Currency exchange trading is all about taking advantage of little-known price movements to make money with small wagers. It seems that everyone is using the Web these days, and you can take advantage of that by using your favorite currency trading software program. Of course, the question you have to ask yourself is, what’s stopping me from opening an account at a major brokerage firm?
The yen versus the dollar are one of the hottest topics in the forex markets these days. Japanese traders are dumping their dollar positions at a record pace, and traders in the U.S. are scooping up these positions as well. Because of these positions, the bid price for a Japanese dollar has gone up more than one percent over the last two weeks. To take advantage of this short change in value, traders will usually trade massive amounts of either the dollar or yen.
Now, let’s assume that the currency prices will remain stable for now. Let’s also assume that you have a risk tolerance of one percent and that you’re not concerned about losing big chunks of money in trades. You then open a JPY/USD trading account. Once you decide to use this account to trade, you should adjust your transaction size to match the maximum loss you are willing to incur during a given period.
If you have a profit target of five hundred thousand Euros, you can buy one hundred,000 Euros at a rate of one Euro per Euro and sell the other hundred,000 Euros at a rate of one Euro per Euro. Your profit target is the difference between the opening and closing sale price. Obviously, this isn’t an ideal way of maximizing your profits, but it is good enough for those with smaller trading accounts.
Using this method, you would have made a profit of fifty thousand Euros and lost only forty thousand Euros on the transaction. If you had used a margin deposit, your loss would have been four thousand Euros. That’s a small difference in profit, but it could easily translate into large losses if you don’t watch your trades carefully.
What does this example demonstrate to you? It shows that using leverage makes it easier to lose money than to make money. It also makes it easier to lose more money than to win it. If you don’t set your stop loss size appropriately or use your margins correctly, you run the risk of being a bad risk taker and losing a lot of money. This bad risk mentality leads to bad risk habits, such as making poor decisions with money and engaging in wasteful spending. If you don’t want to be a bad risk taker, you need to learn how to make better choices with money.
There are two primary methods traders can use to profit from trading: direct and indirect. In a direct trade, you sell directly to the market and wait for the price to rise so you can buy it at a profit. You may have to hold onto the currency until the price goes up high enough so you can then sell it. With indirect trades, the idea is the exact opposite: you buy the currency before it reaches a certain point so that you can then sell it once it has reached that point. These methods are the most widely used by professional traders and they can both be effective.
The best way to profit from forex trading is to utilize both methods, but the most effective is the combination of both: use your indicators to indicate when it is a good time to purchase and sell, and do nothing to change your strategies until the prices move in your favor. When you do this, you can stand to make a long or short position without incurring any loss, because you will always know when the prices move against you. This can be the difference between earning a lot of pips and losing everything.