Important Concepts in Forex Trading
Important Concepts in Forex Trading
In this post I am going to cover 2 very important concepts of forex trading
- Money Management
- Consistency
Lets say someone starts trading forex with an investment of $1000 or INR 40,000 approximately.
Rule 1: Money Management says that you should use the minimum amount to trade forex and that you should use your money wisely.
The minimum amount that can be traded is 0.1 Lots which can earn $1 per pip [1 pip is the point value difference between price changes]
Now considering that forex markets operate monday to friday which is 5 days a week, so we have 20 days in a month.
We need just 50 pips a day to earn 1000 pips in a month.
WOW !!! That is 100% profit in a month at 50 pips earned per day or $50 earned per day.
Rule 2: Consistency
I have just made 100% profits, I am good in forex, I should increase my lot size beyond 0.1 and should use higher lots.
The answer is a BIG NO
Consistent trading at 0.1 will give you 12000 pips in a year at just 0.1 Lot size which means $12000 earned from an initial investment of $1000
WOW !!! That is 1200% returns in a year.
But wait, what have we learnt from this example
If your gain is $1 per pip then your loss is also $1 per pip, which means that you have a margin of 1000 pips in your first trade on the first day, and every profit earned keeps increasing this margin.