The Forex market is an electronic marketplace where banks, governments, companies and individuals exchange different world currencies. Traders generate profits by exchanging one currency for another by buying or selling a currency "pair," then exchanging the second currency back for the first to profit from changes in currency exchange rates. Forex presents opportunities to generate consistent profit for savvy traders, but the risk of loss is significant.
For beginners starting out in a demo account or actually trading, embracing the mentality of a disciplined and strategic trader can greatly increase your changes of consistently profiting in the Forex market. Risk management, sometimes referred to as money management, is one of the most important elements of ensuring consistent profitability in Forex trading.
Risk management philosophies protect investors from large, dangerous losses by limiting the amount they can lose each day to a chosen percentage of their total account size. In general, disciplined traders cap their daily losses at anywhere from 2 to 5 percent, effectively limiting their strategy's drawdown -- the inevitable losses that occur in any Forex system.
Choose and study a risk-management system to understand how to vary your position size for each trade to effectively face the same level of risk for every trade you engage in, regardless of your stop-loss distance. Never allow emotions to affect your trading decisions. Develop a strategy that works in a demo account, and employ it with disciplined precision in live trading. Stick to your chosen entry and exit triggers, profit targets, time cycles and risk-management guidelines trade after trade, using your demo account to test tweaks and changes if necessary.
Making decisions based on the same objective criteria time after time allows a sound trading strategy to achieve consistent profitability. Do not make trading decisions in a vacuum. Check an economic calendar for notable news releases expected during your trading period, and mark these times on your charts.
Be aware that these news release can and do cause markets to unexpectedly change trend direction or momentum, and do not let yourself be caught unaware. When making trading decisions, always use multiple inputs for confirmation.
Consult multiple indicators at once for added confirmation, pay attention to price patterns on your charts and check trend strength on multiple time frames to increase your confirmation and boost the probability of each trade working out. Every Forex strategy has a bit of drawdown, which means that no currency-trading strategy will make a profit on every trade. Train yourself to view profitability in longer time frames, such as weekly or monthly. Set your goal in terms of your overall profit factor and equity curve.
Any strategy with a profit factor greater than one indicates a profitable strategy that earns more money than it loses over time. Your trading platform or broker should be able to furnish you with a detailed report of your trading statistics at any time, including your profit factor and a chart of your equity curve for any given time frame.
David Ingram has written for multiple publications since , including "The Houston Chronicle" and online at Business. As a small-business owner, Ingram regularly confronts modern issues in management, marketing, finance and business law. He has earned a Bachelor of Arts in management from Walsh University. At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors.
This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. These returns cover a period from and were examined and attested by Baker Tilly, an independent accounting firm.
Visit performance for information about the performance numbers displayed above. Skip to main content. Manage Risk Effectively Risk management, sometimes referred to as money management, is one of the most important elements of ensuring consistent profitability in Forex trading. Make Disciplined Decisions Never allow emotions to affect your trading decisions. Think Big Picture Do not make trading decisions in a vacuum.
Understand Drawdown and Profit Every Forex strategy has a bit of drawdown, which means that no currency-trading strategy will make a profit on every trade. References 3 Apiary Fund: About the Author David Ingram has written for multiple publications since , including "The Houston Chronicle" and online at Business. Zacks Research is Reported On:More...