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If They Only Knew...about trading forex successfully

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If They Only Knew...about trading forex successfully

Post by Sean on Wed Dec 17, 2008 12:36 pm

What Stops Smart Investors from
Succeeding in the Forex Market

By Sean Hyman

I've always enjoyed teaching. For instance, I loved teaching my four kids how to ride their bikes. I helped them up whenever they stumbled and fell, and I loved watching as they finally discovered their new talent.

It's the same when you're teaching new investors how to trade. I would know.

For the last few years, I've spent my days teaching both novice investors and fellow professional traders how to trade the spot Forex market.

I'm sort of an anomaly in the Forex market, so I've had the opportunity to instruct students all over the world. And no matter where I go, I've noticed that all Forex students are strikingly similar.

On Day 1, everyone has the same eager, anxious expression. Then the work begins. And by Day 5, most of my students have already made the same mistakes.

Honestly, these are the types of mistakes that all newbie Forex traders make. Not a big deal if you catch them early. But sadly, these are also the types of mistakes that keep savvy investors from trading currencies (the WORST mistake of all).

As I always tell my students, it's actually quite simple to overcome these minor obstacles. Once you do, the Forex market can help you consistently earn profits, even when stock and commodity markets are bleeding cash.

So let's talk about a few of these obstacles, so you can be successful in your trading.

Mistake #1:
"What's the Bare Minimum I Can Trade?"

I hear this all the time in my classes: "How little (dollar wise) can I get started with?" That's not the right question to ask. Instead, it's always better to ask: "How much SHOULD I start trading with?"

Being undercapitalized is one of the biggest mistakes in any market, but it's particularly a problem in a higher leveraged market like the Forex market. In my opinion, a trader ought to have at least US$2,000 to US$3,000 in their account for every mini-lot you plan to trade.

(Remember: Mini-lots involve trading 10,000 units of currency, as opposed to $100,000 units of currency with standard lots. This is how you figure out how much leverage you're using in the Forex market - mini-lots have less leverage.)

But a few traders try to jump into the Forex market with as little as US$300 in their account. They blow through their accounts quickly because they are risking 30% to 50% minimally on each trade. Well if just one trade doesn't go right (and that's likely), you've lost third to half of your trading account minimally. That's just not practical.

Back to the Forex market: Even the professional traders only risk 1% to 5% of their accounts on any one trade. That's because they understand that sometimes trades go against them, so they only risk 1% to 5% on any one trade.

But still newbie retail Forex traders often risk 20% to 50% of their account balances on each trade, so they have the opportunity to lose up to half their account on just a single trade. That just doesn't make any sense.

So start off well-capitalized in your trading account so you have room to trade.

Mistake #2: Undercapitalized + Overleveraged = A Blown Up Account

My students also ask me: "How many lots can I trade with this account balance?" Once again, that's the wrong question. Instead, you should be asking: "How many lots should I be trading with this account size?"

Many traders who have the ability to trade 10 mini-lots will push their account right to the limit by trading 8 or 9 mini-lots. One wrong move and their account is done for. Instead, it's always better to trade LESS. If you have room to trade 10 mini-lots, I would trade 1-3 mini-lots just to be safe.

To recap: Undercapitalization and overleveraging are two mistakes my students often make. So as a newbie trader, simply start with enough padding in your account, and trade fewer lots. Do that, and you'll already be ahead of the curve.

Best Regards,


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