Safe Ways To Trade Forex

You can't be 100 percent safe when trading FOREX or any other commodity. However, you can take steps to lower your exposure to large losses. Careful planning, execution and monitoring of trades will help you keep losses to a minimum without sacrificing profit potential.

Develop Trading Strategy

A successful trading strategy relies on impartial data, not hunches. FOREX traders use technical and fundamental analysis of the currency markets to establish a personal trading strategy.

A good strategy will generate market entry and exit signals that are more often correct than incorrect. A good trader will perform extensive testing via hypothetical trades before committing funds to a strategy. Strategies need constant refinement and monitoring to ensure their continued usefulness.

Eschew Margin Buying

Margin is the amount of collateral a trader puts up to secure a trade. The remainder of the trade's capital is borrowed from a broker; this arrangement is called "margin buying". Margin buying ratios ranging from none to 100:1 are available in the FOREX market. While margin buying can increase returns, it also exposes a trader to margin calls: demands for a trader to provide additional margin on losing trades. If not immediately met, margin calls can lead to the broker closing your position and locking in your loss. The higher the margin buying ratio, the quicker the broker will issue a margin call. If safety is paramount to your trading strategy, you should minimize or avoid margin buying.

Control Trade Execution

Entering orders at the current market price can be risky due to "slippage": the movement of prices in the interim between order entry and trade executions. Use entry trades, which pre-establish the price at which you are willing to enter the market. Always couple an entry order with a stop loss order -- an order to close out a position if prices move against you by a specified amount. Optionally, you can also employ a take-profit stop, which closes out a profitable position when a target price is reached. Entry trades and order stops enforce discipline and increase safety, because you know in advance the maximum amount you can lose on a trade.

Hedge Risk

Hedging a trade means entering a counter-position that benefits when a primary position suffers losses. You can hedge FOREX trading risk in several ways, such as the use of binary options. Binary options pay off if prices have reached a specified level at the time the option expires. If a trader bets that a particular currency will strengthen, he ould couple the purchase of the currency with a binary "put" option that would benefit if the currency weakened instead. Other hedging techniques include the use of regular (not binary) currency options, futures and forwards. A trader should be intimately familiar with any hedging technique before using it--many books and Internet sites provide full information on this topic.

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