Forex Investment and Currency Trading

When you decide to trade Forex, you’re trading with the big boys – central banks, international financial institutions, and major corporations. You also need to thin big and understand where trading Forex fits with your portfolio-management strategies. First, ask yourself these three questions:

• Do I understand the foreign exchange market fully, as well as the risk I’ll be taking?
• Does trading Forex fit with my long-term portfolio-management strategies?
• Can I spend the time needed to research this market daily and make sound Forex trading decisions?

If your answers is “no” to any of these questions, you’re not ready to trade Forex.

That said, if you can answer “yes”, then think of Forex money management as you would if you were managing any other business.

Develop a business plan. Determine how much money you want to risk, what return you expect to make, and how much time you will be able to devote to the business. It is recommended that you start trading with no more than about 2 percent of your portfolio assets. When you are confident that you know what you are doing, you can increase that to 5 percent. You probably would not want to put more than 5 percent of your portfolio assets in such a risky business venture. As you decide on your return expectations, remember that even the best money managers aim for a goal of 15 to 20 percent annual return over the long term.

Set up your business office. You should determine what physical assets your business will have, including your workspace and computer equipment. The more structured you make your business surroundings, the greater control you will have over your business activities. Don’t set up your business periodically on your dining room table. If that’s all you can afford to do, you’re not ready for serious trading. You will need a quiet space where you can research your trades and develop your charts.

View your holdings as inventory. The currency pairs you hold should be treaded like inventory, something you plan to buy and sell. Don’t get emotionally tied to your inventory.

Accept your mistakes. Every business person makes mistakes as they are building a business. That’s true for Forex traders as well. Don’t try to defend a trading mistake. Take your loss and move one. If your choice no longer makes good business sense, make that cold, hard decision to exit the position before a small loss turns into a big one – which can happen in seconds when market conditions are volatile.

Take your profits. When you have a healthy profit and reach your exit point, don’t hold on to the inventory. No one can accurately pick the top or bottom of any trade every time. Don’t push your luck; follow your business plan.

Stick to your trading plan. Once you pick a trading strategy, stick with your plan. Don’t change it in the middle of the trade if things go sour. Follow your plan and then assess your mistake so you won’t make it again. Many traders lean more form their mistakes than their successes.

A business in Forex trading is a 24-hour business. Dramatic moves can occur at any time, depending on world conditions. For example, when Hezbollah and Hamas both struck Israeli territory within days of each other in July 2006, a war erupted. No one expected the moves nor did they know the moves would develop into a war in the Middle East. Oil prices skyrocketed and the money markets became more volatile within hours of the start of the war.