurus overlook is that the entry signals and entry points are rarely right. That is why most trades fail, and experience is paramount to success.
Recommended Forex Reading
The level of skill needed before starting to trade is relative. One investor will have a basic understanding of the terms. Another will be able to write a white paper on different terms and strategies. Unfortunately, many investors start trading before they understand the full impact of terms like resistance, or spreads.
Education should never stop. Spend a few hours reading every week. Subscribe to the industry periodicals. And, stay active in the forums.
A good benchmark would be to start trading after you reach the following points:
- Can explain the typical pip spread for your currencies
- Have tested the markets around the world and found the best time of day to trade
- Create a list of 10 trading terms and be able to explain their effect on your currency pairs and strategy. (Extend this list beyond leverage, Margins, Resistance, Signals, Pips)
- Have developed a Risk Management Strategy
- Have accumulated enough cash to invest – safely
- Have tested your exit strategy against the Leverage, and reduce the chance of losing
- Have worked on your strategy until you win a larger portion of trades than you lose.
Forex Trading Tools
There are several powerful trading tools. Beginners should start with a software program that lets them establish their trading strategies, with enter and exit points, and then run several months worth of trades at one time.
Other vital tools include ‘Real Time Economic Event’ and ‘Resistance Tables.’ These let new traders test their strategies against real world ‘off trading’ factors, such as an economic down turn, sporting events, or the weather.
Online Brokers for Forex
Not all brokers are the same. Do not pay attention to the reviews that are probably paid for. Overlook the fancy aspects of their websites. The best way to find the best broker is to sign up with the associations and forums. Talk with other traders. Find successful traders who have the same budget, skill levels, strategies, and goals. Ask them about their brokers. One broker will stand out from the crowd after a few weeks.
Do not overlook certification or compliance to government regulations. Many of the brokers are located in Europe, they are not bound by the laws and regulations of the USA or UK.
Forex Trading Packages
These can be the biggest obstacle for a new trader. There are many different packages. Each broker has different fees, and charges. Do not be fooled by the ‘no commission.’ The broker does take a few pips. The trader will not see this on their trading sheet. This is the difference between the purchase and sale price.
The ‘Spread’ can be as little as 2 or 3 pips to as much as 10 pips. Read the small print. Several things can change the spread including the currency pairs, size of the trade, and the account. This brings up another problem.
Many brokers promote starter packages where traders can invest less than $100 on a trade. This may look like a good way to start, but there are many disadvantages. The spreads may be higher reducing the investor’s profit margin. These trades may also be considered high risk. Before signing up with one of these, look for clauses that may leave the investor losing money on more trades than they win.
Covering The Margin
One of the most important aspect should be the broker’s handling of a trade gone bad. Brokers have a different treatment when their investors cannot Cover The Margin. This can vary between brokers, and packages. The investor should clearly understand how their ‘bad trades’ will be handled. Will the broker contact the investor before closing the trade and causing a loss? Will they exit the trade without the investor’s knowledge? Do they have alerts? These questions are vital to an investor’s success.
There is nothing worse than waking up in the morning to learn that a currency dropped in the night, and the broker exited the trade, costing the investor thousands of dollars. Some trades rely on buying volatile currencies, when they are diving, and waiting until they balance. This type of trading will not succeed if the broker’s policy is too strict.
The best solution is to make sure there is always enough money in the account to Cover The Spread when a trade does drop. The traditional solution is to learn how to use exit strategies. This is imperative, but do not trust exit strategies alone.
High Levels of Leveraging in Forex Trading
Forex offers much higher leverages than other speculative investing. The collateral the investor can deposit is called the Margin. This can be leveraged up to 200%, depending on the broker and account size. This can lead to a substantial loss, and even owing the broker money. Most investors believe that leveraging is a Joint Venture between the broker and the investor. This is not true. Leveraging is the equivalent to a loan.
This is one aspect of Forex trading that many courses and gurus, skim over in their attempt to keep new investors motivated.
Realistic Forex Trading
Trading is not easy. It is not a hobby. To trade successfully an investor needs to be online constantly, at the same time, in the same markets. Consistency is the only way to learn how to see the subtle fluctuations that signal currency movements.
The gurus are only part of an investor’s journey for a short time. They have no long term investment and risk little. A successful investor has the heart of an entrepreneur. They boldly take what they can from each guru, venue, and trade, using each to reach their ultimate goals.
The secret to success is not found in the ability to track trends, or in a sixth sense. The secret to successful Forex trading is found in learning how to trade around the risk, and increase profits by learning to patiently ride the risk to lucrative trades.
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