Recently forex markets have been opened up to the average investor as it was the domain held exclusive to large financial firms, such as banks and funds management companies. Now days it's possible to start with $250 or less.
Forex trading is trading foreign currency and is traded in foreign currency pairs, for example: Australian / United States dollar which is represented as AUD/USD. This means when you are buying one currency you are selling the other. Unlike shares you can trade in an upward or downward trending market.
A lot of times you will claims of forex been commission free trading which is not entirely true as the commission is in the spread, this is difference between the buying and selling price. For example when go to a currency exchange booth at an airport you may notice a board with different currencies listed with a buying and selling price, this is the spread. The buying price will be less than the selling price.
Leverage This is a two sided sword that can increase your profits when the markets go your way. Should the markets go against you, it can multiply your loss. Some foreign currency brokers allow you leverage of 400:1, most will offer 100:1. This allows you buy $100,000 worth of currency with only $1000 margin deposit.
Leverage used, should be controlled as a trade going against you even slightly could wipe your entire trading funds.
This is about protecting money from the trades that go wrong, by not having too much money on one trade. You will get wrong sometimes no matter how well you predict the market. Put too much money on each trade is a recipe for disaster. A good guide would to only 2.5 and 4 percent on each trade.
You may setup trade using a stop loss and a take profit order, allowing the freedom of not having constantly sit in front of a computer watching the market 24 hours a day.
A stop loss will reduce the size of the loss by closing the deal at a preset level automatically.
Take profit will close the deal and take the profit made a preset level automatically, the opposite to a stop loss.
The difference between a good trader and a bad trader
The good trader has a system which they have tested and proven to work using solid analysis, keeping control of emotions. Has good money management skills
The bad trader trades by gut instinct (flying by the seat of their pants approach to trading), dominated by greed and fear with no proven system. Has bad money management skills and will risk too much on 1 trade. This is gambling, not trading.
Copyright 2006 Richard Wright