Understanding the Basics of Forex Trading

Losses are part and parcel of forex trading. Every successful forex trader understands that losses are an inevitable part of trading. The important issue to consider is how those losses can be minimized while the profits are maximized so that the overall position of the trader is a profitable one. Profitability in this scenario is not left to chance. Forex traders make use of various strategies for consistency and profitability.

If you intend to get into forex trading you should be mentally prepared for losses. This will help you to avoid making emotional decisions. Proper money management is also a good way of ensuring that you keep your losses at a minimum. Failing to keep losses at a minimum is a sure way of failing at forex trading. With statistics favoring loss making rather than profitability for most traders, the odds are definitely against a new trader or even a hopeful losing trader.

Major losses can be curtailed by using a stop loss order. In general it is advisable to make a stop loss order that only allows you to make a maximum loss of 2% of your forex account value on each trade. If for instance your strategy fails to predict the forex trends completely then your overall losses will be lower than those of someone who put a stop loss order of 20% per trade. Of course if the trend swings in their favor before hitting the stop loss limit then a larger stop loss order can be more profitable. This is because your small stop loss limit may be hit by a spike in the trend thereby stopping you prematurely from taking full advantage of the trend. Your stop loss limit can also be determined by how much loss you are willing to bear. If for instance you have equity to the tune of $1000.An overall loss of 50% may not mean much to you. Your level of expertise can best determine how much risk you should take comfortably.

Most forex strategies that are based on technical analysis include signals on when to enter and exit a trade and some guidelines on how to determine a stop loss limit.  A good strategy should allow for inevitable losses while maximizing the profits. Proper analysis will reduce the risk of false signals.

What makes forex trading complex is that there is no right or wrong strategy. The important factor to consider is the suitability of the strategy in the prevailing market conditions. Losses are made when traders enter or exit a trade at the wrong time. Technical analysis is based on probability. Though you may have done your due diligence in analyzing the market, it may still turn out that your signal came in at the wrong time thereby placing you in a loss making position. A reasonable stop loss limit will reduce your risk. If the odds are against you in a particular trade you are better off not entering the trade altogether. Though losses are inevitable, how well you do risk control will determine how profitable you will be.