Is forex trading good

Is Forex Trading A Safe Investment?

Trading Forex is not, strictly speaking, an “ investment ,” in the sense that investing in a bond or a stock is. Traditionally an investment should be held for a long time to appreciate in value, and is usually a low or balanced risk, while the majority of forex trades are short term and higher risk/reward, completing in a matter of minutes or hours.

When you trade forex, you put your money at risk in an investment strategy. However, the risk can be managed with a prudent trading strategy.

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As in all investment strategies, there is a ratio of risk versus return. Risk is high in forex trading, but it can be managed.

The high level of risk stems from the number of forces that affect the global forex market.

One can understand the technical reasons for a move in a given currency, but that move may go the opposite way due to a political or even a climate event. A storm, a plane crash, an election – all of these may change the rules about what happens to your trade .

And this is why a good trader starts the day by studying the calendar of events on forex websites, and by reading the news carefully. Even then, stuff happens. That’s what the stop loss is for .

So traders manage the risk when they put money on the forex market. They make use of the limit order and the stop loss.

They watch for patterns of trading , so that they can predict market action. Technical trading is all about this kind of pattern-spotting, and, in orderly trading – and there is orderly trading on many markets when events do not intervene – it’s possible to follow, for example, a Fibonacci retracement, to let it take its course, and to take advantage of it .

Orderly trading takes place most of the time, and, as a result, putting money on the forex market is safe if you understand what you are doing. A disciplined, well-educated trader is a safe trader.

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Risk Warning.

Your capital is at risk. Trading in Forex and Contracts for Difference (CFDs) is highly speculative and involves a significant risk of loss. The information contained in this publication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This website is provided for informational purposes only and in no way constitutes financial advice. A featured listing does not constitute a recommendation or endorsement.

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How to Become a Successful Forex Trader.

Retail traders just starting out in the forex market are often unprepared for what lies ahead and end up undergoing the same life cycle: first they dive in head first – usually losing their first account – and then they either give up, or they take a step back and do a little more research and open a demo account to practice. Those who do this will often eventually open another live account, and experience a little more success – breaking even or turning a profit.

[Successful trading in the forex market requires a variety of skill sets. Investopedia's Become a Day Trader Course teaches you a proven strategy with six different kinds of trades that work in any market. With over five hours of on-demand video, exercises, and interactive content, you'll gain the confidence and knowledge to trade on a daily basis with consistent results.]

Why Medium Term?

So, why are we focusing on medium-term forex trading? Why not long-term or short-term strategies? To answer that question, let's take a look at the following comparison table:

Now, you will notice that both short-term and long-term traders require a large amount of capital – the first type needs it to generate enough leverage, and the other to cover volatility. Although these two types of traders exist in the marketplace, they are often positions held by high-net-worth individuals or larger funds. For these reasons, retail traders are most likely to succeed using a medium-term strategy.

The Basic Framework.

The framework of the strategy covered in this article will focus on one central concept: trading with the odds. To do this, we will look at a variety of techniques in multiple time frames to determine whether a given trade is worth taking. Keep in mind, however, that this is not a mechanical/automatic trading system; rather, it is a system by which you will receive technical input and make a decision based upon it. The key is finding situations where all (or most) of the technical signals point in the same direction. These high-probability trading situations will, in turn, generally be profitable.

Chart Creation and Markup.

Selecting a Trading Program.

We will be using a free program called MetaTrader to illustrate this trading strategy; however, many other similar programs can also be used that will yield the same results. There are two basic things the trading program must have:

Setting up the Indicators.

Now we will look at how to set up this strategy in your chosen trading program. We will also define a collection of technical indicators with rules associated with them. These technical indicators are used as a filter for your trades.

If you choose to use more indicators than shown here, you will create a more reliable system that will generate fewer trading opportunities. Conversely, if you choose to use fewer indicators than shown here, you will create a less-reliable system that will generate more trading opportunities. Here are the settings that we will use for this article:

Adding in Other Studies.

Now you will want to incorporate the use of some of the more subjective studies, such as the following:

Significant trendlines that you see in any of the time frames Fibonacciretracements, arcs or fans that you see in the hourly or daily charts Support or resistance that you see in any of the time frames Pivot points calculated from the previous day to the hourly and minutely charts chart patterns that you see in any of the time frames.

In the end, your screen should look something like this:

Finding Entry and Exit Points.

