Forex trading is lucrative because you can use leverage and most brokers will allow you to leverage your deposit by 200:1, while it can make you big money it can also see you wiped out quickly.
So how do you use leverage to seek big gains, while at the same time avoiding big losses?
Lets take a look.
Risk per Trade
Most traders simply think their risk per trade is their expected return their stop protection but this is rubbish. This is simply a mental guess and what may look on paper like a good risk to reward trade is not.
The fact is traders make calculations that lull them into a false sense of security.
When trading FX start by looking at the volatility of the market and how to deal with it.
Placing Stops
For example there is absolutely no point in placing a stop close when it's within normal volatility for the currency.
Who does this?
Day traders are prime culprits.
They think that if they place a stop just outside the daily range it gives them a good chance of winning, in fact the reverse is true as volatility can and does take prices anywhere in a day, the risk of them losing is guaranteed over the longer term.
If you are trading you need to have a stop behind a key resistance or support level and if possible on stop close only basis. Daily volatility often carries trades through support and resistance takes out stops and then closes below the level.
Trailing stops
Never be tempted to move them up to quickly to lock in profits.
You need to understand the volatility of the market and keep stops back - way outside of short term normal market pullbacks. Accept that if you are trend following, that you will have to give a big, chunk of your gains back the market when the trend ends.
This wont matter if your trend following you cant predict the end of a trend and if you got 70% of every major trend you would make a lot of money.
Cut Your Trading Down
You dont get rewarded for how often you trade you get rewarded for making money.
The really good trades only come around a few times a year in each currency, so be very selective and when you see these trends - risk as much as you can.
I know traders who make 100% or more on an annulized basis and they trade around six to ten times a year! They do so well becuase they are only interested in the big high odds trades and these only occur ocassionally.
The fact is most traders, trade low odds opportunties to often and lose - dont fall into this trap.
Leverage can make you a Lot of money but it needs to be handled wisely.
Accept that you have to take calculated risks, trade only when the time is right, follow the trend until it reverses and dont try and predict when it might end - let the market tell you that.
If you do the above you can use leverage to your advantage.
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