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Setting On The Right Foot

If you are a beginning forex trader, the most expensive mistake you can make is to jump right in and trade, not even bothering to understand how the market works.

This is because a forex trader who lacks knowledge ultimately will be guided by his reactions to what he sees on the computer screen, and on what he perceives is great profit or alarming loss.

The most seasoned traders know that in order to make the most profit out, a trade should be based on a thorough technical and fundamental analysis on the market. Hence, they are rarely react emotionally towards movements in the forex market.

If you have just signed up with a forex broker, invest some of your time in studying the market and mastering the different analysis techniques before investing your money.

Forex investors are divided into five major groups: governments, banks, corporations, investment funds, and traders. Each group is generally motivated by different reasons. What is common among them, except for the traders, is that they all have systems in place in forex trading - they have put in place specific controls and accountabilities with forex decision. Individual traders are accountable only to themselves, and hence are more prone to be more possessive of their investments and clouding their judgment.

But any forex trader can quickly learn what should be learned. In this case of profit or loss, what should be learned is trading strategy.

A trading strategy ultimately eliminates emotional responses to movements in the forex market. The institutional stakeholders in the forex industry have always practiced strategizing before trading. A forex trading strategy arises from (a) having an intimate knowledge on how the market moves (b) being able to plot entry and exit points from a technical analysis of charts (c) making intelligent use of the different types of stop orders to minimize risk and maximize profit.

Always make money management a part of your trading strategy. Money management pertains to the amount you're willing to deposit, the market position size, trading margin, your most recent profits and losses, and your contingency plans - in case the market does not respond favorably.

In any given forex transaction, the wisest risk limit is from to 1% to 3% of each transaction. If, for example, you are trading a standard forex lot of $100,000, you should limit the risk to $1,000 to $3,000. This is done by placing a stop loss order (automatic selling) if the rate goes 100 pips (if one pip is equal to $10) above or below your entry position.