The key to finding entry points is to look for times in which all of the indicators point in the same direction. Moreover, the signals of each time frame should support the timing and direction of the trade. There are a few particular instances that you should look for:

Bullish candlestick engulfings or other formations Trendline/channelbreakouts upwards Positive divergences in RSI, stochastics and MACD Moving average crossovers (shorter crossing over longer) Strong, close support and weak, distant resistance.

Bearish candlestick engulfings or other formations Trendline/channel breakouts downwards Negative divergences in RSI, stochastics and MACD Moving average crossovers (shorter crossing under longer) Strong, close resistance and weak, distant support.

It is a good idea to place exit points (both stop losses and take profits) before even placing the trade. These points should be placed at key levels, and modified only if there is a change in the premise for your trade (oftentimes as a result of fundamentals coming into play). You can place these exit points at key levels, including:

Just before areas of strong support or resistance At key Fibonacci levels (retracements, fans or arcs) Just inside of key trendlines or channels.

Let's take a look at a couple of examples of individual charts using a combination of indicators to locate specific entry and exit points. Again, make sure any trades that you intend to place are supported in all three time frames.

In Figure 2, above, we can see that a multitude of indicators are pointing in the same direction. There is a bearish head-and-shoulders pattern, a MACD, Fibonacci resistance and bearish EMA crossover (five - and 10-day). We also see that a Fibonacci support provides a nice exit point. This trade is good for 50 pips, and takes place over less than two days.

In Figure 3, above, we can see many indicators that point to a long position. We have a bullish engulfing, a Fibonacci support and a 100-day SMA support. Again, we see a Fibonacci resistance level that provides an excellent exit point. This trade is good for almost 200 pips in only a few weeks. Note that we could break this trade into smaller trades on the hourly chart.

Money Management and Risk.

Money management is key to success in any marketplace but particularly in the forex market, which is one of the most volatile markets to trade. Many times fundamental factors can send currency rates swinging in one direction – only to have the rates whipsaw into another direction in mere minutes. So, it is important to limit your downside by always utilizing stop-loss points and trading only when good opportunities arise.

Here are a few specific ways in which you can limit risk:

Increase the number of indicators that you are using. This will result in a harsher filter through which your trades are screened. Note that this will result in fewer opportunities. Place stop-loss points at the closest resistance levels. Note that this may result in forfeited gains. Use trailing stop losses to lock in profits and limit losses when your trade turns favorable. Note, however, that this may also result in forfeited gains.

The Bottom Line.

Anyone can make money in the forex market, but this requires patience and following a well-defined strategy. However, if you approach forex trading via a careful, medium-term strategy, you can avoid becoming a casualty of this market.

10 Ways To Avoid Losing Money In Forex.

The global forex market boasts over $4 trillion in average daily trading volume, making it the largest financial market in the world. Forex's popularity entices traders of all levels, from greenhorns just learning about the financial markets to well-seasoned professionals. Because it is so easy to trade forex - with round-the-clock sessions, access to significant leverage and relatively low costs - it is also very easy to lose money trading forex. This article will take a look at 10 ways that traders can avoid losing money in the competitive forex market. (There are no specifically forex focused programs, but there are still some advanced education alternatives for forex traders. Check out 5 Forex Designations .)

1. Do Your Homework – Learn Before You Burn.

2. Take the Time to Find a Reputable Broker.

Traders should also research each broker's account offerings, including leverage amounts, commissions and spreads, initial deposits, and account funding and withdrawal policies. A helpful customer service representative should have all this information and be able to answer any questions regarding the firm's services and policies. (Discover the best ways to find a broker who will help you succeed in the forex market. Refer to 5 Tips For Selecting A Forex Broker .)

Nearly all trading platforms come with a practice account, sometimes called a simulated account or demo account. These accounts allow traders to place hypothetical trades without a funded account. Perhaps the most important benefit of a practice account is that it allows a trader to become adept at order entry techniques.

Few things are as damaging to a trading account (and a trader's confidence) as pushing the wrong button when opening or exiting a position. It is not uncommon, for example, for a new trader to accidentally add to a losing position instead of closing the trade. Multiple errors in order entry can lead to large, unprotected losing trades. Aside from the devastating financial implications, this situation is incredibly stressful. Practice makes perfect: experiment with order entries before placing real money on the line.

