The term “profit” and “loss” are often used interchangeably when it comes to Forex trading. However, there is a big difference between these terms. For instance, let us assume that you currently have a balance of a thousand dollars and you’re not trading on leverage. You initiate a single $1000 transaction that nets you 50 pips. The profit from this transaction would then be -$1000 or simply a loss.
If you were instead to use this same cash to make a fifty to one margin transaction giving you a maximum trade value of fifty thousand, the resulting profit would then be -$5000 or a loss of -$5000. Obviously these two scenarios are far removed from each other. In order for us to correctly interpret the above example, we must first take note that the currency pair in question is USD/JPY. This being the case, the profit/loss being illustrated here is not the profit/loss being attributed to the direction of the currency pair (USD/JPY) but to the strength of the market position (i.e. selling at a higher price and buying at a lower price).
When trading on foreign exchanges, it is important to remember that all prices move in one direction – up. While this may seem obvious in regards to Forex trading, many new traders let their emotions come into play and attempt to time the markets to “make a profit”. Unfortunately, timing the markets is something that requires careful analysis and is not something which can be effortlessly achieved. For instance, while some traders believe that it is possible to accurately predict where the prices of certain pairs of currencies will move, there really is no such thing as a “shortcut” or an “idiot’s dream”. Neither method relies on accurate Forex trading signals.
Therefore, while there is a chance of achieving success through correctly anticipating where particular currencies will move, it is also true that without the correct mental attitude and correct application of knowledge and skills, it may be nearly impossible to do so. So, if a trader is aiming to make some quick big returns and wants to do so by trading “on the cheap” or by under-estimating the risks associated with such activity, it may be best to stick with traditional methods of investing and to focus on technical analysis instead of emotions. By doing so, a trader will be able to avoid the risk and associated losses associated with such risky and potentially lucrative investment activities.
Similarly, if a new trader wants to trade using a “stop-loss order” so as to limit his or her potential losses, this should also be implemented. Basically, a stop-loss order is an order placed with a trading firm or online trading service to purchase an inventory when a certain level is reached – typically, a set percentage of the total daily sales for that day. While such orders may not be enforceable, they do offer traders a way to limit their potential losses. (As an added bonus, if you use a stop-loss order, you will earn additional points toward your deposit.)
Another area that can have an adverse effect on a newbie trader’s ability to attain profits is the behavior of others in the market. The fact is that while “market psychology” can have an overall impact on the short and long positions taken by a trader, it is much more specific in the case of forex trading. Traders who are involved in short positions – essentially, those who buy and sell currency when the price moves below a certain level – are at the mercy of others in the market, namely other traders who may be interested in buying at a low enough price so as to sell it at a higher price later. While it is true that there are good times and bad times to trade, it is also true that a trader who is able to establish a firm profit by being aware of market psychology and employing proper tactics may have a distinct advantage over the competition.
There is one aspect of forex trading that experienced and successful traders all over the world agree is an essential part of any winning strategy: timing. In forex trading, timing means being able to enter and exit trades with the goal of cashing in at the most opportune time. Market conditions can change at the snap of a finger, so it is important to be able to identify and establish profitable trends and exit them at just the right moment. Timing is perhaps the most crucial skill in the art of making profit in foreign exchange. The difference between successful traders and unsuccessful ones is their ability to identify trends and to respond appropriately to these trends.
It can be said that anyone who wants to profitably trade in the forex market needs to be willing to accept a certain amount of risk. This is particularly true for novice traders because they are more susceptible to losses than more experienced traders. A trader can mitigate his risk by having a sensible entry-exit strategy and by diversifying his trading portfolio. By putting some of the risk on a small number of trades and by limiting his risks, a trader can reduce his potential losses while maximizing his profits. If a trader wants to put up a reasonable chance of making a profit in the forex market, he must also be willing to take on some loss in the process.