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Many people like trading foreign currencies on the foreign exchange forex market because it requires the least amount of capital to start day trading. Forex trades 24 hours a day during the week and offers a lot of profit potential due to the leverage provided by forex brokers. Forex trading can be extremely volatile, and an inexperienced trader can lose substantial sums. The following scenario shows the potential, using a risk-controlled forex day trading strategy. Every successful forex day trader manages their risk; it is one of, if not the most, crucial elements of ongoing profitability.

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The reasons vary, and you'll be tempting fate to do her worst. You might have had several losing trades in a row, which will make you want to earn back some of the losses. A winning streak can make you feel as if you can't lose. There will always be one trade promising such good returns, you are willing to risk almost everything on it.

If you risk too much you are making a mistake, and mistakes tend to compound. Traders have been known to their stop-loss order in the hopes of a turnaround. Many also get caught up keeping their margin, telling themselves it will turn around and they'll win big. Resist temptation, stick to your risk management strategy and avoid going all in or adding to your position.

Many pairs two stocks—one long, one short, both correlated rise or fall sharply in the wake of scheduled economic news releases. Anticipating the direction the pair will move, and taking a position before the news comes out, seems like an easy way to make a windfall profit. It isn't.

Often the price will move in both directions, sharply and quickly, before picking a sustained direction. That means you are just as likely to be in a big losing trade within seconds of the news release as you are to be in a winning trade.

There is another problem. In the initial moments after the release, the spread between the bid and ask price highest purchase price and lowest sell price is often much bigger than usual. You may not be able to find the liquidity you need to get out of your position at the price you want using smaller trades to get out of the position. Instead of anticipating the direction that news will take the market, have a strategy that gets you into a trade after the news release.

You can profit from the volatility without all the unknown risks. The non-farm payrolls forex strategy is an example of this approach. Depositing money with a forex broker is the biggest trade you will make. If it is poorly managed, in financial trouble, or an outright trading scam, you could lose all your money. Take time in choosing a broker.

There is a five-step process you should go through when deciding on which broker to use. You should consider what you want to accomplish, what a broker offers, and use reliable sources for broker referrals. Then, test the broker using small trades at first, and don't accept offers of bonuses with their services. You may have heard that diversification is good. Diversification is a strategy that depends on your knowledge, experience, and what you are trading.

Warren Buffett once said about diversification:. If you believe in diversification you may be inclined to take multiple day trades at the same time instead of just one, thinking you are spreading your risk. Chances are you are actually increasing it. If you see a similar trade setup in multiple forex pairs, there is a good chance those pairs are correlated.

That is why you are seeing the same setup in each one. When pairs are correlated, they move together, which means you will probably win or lose on all those trades. If you lose, you have multiplied your loss by the number of trades you made. If you take multiple day trades at the same time, make sure they move independently of each other. It is easy to get caught up in the news of the day or to form a bias based on an article you read that says economic conditions are good or bad for a particular country or currency.

The long-term fundamental outlook is irrelevant when you are day trading. Your only goal is to implement your strategy , no matter which direction it tells you to trade. Bad investments can go up temporarily, and good investments can go down in the short-term. Fundamentals have absolutely nothing to do with short-term price movements—using fundamental analysis causes you to focus on the wrong concepts and form biases.

Any long-term biases can only cause you to deviate from your trading plan. Your trading plan and the strategies it contains are your guide in the market and prevent you from taking unnecessary risks, or gambling.

A trading plan is a written document that outlines your strategy. It defines how, what, and when you will day trade. Your plan should include what markets you will trade, at what time and what time frame you will use for analyzing and making trades. Your plan should outline your risk management rules and should outline exactly how you will enter and exit trades for both winning and losing trades. If you don't have a trading plan, you are taking unnecessary gambles. Create a trading plan and test it for profitability in a demo account or simulator before trying it with real money.

If these tips seem similar to warnings about gambling, it is because they are. Day trading, or stock trading in general, can cause people to win and lose a fortune in a day—recent studies and theories behind compulsive trading addiction are gaining strength for valid reasons , and you should be on the lookout for the signs. Planning and executing anything takes patience, skill, and discipline. As you get deeper into day trading, you should step back and adjust your plan as time goes on.

While the forex market is expected to be less volatile in the long term than the equity market, it is obvious that the inability to withstand periodic losses and the negative effect of those periodic losses through high leverage levels are a disaster waiting to happen. These issues are compounded by the fact that the forex market contains a significant level of macroeconomic and political risks that can create short-term pricing inefficiencies and play havoc with the value of certain currency pairs.

Many of the factors that cause forex traders to fail are similar to those that plague investors in other asset classes. The simplest way to avoid some of these pitfalls is to build a relationship with other successful forex traders who can teach you the trading disciplines required by the asset class, including the risk and money management rules required to trade the forex market. Only then will you be able to plan appropriately and trade with the return expectations that keep you from taking an excessive risk for the potential benefits.

While understanding the macroeconomic, technical, and fundamental analysis necessary for trading forex is as important as the requisite trading psychology , one of the largest factors that separates success from failure is a trader's ability to manage a trading account.

The keys to account management include making sure to be sufficiently capitalized, using appropriate trade sizing, and limiting financial risk by using smart leverage levels. Your Money. Personal Finance. Your Practice.

Popular Courses. Table of Contents Expand. Table of Contents. Forex Market Trading Hazards. Managing Leverage. The Bottom Line. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Articles. Partner Links. Forex Broker Definition A forex broker is a financial services firm that offers its clients the ability to trade foreign currencies.

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