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Example of Buying
A speculator will buy a particular FOREX currency pair if he expects the exchange rate to rise. For example, a trader who expects the Euro to strengthen against the U.S. dollar has just bought one EUR/USD mini contract at 1.2089. Now, if the Euro strengthens to, say, 1.2150, the trade will profit. Let's say that the trader only wants to risk $75. Since each pip of this mini contract is worth $1, the trader will enter a stop order to sell one EUR/USD mini contract at 1.2014. If the EUR/USD bid ever drops to 1.2014, then this position will be closed and there will be no futher loss. With the stop order in place, the trader is protected in case prices move adversely. His strategy now is to watch and see if the Euro does in fact strengthen and, if it does, decide when to take profit.

Example of Selling
In the FOREX market, since there is no actual delivery of foreign currencies, a trader can sell first and buy back later, hopefully at a lower price. A trader will do this if he expects the exchange rate to fall. For example, a trader who expects the Euro to weaken against the U.S. dollar has just sold one EUR/USD mini contract at 1.2089. Now, if the Euro weakens to, say, 1.2043, the trade will profit. Let's say that the trader only wants to risk $75. Since each pip of this mini contract is worth $1, the trader will enter a stop order to buy one EUR/USD mini contract at 1.2164. If the EUR/USD offer ever rises to 1.2164, then this position will be closed and there will be no futher loss. With the stop order in place, the trader is protected in case prices move adversely. His strategy now is to watch and see if the Euro does in fact weaken and, if it does, decide when to take profit.

In deciding whether to buy or sell, many traders begin by looking at a chart. They attempt to predict the future movement of an exchange rate by studying what has happened in the past. This method is called technical analysis. Trend lines, reversal patterns and moving averages are all part of technical analysis. Other traders rely on economic variables to provide clues to future exchange rate movements, variables such as short-term interest rates and capital and merchandise trade flows. This is called fundamental analysis. (See our on-line bookstore for more information.) Still others rely only on their gut instinct, or on what they read in the newspaper or hear on television. As you practice in the demo account, you will get a feel for which method works best for you.

FOREX trading is risky. Anyone who is contemplating FOREX trading should understand the following: THE RISK OF LOSS IN TRADING FOREX CAN BE SUBSTANTIAL. YOU SHOULD, THEREFORE, CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. FOREX TRADING IS NOT SUITABLE FOR EVERYONE.

ALWAYS TRADE WITH RISK CAPITAL, THAT IS, MONEY THAT YOU CAN AFFORD TO LOSE.

LEVERAGE CAN WORK FOR YOU OR AGAINST YOU. If you are trading with high leverage, then even a small move against your position may result in a large loss, including the loss of your entire initial deposit. And keep in mind that the market can always move against you. No one can predict prices with certainty.

The trading system could break down. If you are using an Internet-based or other electronic system to place trades, some part of the system could fail. In the event of a system failure, it is possible that, for a certain time period, you may not be able to enter new orders, execute existing orders, or modify or cancel orders that were previously entered. A system failure may also result in loss of orders or order priority.

In the FOREX market, you are relying on the creditworthiness and reputation of the other party to the transaction. FOREX trades are not guaranteed by a clearing organization. Furthermore, funds that you have deposited to trade FOREX may not be insured or receive a priority in bankruptcy.

The following are guidelines to help you manage the risk of FOREX trading:

Keep Excess Margin
Cash in the FOREX account that is above the amount required to meet the margin for outstanding positions is referred to as excess margin. A trader should always maintain excess margin - enough to be able to tolerate several losing trades in a row since several losing trades may occur before a winning trade does. When excess margin approaches zero, the trader should begin to liquidate some or all positions, or deposit more cash into the trading account. As a built-in safety measure, open positions are automatically closed should excess margin dip below zero. Excess margin is provided on a continuous, real-time basis and so is immediately available.

Start with a Flexi or Mini Account
The Flexi and Mini accounts allow you to trade in amounts of foreign currency that are much smaller than the standard contract, and therefore less risky. For example, profit and loss on a mini contract fluctuates 1/10 the amount of a standard contract.

Use Stop Orders
Stop orders are used to automatically close a position once loss has reached a specific point - a point that you specify. For example, say that a trader who believes that the British pound will strengthen against the U.S. dollar has just bought a GBP/USD mini contract at a price of 1.8331 and wants to risk only $50 on the trade. Since every pip value is worth $1 for this mini contract, the trader will enter a stop order to sell one GBP/USD mini contract at a price of 1.8281. Now, if the GBP/USD bid drops to 1.8281, the trade will be automatically closed.

Practice First
The demo account provides an excellent and safe arena to practice your trading skills and learn first-hand about the risk management techniques listed above.

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Disclaimer - I am not a commodity trading advisor. The information on this site is for trading education only. There are no trading recommendations for any one individual made on this site and this information is paper trades for trading education. All trades are extemely risky and only risk capital should be used when trading.

U.S. Government Required Disclaimer - Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results.

CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.