Forex Trading 1 – Why & How do I trade Foreign Exchange?
Rohit Malhotra | Mar 20, 2020
This is Part 1 of an audio podcast on a guide to forex trading, where we talk about the essential tips and tricks to keep in mind to maximize your returns.
You MAY feel you’ve MADE your mark in TOUGH investment markets, consistently earning supernormal returns.
You may feel pretty confident that you are ready to take on Currency markets. Relish that well-deserved sense of “the invincible me”! 😊
Foreign Exchange Trading is a term that sounds, well, almost foreign to most people and yet, wherever you go, you are bound to hear someone wax eloquent about the huge profits they made trading on the ForEx market.
Intriguing? Definitely. Murky waters to maneuver? Certainly. Worth understanding in more detail? Absolutely!
You are listening to a Mindwealth Audio Visual MWAV Podcast. I am Rohit and this begins a short series on some essential thoughts on trading on the Foreign Exchange Market.
In today’s episode, we’re going to touch on the WHY AND HOW of Forex trading.
Start with the all-important WHY. Be clear as to why you want to do the trade.
Why choose this currency? Do you have a strong fundamental view on the Euro?
Do you have a view based on charting or technical analysis suggesting that the Euro may strengthen sharply versus the USD going forward?
Maybe you live in America and have business revenues or personal income in USD and wish to diversify your currency exposure?
Do you wonder whether the Euro could rise over the next few days, weeks, or months against other G7 currencies? Would you bet on a stronger Euro?
Maybe someone else desires to import capital goods or buy some property in a european country. That could certainly factor into a decision.
Maybe you are living in a country whose currency is pegged to the USD or trades in a very tight band against the USD like Hong Kong or other countries in the Middle East.
Maybe your WHY is as simple as making enough for that upcoming fabulous family vacation or a desire to wow your spouse with your financial savvy or that special gift he or she wanted.
Or, maybe you are a personal trader seeking to capture market moves using various technical and sentiment-based tools?
Whatever is driving your decision, so long as you are clear on the reason, you will have clarity on your threshold for pain. You’ll know how much risk you’ll be willing to take on to get the return you want.
Having a clear “reason” to do something is most certainly a lifesaver!
Once you have your WHY, make sure to know HOW!
You can trade with or without leverage. Leverage is the concept of putting a small deposit down on a trade, known as a margin. When the trade happens however, your profit is based on the full value of the trade.
Let us say you have 200k USD in the bank and you wish to risk-manage your current or envisaged Euro exposure? Alternatively, you may have 1000 USD to earmark and wish to take a 100,000 EUR position against that. OR it could be both, you could have 200k USD in the bank but only wish to risk no more than a 1000 USD
Using leverage, you can participate in more trades at once and amplify your profits.
I generally recommend working with low leverage. If your trade produces a loss, you’re responsible to pay the entire loss amount, not just your deposit. If you do wish to use substantial leverage, then it becomes of paramount importance to be very disciplined in your trading strategy and work with a tight “stop-loss.”
E.g. if you have 5000 usd and wish to take a large size position you do not wish to lose more than a 1000 dollars. So if you take a million euro position, the margin of error is very small.
On the other hand, if you wish to trade a 100,000 euro, your margin of error is much more reasonable before you “hit your existing stop loss”
Bottomline – set your stop loss or pain threshold and decide your trade size and your price stop loss
If you wish to learn more about leverage, head down and click the link in the description of this podcast to see an explanation of leverage. I am not affiliated with IG, but being a trading platform, they have a fiduciary responsibility to explain “leverage” so it may be useful to have a quick read.
Forex trading is no simple task. It relies heavily on your sense of risk and how well you know your market. Have your reasons, and don’t get caught up in too many things at once.
The idea of leveraging large amounts for one enormous win may sound tempting. But realize the more leverage you take, the more you begin to damage your odds at making a profit.
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Stay tuned in, as we’ll go through some more essentials of Forex trading in part two of this mini series.