Insider’s Guide to Forex Trading

This is the first in a series of insights into trading the forex markets successfully. We have ten keys to trading success that all new forex traders and certainly many experienced forex traders need to learn and need to know. We’ll start with the top three with the rest detailed in the rest of this series.

11. Commission Free Trading

This was the initial sales pitch most brokers used and many still do. “You’ll trade for free – no commissions!” Well, any of us who trade actively know commissions add up to some ungodly amounts – many times you look at your annual statements if you trade actively and it’s not uncommon that your broker makes more, maybe much more, than you do in your trading profits. Forex trading is not commission free. Sure, there is usually not an “add-on” commission. However, they force you to pay a spread on every trade. You have to always buy at the ask and always sell at the bid. This is not the case in stocks, or futures or really any other market.

This forced spread on every trade is a commission. That’s what it is. Despite what the broker might claim. And that forced spread is not cheap. 3 pips is $30 on a just one full sized pair. Try $50 on a 5 pip spread you still see as commonplace.

Now, compare that to your average futures or stock trade. Which is more? Forex usually by far.
Now, let’s not leave it at that. Remember, you get some amazing leverage opportunities with Forex so the actual commission compared to the dollar volume you are able to trade is actually reasonable in some cases – assuming you trade at the right places and follow the right strategies. We’ll cover that below.

12. 100:1 Leverage…No, Wait! How about 200:1….or 400:1?

You’re going to be rich! With that kind of leverage you make just a few pips per days and you’ll spend as much time with your banker as you do with your significant other, right? You look at the end of month totals from your strategy, run it through your state of the art Leverage Calculator and instantly you are making 100%, 300% or 500% per month. Do that a few months, a bit of compounding and you’ll be buying that private island after all.
This is another one of those broker come-ons. It just doesn’t work this way. Yes, you can get this leverage. The brokers are going to allow it so I’m not saying it isn’t as advertised. However, you are guaranteed to wipe out using it. Guaranteed. There simply is no way you can trade at these leverage levels and make it. Not unless you are some trading genius who can take a trade and never lose. If you are – please contact me at once!

For the rest of us, you are going to lose. You are going to lose more than once. You are going to have some losing streaks. It’s the nature of trading. It’s not a big deal, especially if you can win more than you lose, and if your average win is greater than your average loss. You do that and who cares about some losses. Don’t get hung up on it.

However, you will care very much if you over-leverage. Do not over-leverage! This is the single, greatest mistake most new Forex traders make. Your state of the art trading calculator spits out numbers that are too great to pass up and you let greed get in the way of logic.

Think about it this way. 200:1 leverage.

You have a trade where you are targeting 25 pips and risking 25 pips. As you’ll learn below, that trade actually has to go 28 pips or more to hit your target of 25 pips and you’ll actually be risking 28 pips or more – but for this example we won’t get hung up on that. We’ll solve that later.

You have a $5,000 account and trade it with 200:1 leverage. That means you can trade 1,000,000 worth of currency (you can see why we said spreads above are a significant cost but with leverage can end up being a small percentage of cost) – and that means 10 full sized pairs.

Oh, and you lose on this trade. Let’s do the math. 10 pairs x 25 pips = 250 pip loss. Make that with spread 10 pairs x 28 pips = 280 pips loss x $10/pip = $2800 loss.

Oops. You’ve just lost over 50% of your account. Don’t even think about what would have happened if you were risking more – and these days on the Forex, good luck risking much less.

If you lose twice in a row – which happens all the time – you’ve just wiped out. Sure, if you win you make a great return, but you are completely counting on virtually never losing. Even if you get a few wins immediately, you’ll eventually wipe out.

It’s what happens to the new gambler in Las Vegas. They try a few hands, they win, they get sucked in, and then before they know it they are at their ATM machine looking for their mortgage money to try and get back that winning feeling.

You’ll have success trading with huge leverage. Some of the time. It will be great and you’ll brag to your friends how you made 50% that afternoon. Then, a few days later you’ll be asking them to pick up the lunch tab.

Do not use crazy leverage. Do not use crazy leverage. Do not use…ok, you get the idea.

Decide on a fixed percentage you are going to risk on your account on any one trade. 5%? 10%? And calculate that amount to determine what size you can trade based upon the risk per trade. It will still be great leverage – Forex provides that. What’s wrong with 5:1 leverage or 10:1 leverage? It blows away the stock market but it’s not going to wipe you out in a couple of trades.

13. Spreads

Find a broker that does not charge high spreads. Sure, you need a broker who provides a stable platform, which provides good customer service, which is regulated (important!), that has account insurance/guarantees, and so on. But realize these brokers make money many different ways. They make spread money, they make money by laying off orders on other banks, they make money on stop running. Did I say that? Guess it’s too late to take it back.

There is simply no reason to pay more than 3 pips on the EURUSD. And really, you should be paying 2 pips. On the GBPUSD and USDCHF why are you paying 5 pips? Sorry, it’s not going to a charitable cause – your broker’s bank account isn’t a non-profit. Those spreads are crazy. You should pay 3, maybe 4 at most on the other majors.

There are new trading platforms coming out in recent months, some based upon the “Currenex” platform that basically takes your orders direct to the “real” trading market and your broker only takes a small commission on the trade, closer to the model we see in stocks and futures. Or they are mimicking the Currenex platform and developing on that works similar. Look for this; it is important to have liquidity and low costs.

And forget about all the “exotics” – avoid trading anything that is not amongst the main pairs – EURUSD, USDCHF, GBPUSD, USDCAD, AUDUSD, USDJPY, EURJPY and maybe EURGBP. And stay away unless spread is 2 or 3 pips, maybe 4. That’s already more than enough to trade so why do you need to trade the GBPCHF for 15 pips spread? Unless you really like to make car payments and pay for rounds of golf for your broker. If you do see a compelling reason to trade, for example, the GBPJPY – and there are some great moves there – just be sure you are building the spread costs into your trading outcomes – you might need it to go 7 to 10 pips just to get break-even, let alone to start making a profit.

The rest of this important top 10 with critical insight into ensuring your forex trading success can be found here: http://www.netpicks.com/BetterTrading.html