Failure can happen for a number of reasons, such as under capitalization, no trading strategy, no money management and a lack of discipline. The following tips are based on what most people face trading forex.
1. Stay out of the market for major news announcements. Currencies are representations of the strength of the economies. Fundamental news, whether economic or unsettling global events will have an affect on currency pairs. It is common for a major news announcement to drive the currency 200 pips. If it is the wrong direction, you can lose all your money depending on your margin leverage.
2. New traders should only trade pairs with smaller spreads, about 4 pips like EUR/USD. Some pairs can be greater than 10 pips. This means that the pair has to move in your favor by 10 pips to become even.
3. Use a practice account to get used to placing orders and for longer term trading practice, not for short term trading. Short term trading will not be the same as live trading because of the difference with fill prices. The actual entry price on live accounts will not be as good as the practice platforms in most cases. Some platforms are worse than others. Market makers have more of an affect on this than ECN brokers.
It is better to do live trading with a mini contract. It is real trading but with a small risk. Each pip move is only worth one dollar.
4. Look seriously into using algorithmic trading, also known as robot-trading, algo, black-box or automated trading. Today over 20% of all forex trading is being done by algorithmic trading. It is estimated that by 2010 the US and EU stocks markets will be trading 50% of automated trading.
Hedge funds, pension funds, and other large institutional traders use automated trading. For the small investor, there are some legitimate companies that offer a version of automated trading mostly known as robot trading.
5. This tip is important for traders using a smaller amount of capital. Make sure that your broker has the option to get you out of a trade if your capital funds get wiped out. If not, place your own stop loss where your capital reaches zero. Always keep a stop loss order slightly above that amount to get you out with a safety margin. It is good to place this stop with a little more room in case there is news that making the price volatile.
6. Forex trading is highly leveraged, since low margin deposits normally are required, an extremely high degree of leverage is obtainable in foreign exchange trading. You can get over 200:1 margin leverage but do not go over 100:1 margin. The higher margin will tempt you to enter larger trades and will ultimately use most of your margin on a trade. Once your capital goes down to zero, you are out of the trade with no more money left.
