Important Details of Forex Trading

By Joshua Geralds

All traders should understand the principles of money management, leverage and margin. Unfortunately most new entrants to the market are usually much focused on making money that they forget to defend their account. What happens then is that greed and emotion comes into play and very soon the account is wiped clean.

1. Money Management

Money management is the keystone or corner stone to a trader's trading plan. We can define money management as "a plan to defend and protect a trader's account by use of position size, diversification and proper leverage". A money management plan is simple to establish but most new traders find it very difficult to put into practice. A good way to put money management into play is for you to write the money management rules into your trading plan. An important area in money management is position size. A savvy trade never trades more than 5% of his/her total account. The danger of trading more than 5% is that if you have a series of failed trades (very common) in no time your account will be lost.

2. Leverage/Margin

The concept of leverage and margin has been totally confused by many "smart" marketers of brokers. Margin and leverage are completely different terms and cannot be used interchangeably. Simply said, margin is what we place into the brokers account as a sort of guarantee. Leverage on the other hand is the amount we borrow from the broker to trade. Thus margin is usually represented in percentages (2% of account) and leverage is usually in a ratio format (1:100). The danger for a trader is when the account is under funded and over leveraged. Usually these two come hand in hand. Most traders seem to like to take the risk of fast money. That means leveraging their account as high as 1:200 or even more. All the while maintain a small account as possible. What happen are frequent margin calls and that ultimately leads to more draw-downs.

Discipline

Without discipline all the above are irrelevant. There is nothing as important to a trader as discipline. Discipline over emotion, discipline in following the trading plan and most of all discipline in the trade. To build discipline is arguably one of the hardest things a trader can do. Here is a quick tip, start a trading journal. Each time you enter into a trade, write down all you feelings and emotions. Write down everything you did before, during and after the trade. Don't miss anything out, do a reflection at the end of the week. You can learn a lot about yourself from this simple exercise. More importantly you build discipline slowly but surely.

Trading is a game best played slow, take your trades slowly, defend your account at all costs and never allow yourself to be caught in a situation that requires you to top up your account. When that happens it is high time for you to stop trading and start asking yourself what is going worng.

Dr. Joshua Geralds is a successful Investment Specialist with over twenty years experience increasing the income of people world wide. Visit http://www.pipsalot.com to learn how to make steady profits through safe trading and down load your FREE e-book "Money Management" for a limited time only!