Advice on Becoming a FOREX Trader
The foreign currency exchange market, "Forex," is a way to actively trade the financial markets. This market operates 24 hours per day so a novice may keep her day job while she practices her trading skills. But the Forex market is one of the riskiest markets anyone can trade. While its potential rewards are great, betting on exchange rates requires experience. Some simple advice can ensure you don't lose a lot of money during the learning curve.
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Use a Simulator
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It is possible to explore the entire process of trading Forex without actually risking any money. This is an important first step for anyone who plans on becoming a Forex trader. Open a "demo" account with any Forex broker. You do not need to sign up for a brokerage account or give away sensitive personal information to do so. The demo account functions exactly like a real account with that broker, but it is stocked with fake capital. You can simulate with many brokers' demo accounts for many months, if you want. The trading experience you gain is excellent, and you don't risk your own hard-earned capital in the process. If you already have a real Forex brokerage account, opt to use the simulation account anyway until you are consistently profitable.
Trade Small Positions
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When you are finally ready to trade real money, use only small positions in the beginning. The psychological component of trading with real money adds new challenges to the trading process. To minimize your risks, trade as small of a position as you can until you are consistently profitable. Consider opening a "micro" brokerage account, which lets you trade with particularly small sums of cash. This greatly reduces your risks. You can build confidence by making small profits, and you minimize the destruction of your losing trades.
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Understand Leverage
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It is important for all Forex traders to understand the risks that high leverage provides. Most Forex brokers extend considerable leverage to their clients to increase the risk-to-reward ratio. Leverage is the ability to buy more assets than your actual cash balance should normally allow. In the United States, leverage of 50-to-1 is common. This means a $2,000 account can buy up to $100,000 worth of foreign currency. As an example, consider that you spend $1,000 to purchase foreign currency with an exchange rate of 1.52. At 50-to-1 leverage, if this rate changes by just one penny, to $1.51, then you have lost approximately $329 on this trade, a loss of nearly 33 percent. Never lose sight of the role of leverage in your trading.
Warning
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All the important advice on becoming a Forex trader centers around risk management. This is because it is possible to lose all the money in a Forex account very quickly if you are inexperienced. Every trader develops her own trading strategy and finds ways to trade effectively. While Forex traders vary widely in their actual trading ideas, all successful traders share these same priorities on managing their risk. If you do not maintain a consistent awareness of the potential losses in Forex trading, you are unlikely to succeed.
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