Understanding Forex Trading: Risks and Realities
Most forex traders start out looking for a way to get out of debt or to make easy money. It is common for forex marketing to encourage you to trade large lot sizes and trade highly leveraged to generate large returns on a small amount of initial capital. You must have some money to make some money. It's possible for you to generate outstanding returns on limited capital in the short term. However, with only a small amount of capital and outsized risk, you will find yourself being emotional with each swing of the market and jumping in and out at the worst times possible.
The Importance of Risk Management
Risk management is key to survival. You can be a very skilled trader and still be wiped out by poor risk management. Your number one job is not to make a profit but rather to protect what you have. As your capital gets depleted, your ability to make a profit is lost.
Avoiding the Pitfall of Overtrading
Some traders feel that they need to squeeze every last pip out of a move. There is money to be made in the forex markets every day. Trying to grab every last pip before a currency pair turns can set you up to lose the profitable trade that you are sitting on.
Dealing with Trading Remorse
Sometimes you might find yourself suffering from trading remorse. This happens when a trade that you open isn't immediately profitable, and you start saying to yourself that you picked the wrong direction, and then you close your trade and reverse it, only to see the market go back in the initial direction that you chose.
The Danger of Picking Turning Points
Many new traders try to pick turning points in currency pairs. They will place a trade on a pair, and as it keeps going in the wrong direction, they continue to add to their position, being sure that it is about to turn around this time. If you trade this way, in the end, you end up with much more exposure than you planned and a terribly negative trade.
Accepting Losses and Moving On
Some trades just don't work out. It's human nature to want to be right, but sometimes we just aren't. As a trader, sometimes you have to accept being wrong and move on, instead of clinging to the idea of being right and ending up with a blown account.