Once a forex trader has opened an account, it may be tempting to take advantage of all the technical analysis tools offered by the trading platform. While many of these indicators are well-suited to the forex markets, it is important to remember to keep analysis techniques to a minimum in order for them to be effective. Using the same types of indicators – such as two volatility indicators or two oscillators, for example – can become redundant and can even give opposing signals. This should be avoided.

Any analysis technique that is not regularly used to enhance trading performance should be removed from the chart. In addition to the tools that are applied to the chart, the overall look of the workspace should be considered. The chosen colors, fonts and types of price bars (line, candle bar, range bar, etc) should create an easy-to-read and interpret chart, allowing the trader to more effectively respond to changing market conditions.

While there is much focus on making money in forex trading, it is important to learn how to avoid losing money. Proper money management techniques are an integral part of successful trading. Many veteran traders would agree that one can enter a position at any price and still make money – it's how one gets out of the trade that matters.

Part of this is knowing when to accept your losses and move on. Always using a protective stop loss is an effective way to make sure that losses remain reasonable. Traders can also consider using a maximum daily loss amount beyond which all positions would be closed and no new trades initiated until the next trading session. While traders should have plans to limit losses, it is equally essential to protect profits. Money management techniques, such as utilizing trailing stops, can help preserve winnings while still giving a trade room to grow.

6. Start Small When Going Live.

Once a trader has done his or her homework, spent time with a practice account and has a trading plan in place, it may be time to go live – that is, start trading with real money at stake. No amount of practice trading can exactly simulate real trading, and as such it is vital to start small when going live.

Factors like emotions and slippage cannot be fully understood and accounted for until trading live. Additionally, a trading plan that performed like champ in backtesting results or practice trading could, in reality, fail miserably when applied to a live market. By starting small, a trader can evaluate his or her trading plan and emotions, and gain more practice in executing precise order entries – without risking the entire trading account in the process.

Forex trading is unique in the amount of leverage that is afforded to its participants. One of the reasons forex is so attractive is that traders have the opportunity to make potentially large profits with a very small investment – sometimes as little as $50. Properly used, leverage does provide potential for growth; however, leverage can just as easily amplify losses. A trader can control the amount of leverage used by basing position size on the account balance. For example, if a trader has $10,000 in a forex account, a $100,000 position (one standard lot) would utilize 10:1 leverage. While the trader could open a much larger position if he or she were to maximize leverage, a smaller position will limit risk. (For additional reading, see Adding Leverage To Your Forex Trading .)

8. Keep Good Records.

9. Understand Tax Implications and Treatment.

10. Treat Trading As a Business.

It is essential to treat forex trading as a business, and to remember that individual wins and losses don't matter in the short run; it is how the trading business performs over time that is important. As such, traders should try to avoid becoming overly emotional with either wins or losses, and treat each as just another day at the office. As with any business, forex trading incurs expenses, losses, taxes, risk and uncertainty. Also, just as small businesses rarely become successful overnight, neither do most forex traders. Planning, setting realistic goals, staying organized and learning from both successes and failures will help ensure a long, successful career as a forex trader.

The worldwide forex market is attractive to many traders because of its low account requirements, round-the-clock trading and access to high amounts of leverage. When approached as a business, forex trading can be profitable and rewarding. In summary, traders can avoid losing money in forex by:

Being well-prepared Having the patience and discipline to study and research Applying sound money management techniques Approaching trading activity as a business.

Forex Trading Pros And Cons.

The first decision a new trader has to make is which market to trade.

Stocks, futures, mutual funds, options, exchange traded funds are all good candidates but unfortunately require trading accounts that are too large, at least initially, for many beginning traders.

For these traders the foreign exchange market (Forex) may be the best starting point.

Is Forex trading profitable? Let’s look at the pros and cons of Forex trading.

The Plus Side Of Forex Trading.

High Trading Leverage.

This is the big advantage and profit of the Forex for many traders. Brokers will allow traders to take trades with up to 50:1 margin (country dependent).

Compare this to the stock market where the broker may grant you 2:1 margin. With a small account you can control a large trading position in Forex and when you have a winning trade the payout can be huge.

“Leverage involves borrowing a certain amount of the money needed to invest in something. In the case of forex, that money is usually borrowed from a broker.” – Investopedia.

Unfortunately high leverage also means high risk and we’ll cover this when we talk about the Forex trading cons.

Ability To Scale.

