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Profiting from currency trading with the world’s most tradable currencies

Profiting from currency trading with the world’s most tradable currencies

Profiting from currency trading is not as easy as many people make it sound. This article will indicate the steps that must be taken if a trader is to profit from trading the world’s tradable currencies.

What are the Tradable Currencies?

Not every currency is tradable. Tradable currencies refer to those currencies which have the following characteristics:

  • a) They must be floating”, i.e. the central government issuing the currency allows the value to be dictated by market forces. As a consequence, currencies such as the Chinese Yuan and the Hong Kong Dollar do not qualify as tradable currencies because they are under a fixed currency regime.
  • b) Such a currency must be listed widely across trading exchanges.
  • c) A tradable currency must have inter-convertibility with the major currencies, i.e. it must be easy to pair and exchange it with another currency.

Some Basics to Know

Before we go on to discuss how to profit from forex trading, it is important that the trader understands some basics of the forex market. Some of these basics are as follows.

  • a) The forex market is a two-way market. You can profit from rising or falling prices, using long (buy) or short (sell) orders respectively.
  • b) The profit (and also loss) potential in forex stems from the price differential between the entry and exit prices in a forex position.
  • c) Currencies are always traded in pairs.
  • d) The price movements in forex are very small, which is why the market is heavily leveraged. However, traders must put up an amount as collateral on each trade, known as the margin.
  • e) Currency trades are quantified in terms of the lot size of each position. The standard measurement of trade size in forex is the Standard Lot, which is equivalent to $100,000 of the traded currency position. This size can be subdivided further, according to the trader’s financial capacity.
    – A trader can also trade 1 mini-lot (one-tenth of a lot), and this is worth $10,000. Any position between 0.1 lots and 0.99 lots are mini-lots.
    – There is also the micro-lot size, which is one-tenth of a mini-lot or one-thousandth of a lot. This position size is worth $1,000, and any position between 0.01 lots and 0.099 lots is a micro-lot.

What it Takes to Profit in Forex

For a trader to remain profitable over a long period of time, three factors have to come together.

  • a) The trader must have a trading system, capable of identifying potentially profitable setups with clearly defined entry and exit rules.
  • b) The trader must have an appropriate trading psychology. Trading is a highly emotional event, and ability to control the various contending emotions is a principal strategy in forex.
  • c) The trader must have a solid risk management system in place.

1. Trading System

You should have a system that can spot potentially profitable setups. No matter the strategy used, it must comply with the following rules.

– Must be profitable over time.
– Must be able to spot setups with risk-reward ratios of at least 1:3.
– Must have well defined entry and exit parameters.
– Should be amenable to risk management.

You may copy that of a mentor who is successful, or you can develop yours.

2. Trading Psychology

Whenever money is involved, emotions tend to run high. As human beings, money earned represents the reward for physical and mental effort put into work, and if money is put into jeopardy, people tend to get all sorts of emotions about the situation. That is why trading is usually an emotionally charged affair, with traders experiencing all kinds of psychological effects that stem from emotional affectations. Traders undergo emotions such as fear, elation, anxiety, caution, panic, etc. Some emotions are good and some are bad. However, it just happens that we have more of bad emotions than good ones. Bad emotions cause traders to make irrational decisions, which could end up affecting trading outcomes.

This is why it is essential to have a sound trading psychology in place. There are books and other materials that dwell on the topic of trading psychology, but in reality, the trader has to undergo some sort of mind-conditioning to be able to control emotions. Some handle this by getting off their computers whenever they are done with setting up their orders, using alarms and other sound alert systems to notify them of when key targets have been reached. Yet there are some who decide to hand off all their trading to automated algorithms and robots, which are able to trade without emotional influence. The coming of artificial intelligence is no doubt going to revolutionize this aspect of trading. But for the retail trader without the resources to engage the services of costly automated programs, it is best to simply follow laid-down rules that will help control emotions.

Some of these rules are:

– Finding at least three reasons to enter a trade.
– Never adjusting stop loss/take profit settings, no matter what.
– Taking time off trading if a sequence of losses has occurred.
– Resisting the temptation to immediately recover losses.
– Getting enough sleep.

The topic of trading psychology cannot be exhausted here. It is something that has to cultivated over time.

3. Risk Management

Risk management is what enables certain traders to swim and survive when the boat capsizes, while others drown or are eaten by sharks. In market terms, good risk management protects the account from ruin during a bad run of results, but poor risk management can cause an account with a greater number of profits than losses to still end up getting the dreaded margin call.

Risk management is the single factor that separates successful from unsuccessful forex traders.