FOREX Trading Philosophy

Forex Day Trading Allure

Many beginning FOREX traders are captivated by the allure of easy money.  FOREX websites offer 'risk-free' trading, 'high returns' 'low investment' – these claims have a grain of truth in them, but the reality of FOREX is a bit more complex.
There are two common mistakes that many beginner traders make – trading without a strategy and letting emotions rule their decisions.  After opening a FOREX account it may be tempting to dive right in and start trading.  Watching the movements of EUR/USD for example, you may feel that you are letting an opportunity pass you by if you don't enter the market immediately.  You buy and watch the market move against you.  You panic and sell, only to see the market recover.


This kind of undisciplined approach to FOREX is guaranteed to lose you money.  FOREX traders need to have a rational trading strategy and not allow emotions to rule their trading decisions.
To make rational trading decisions the FOREX trader must be well-educated in market movements.  He must be able to apply technical studies to charts and plot out entry and exit points.  He must take advantage of the various types of orders to minimize his risk and maximize his profit.
The first step in becoming a successful FOREX trader is to understand the market and the forces behind it.  Who trades FOREX and why?  Who is successful and why are they successful?  This knowledge will allow you to identify successful trading strategies and use them as models for your own.
There are 5 major groups of investors who participate in FOREX – Governments, Banks, Corporations, Investment Funds, and traders.  Each group has varying objectives, but the one thing that all the groups (except traders) have in common is external control.  Every organization has rules and guidelines for trading currencies and can be held accountable for their trading decisions.  Individual traders, on the other hand, are accountable only to themselves.

Forex Day Trading Conclusion

This means that the trader who lacks rules and guidelines is playing a losing game.  Large organizations and educated traders approach the FOREX with strategies, and if you hope to succeed as a FOREX trader you must play by the same rules.
Money Management
Money management is part and parcel of any trading strategy.  Besides knowing which currencies to trade and recognizing entry and exit signals, the successful trader has to manage his resources and integrate money management into his trading plan.  Position size, margin, recent profits and losses, and contingency plans all need to be considered before entering the market.
There are various strategies for approaching money management.  Many of them rely on the calculation of core equity.  Core equity is your starting balance minus the money used in open positions.  If the starting balance is $10,000 and you have $1000 in open positions your core equity is $9000.
When entering a position try to limit risk to 1% to 3% of each trade.  This means that if you are trading a standard FOREX lot of $100,000 you should limit your risk to $1000 to $3000 – preferably $1000.  You do this by placing a stop loss order 100 pips (when 1 pip = $10) above or below your entry position. 
As your core equity rises or falls you can adjust the dollar amount of your risk.  With a starting balance of $10,000 and one open position your core equity is $9000.  If you wish to add a second open position, your core equity would fall to $8000 and you should limit your risk to $900.  Risk in a third position should be limited to $800.
By the same principal you can also raise your risk level as your core equity rises.  If you have been trading successfully and made a $5000 profit, your core equity is now $15,000.  You could raise your risk to $1500 per transaction.  Alternatively, you could risk more from the profit than from the original starting balance.  Some traders may risk up to 5% against their realized profits ($5,000 on a $100,000 lot) for greater profit potential.

Forex Definitions, Terms and Acronyms:

• Exchange rate - also known as a foreign-exchange rate, forex rate or FX rate.
• Floating exchange rate - a type of exchange rate regime in which a currency's value is allowed to fluctuate according to the foreign exchange market.
• Forex - acronym for foreign exchange market.

The Psychology of Forex Market Trading

When it comes to trading on the Forex market, winning is a matter of the mind rather than mind over matter. Any trader who’s been in the game for any length of time will tell you that psychology has a lot to do with both your own performance on the trading floor and with the way that the market is moving. Playing a winning hand depends on knowing your own mind – and understanding the way that psychology moves the market.


Studying the psychology of the market is nothing new. It doesn’t take a genius to understand that any arena that rides and falls on decisions made by people is going to be heavily influenced by the minds of people. Few people take into account all the various levels of mind games that motivate the market, though. If you keep your eye on the way that psychology influences others – including the mass psychology of the people that use the currency on a daily basis – but neglect to know what moves you, you’re going to end up hurting your own position. The best Forex coaches will tell you that before you can really become a successful trader, you have to know yourself and the triggers that influence you. Knowing those will help you overcome them or use them. Are you saying ‘Huh?” about now? Believe me, I understand. I felt the same way the first time that someone tried to explain how the mind games we play with ourselves influence the trades and decisions that we make. Let me break it down into more manageable pieces for you.

Anything involving winning or losing large sums of money becomes emotionally charged.

All right. You’ve heard that playing the market is a mathematical game. Plug in the right numbers, make the right calculations and you’ll come out ahead. So why is it that so many traders end up on the losing end of the market? After all, everyone has access to the same numbers, the same data, the same info – if it’s math, there’s only one right answer, right?
The answer lies in interpretation. The numbers don’t lie, but your mind does. Your hopes and fears can make you see things that just aren’t there. When you invest in a currency, you’re investing more than just money – you make an emotional investment. Being ‘right’ becomes important. Being ‘wrong’ doesn’t just cost you money when you let yourself be ruled by your emotions – it costs you pride. Why else would you let a loser ride in the hope that it will bounce back? It’s that little thing inside your head that says, “I KNOW I’m right on this, dammit!”
Bottom line: You can’t keep emotions out of the picture, but you can learn not to let them control your decisions.
To most people, being right is more important than making money.
Here’s the deal. The way to make real money in the forex market is to cut your losses short and let your winners ride. In order to do that, you have GOT to accept that some of your trades are going to lose, cut them loose and move on to another trade. You’ve got to accept that picking a loser is NOT an indication of your self-worth, it’s not a reflection on who you are. It’s simply a loss, and the best way to deal with it is to stop losing money by moving on – and really move on. Moving on means you don’t keep a running total of how many losses you’ve had – that’s the way to paralyze yourself.  This brings us to the next point:
Losing traders see loss as failure. Winning traders see loss as learning.
Not too long ago, my twelve year old son told me that before Thomas Edison invented a working light bulb, he invented 100 light bulbs that didn’t work. But he didn’t give up – because he knew that creating a source of light from electricity was possible. He believed in his overall theory – so when one design didn’t work, he simply knew that he’d eliminated one possibility. Keep eliminating possibilities long enough, and you’ll eventually find the possibility that works.

Forex Definitions, Terms and Acronyms:

• Euro - EUR, the currency of twelve European Union member states: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain (European Union).
• Money - any marketable good or token used by a society as a store of value, a medium of exchange, and a unit of account.
• Pip example - if the quotation of EUR/USD is 1.2025, a pip is represented by EUR 0.0001.

Winning traders see loss in the same way. They haven’t failed – they’ve learned something new about the way that they and the market work.
Winning traders can look at the big picture while playing in the small arena.
Suppose I told you that last year, I made 75 trades that lost money, and 25 that made money. In the eyes of most people, that would make me a pretty poor trader. I’m wrong 75% of the time. But what if I told you that my average loss was $1000, but my average profit on a winning trade was $10,000? That means that I lost $75,000 on trades – but I made $250,000, making my overall profit $175,000.  It’s a pretty clear numbers game – but how do you keep on trading when you’re losing in trade after trade? Simple – just remember that one trade does not make or break a trader. Focus on the trade at hand, follow the triggers that you’ve set up – but define yourself by what really matters – the overall record.