Determine Your Trade Risk Before Placing Your First Trade Of 2014

Every trader has his own tolerance for risk. If you have just picked up Forex in 2014 or are a reoccurring trader who is struggling in the market, smaller lots are recommended. We recommend you start with micro lots or mini lots. When you make profits several weeks in a row, and when you feel comfortable with bigger risks, you can move to bigger lot sizes. As world renowned poet Maya Angelou once said that one is not born with courage. One develops it by doing small courageous things—in the way that if one sets out to pick up a 100-pound bag of rice, one would be advised to start with a five-pound bag, then 10 pounds, then 20 pounds, and so forth, until one builds up enough muscle to lift the 100-pound bag. In some ways courage is needed in trade risk. So it might be awhile until you are ready to trade a standard lot. 

Several factors affect how much of your account size you should be willing to risk. We recommend you risk no more than 2% of your account at first (1% would be better). Risk, in this context does not mean the size of the trade you put on. Rather it is the maximum loss you will tolerate before closing the trade. If you have a $5,000 account, we recommend you hold your losses to $100 per trade. That way, you can lose 50 trades in a row before all your money is gone. You are unlikely to lose more than 5-10 trades in a row, so this should keep you alive for a while. When you have more experience, you can risk a bit more, but at first, keep the losses small. Happy trading in 2014! 

Is Trading Forex Like Trading Stocks?

Is Trading Forex Like Trading Stocks?

The quick and simple answer is “no.”

Trading Forex is different from trading stocks in many respects. In fact, it is different in almost every respect.

First of all, when trading Forex, you are trading “pairs,” rather than a single item. You can “pair trade” certain stocks and futures, as well. For example, you can trade corn vs. wheat, BMW vs. Mercedes, gold vs. silver, and many other pairs. But the only way you can trade Forex is in pairs.

The second big difference between trading Forex and stocks is that stocks tend to reverse directions fairly frequently, while Forex pairs tend to trend longer. A currency can be thought of as the economic strength of an entire country distilled into one trading entity. Thus, when you trade the USDCHF, you are considering the economic strength of the USA vs. that of Switzerland. The economy of a country doesn’t generally turn quickly, and neither does Forex. During most trading days, popular Forex pairs will remain within a fixed range. The EURUSD, for example, trades in a range of about 100 pips each day.

A third difference is the margin requirements. In Forex, the margin is typically 50:1. Stocks usually have a maximum margin of 4:1. This difference can be both useful and dangerous – useful because you can control more currency with fewer dollars; and dangerous because you can lose a lot of money very quickly.

There are other important differences, and we’ll discuss them in detail in the course.