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All along we have been talking about trading in forex markets and making profits from it. But think for a moment what does the forex market actually achieve? At the least it provides for a method to make payments across national borders. So when you are transferring money across borders you are actually transferring purchasing power from one currency to another. In the process what happens? A mechanism evolves whereby exchange rates between different currencies get determined. A major beneficiary of this is of course the forex trader since he has the tools to capitalize on currency price fluctuations. As forex market participants include countries from around the world, it so happens that when currencies are faced against each other, some are worth more or some are worth less than the original valued currencies that are being traded. Nevertheless forex markets create wealth for all its participants whether they are banks, brokers, individuals or even governments.

Check out the profitability of your trading strategy

There are numerous strategies or trading systems you could use to trade in the forex markets. Some might suit you but others might not for the reason that some are based on fundamental analysis, while others are based on technical analysis. Perhaps you should develop a trading strategy which is a unique combination of both the factors. The point is you have to be comfortable with the trading strategy you develop. You could even trade on a trading system developed by someone else. Either way you have to first determine the profitability of the strategy you have adopted. That is one of the keys to your eventual success in forex markets. The best method of ascertaining the profitability of your trading strategy is to check it out in a demo account. This would give you a better understanding of your strategy and allow you to familiarize yourself with the trading platform.
There are other esoteric ways of determining your profitability in terms of “expectancy” and opportunity. Both these elements could tell you what you could possibly earn over a period of time. Expectancy is calculated using the profit or loss on each trade and then divided by the initial risk, and then taking the average of this number over a series of trades. The figure you get is the average amount you could possibly make per trade. If you get a negative figure, drop the system since it could be of no use to you. On the contrary if the figures were positive and higher it is a good system to follow. A detailed explanation about this element is beyond the scope of this article. However if you wish to learn more about it click on the hyperlinked text above.

How much should you invest in forex trading?

It doesn’t matter whether you are a small investor or a large investor in forex trading. But it does matter that the pattern of your investment must always be within the limits of your income.
You could consider yourself eligible for forex investment only if the following three criteria could be met.

  1. If you are sure of having a steady income
  2. If your income sources are able to meet your current expenses and obligations
  3. If you have cash reserves to meet unforeseen emergencies.

These conditions are safeguards that should dictate your level of investment in forex markets. In other words, if you follow this conditionality you are less likely to make any haphazard investments in forex markets.
For example one of the conditions talks of the need to have cash reserves to meet unforeseen emergencies. You could soon realize that a cash reserve would enable you to handle margin calls in your forex trading. Not only that, a reserve allows the possibility of investment over a period of time rather than all at once. As you learn more about forex markets, you will naturally hear both sides of the argument. Some traders would prefer to back a good situation with all the funds at their command while others would prefer partial investment at varying intervals to spread the risk. Ultimately whatever policy you adopt, you must give yourself the flexibility of moving either way your judgment warrants. There are instances of forex traders starting off with an initial float of $500. Then they would invest $1 to $10 per pip and then go on to reinvest the profits obtained thus far. But always remember that although a smaller outlay is required to invest in forex markets as compared to stocks for instance, the fact remains that forex markets are greatly speculative. This is one of the underlying dangers of the forex market. Therefore as a beginner in forex trading it would be prudent to invest only that amount of money which you could well afford to loose.

Different Types of Forex Trading

The complexity of forex markets offer different types of forex trading like for example spread betting, day trading and auto trading. Although it may look similar to each other, each has its own advantages and disadvantages. As a newcomer to forex markets you should at least know their basic differences.
Traditional forex trading involves buying a currency at a low rate. You either then sell it for a higher price or exchange it for another currency when the exchange rates rise.Spread betting does not involve buying and selling currencies as in traditional forex trading. It simply involves betting on whether a currency would appreciate or depreciate. It may look similar to gambling, but a lot of people think it is a good way of making money in forex markets.
Day trading involves buying and selling currencies for one day. In this case you don’t hold on to a currency for more than a day. So you don’t have to pay carry forward charges to the broker. Most forex traders consider day trading to be risky business.
Auto trading as the name indicates means that a forex trader invests a given sum of money in a trading platform that would automatically execute trades depending on its own analysis. In other words, you are letting computer software handle the trades for you. Most forex traders are uncomfortable with this sort of thing and consider it to be risky business.
Whatever type of forex trading you would like to choose, first read up on the market and get to know how the trading is done, and what the signals to look out for are. In other words knowing forex trading and the signals associated with it, will help minimize the inherent risks in your trading strategy.

Focus on one currency pair to begin with

Many new forex traders begin trading one currency and within a month or probably less would have traded all the major currencies. That would indeed be a big mistake.Why is it important to focus on trading one currency?
Most forex traders would like you to believe that if you switched from one currency to another it increases your chances of success, because by doing so you would be spreading your bets. This does seem to be a logical answer but it need not be always right. For example consider this analogy. Imagine for a moment that you are a very strong guy and should any bully accost you in the streets you can handle the situation to your advantage. But have you ever thought what would be the outcome if you are put into a ring and asked to fight a guy who trained in martial arts. Suddenly your chances of coming out unscathed appear bleak.
This analogy is very apt in the context of forex trading because in forex trading you got to always swing the odds in your favor. If you concentrate on one currency, naturally those odds will increase. Why is that so? That is because, technically the factors that influence the Pound Sterling for example are different from that of the Euro or Yen or for that matter any other currency. So like your fight against the martial arts guy you are always up against the experts in a particular currency who could well be large banks or currency analysts. However by focusing on one currency you stand a better chance
Different currencies are influenced by different kinds of information and you should be aware of it. For example the Yen reflects the ethos of a nation with huge export surplus; the Swiss franc does well whenever global security is considered a problem and the Australian dollar is driven by the price of commodities and so on. So you got to be aware of the conflicting moods and personas of the currencies, and how they relate in the global scenario.
As a beginner, your best chance would be to master the ethos of one chosen currency. This helps build trading discipline and focus. If you focus on one currency, it obviates the need to gather information about other currency pairs. That means you have that much less technicalities to work on. By focusing on one currency you will taste success and when you taste success you begin having confidence in your trading style. And when you have confidence in your trading style you are on the road to make profits.
Remember no one currency is easier to trade than the other nor would you make more money trading one particular currency over another. So stay focused on one particular currency and the odds of success would shift in your favor.

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