One of the most attractive features of Forex is that you have great flexibility in position sizing which makes the Forex trading profitable. Most brokers allow you to trade full sized lots, mini lots or micro lots.

Trading full sized lots each pip in a USD pair is worth $10, Trading minis each pip is worth $1 Trading with micros each pip is $0.10.

Depending on the size of the trading account this allows the trader to control and limit his risk.

For example when entering a Forex swing trade with a 500 pip risk the trader can limit his risk to $500, or $50, or as little as $5 depending on the type of position taken, so even a small account can take advantage of large moves in the currencies.

Around the Clock Forex Trading.

No matter where you live or what hours you work the Forex market is up and running. As long as you have a computer and an internet connection you can trade.

Low or No Fees.

Most brokers don’t charge commissions on Forex trades. Instead they are compensated by taking the spread between the bids and ask on the buy side.

Depending on the broker, currency pair and time of day this can be as low as one or two pips, although it can go significantly higher. Of course the impact of this pricing will depend on the size of the trades you take.

A one or two pip spread is quite modest when taking a 100 pip trade, but can be significant if scalping five or ten pips on each trade.

Free Trading Software and Data.

Almost all Forex brokers provide free real time Forex data, free charting, and trading software. Traders can obtain the free MetaTrader platform and a demo account from most brokers, and once ready can open a funded live account and continue to use the same software. This is not the case with most other trading instrument types, so this is a big plus for Forex traders.

Free Web Resources.

A search on the internet brings up page after page of resources for the Forex trader, including brokers, educational materials, calculators, software and manual strategies, etc. Some of these are quite good and can help the new trader learn about this market, others unfortunately are scams or sales pitches. Buyer beware!

The Downside Of Forex Trading.

High Leverage.

The dark side of high leverage is high risk. Sure a trader can tally up huge wins using 50:1 margin, but what happens when the first losing trade comes along?

The broker will in all likelihood force an exit to the trade and the trading account will be wiped out.

The fact that brokers are offering insane margin levels doesn’t mean that they should be used. The key to surviving and thriving in the Forex markets is being able to survive a series of losing trades. No matter what system is being used, losing trades will come, and they will come in streaks of three, four, or more losing trades in a row.

The prudent trader will therefore limit the amount of his trading capital that he risks on each and every trade.

Our recommendation is to risk no more than 2% of the trading capital on any single trade. By limiting the risk on each trade even a series of ten losing trades in a row won’t destroy the trading account, instead the account will only suffer a 20% drawdown which, while still painful, can easily be recovered.

And thanks to the scalability of Forex trading, everyone, even traders with small accounts, can control the risk they assume with each trade.

Around the Clock Trading.

Just because Forex can be traded 24 hours a day doesn’t mean that it should be traded 24 hours a day.

The reality is that markets move differently throughout the day: at peak hours moves can be large and have follow through; at off-peak times price will chop around with little direction.

As it turns out each time zone has its own trading session, from the Asian to the UK and the US, and each of these tends to exhibit the most activity during the early parts of the trading session.

Instead of just trading any old time of the day the successful trader will observe the major markets in his time zone and focus his trading on their peak hours.

No Centralized Exchange.

Unlike stocks or futures the Forex market has no centralized exchange or clearing house.

Instead each broker acts as its own exchange and the broker in effect becomes the market maker. This can lead to abuse on the part of the broker or worse.

Fortunately regulations in major markets like the US have greatly reduced the risk but some traders still get drawn in by brokers from locations with little or no regulation and get scammed.

Because of the lack of a centralized exchange we also see price variations from broker to broker. When dealing with major brokers in well regulated countries these differences will be small but traders need to be aware of this fact especially if their charting data provider is not the same as their broker as it can lead to inconsistencies between intended and actual execution of trades.

Competition.

The major traders in Forex are the large financial institutions. They have departments staffed with highly paid traders and millions of dollars invested in the best trading software and hardware.

That’s the competition for the individual trader, and these large institutions can push prices around (within limits of course) simply because of the volume that they control.

The best way for the individual to compete is to use a well-tested and profitable trading strategy, tight risk management and a focused and disciplined attitude towards the business of trading.

Trading Forex can be a very profitable business for the individual trader, but like every high reward business it also has significant risks. Research and study the markets and paper or demo trade before placing your first live trade.

And put the odds in your favor by trading with a large reputable broker in a well regulated country, and maintaining focus and discipline while trading a tested strategy with solid risk management.