There are several questions you need to ask yourself if you're about to open a forex trading account. First and most important question.
Do I like to take risks? If you answered no then forex is definitely not for you, but I assume that if you're reading this then you must be somewhat comfortable with some degree of risk. Let me talk a little bit more about risk before moving on to the next topic. Forex brokers give you leverage anywhere from 50 times up to 500 times, meaning depositing $1000 in your new account will allow you to control $50,000 to $500,000. Recently there were rule changes introduced in the US which effectively made the margin you get on your account 50:1 or lower(depending on the currency pair you chose to trade) but for now let's say your leverage is 50 times(or 50:1 or 2%, same thing stated differently). Now I'll give you an example that shows how high leverage could lead to huge gains(or losses), you decide to buy the EUR/USD which right now is trading at 1.3920, which means to buy 1 EUR you will have to pay 1.3920 USD. You decide to to buy 25000 EUR/USD, to keep this simple let's say this uses half of your margin, so now you have this position sitting in your account, this is how it looks in meta trader 4(MT4) a very popular platform used by many brokers.
So what we see here is our position, when it was open, what amount(0.25 lots which is 25000), the price we bought the EUR/USD at and finally the profit/loss in USD. If the EUR/USD goes up we will be making profit, if it goes down we will be losing. So let's say we go away and come back in 2 hours, the EUR/USD is now trading at 1.4200, a huge move in the forex market, 282 pips to be exact(1.4200-1.3918 = 0.0282) for our 25000 EUR/USD position this will mean a profit of 282 * $2.5 = $705, whoa this is almost double our account, we started with $1,000 and we're up by 70.5%. You can imagine what will happen if this trade went in the opposite direction, you will be down by $750.
So as you can see there are huge profits to be made in this market, but also there is a big risk. I personally am willing to take the risk... Are you?
How much money should I start with?
This is a tough question and I will tell you why. Statistically you're very likely to lose all of the money you deposit, there have been surveys that show 90% or more of forex retail traders lose all or most of their account equity at some point in their trading career. I have at least 2 friends who I can think of who lost all of their money(they eventually learned how to trade and made back what they lost and then some) . Now that we know that odds are against you, I'd say open a small account, $250 - $1000, depending on how much money you make at your day job or from your business you can decide what amount you are ready to lose(not saying you will but you never know!). You should never trade with money you can't afford to lose, especially when you're just starting out. There are so many factors involved in trading, even if you have a good strategy you can still lose money. To name a few external and internal factors - spread widening, slippage, news that move the market, broker "tricks"(we'll talk about this in another article), self sabotage, greed, fear, trading platform issues.
Should I trade long term or short term?
This is a very tough question to answer, everyone is different, I think it's genetics, some people like long term trader others don't like to leave trades open overnight. You will find your style of trading, you might change your style but you will decide how to trade on your own, I can't help you here.
Should I buy a forex signal or forex mentoring service?
Trading is tough, to make a decision to enter the market and put your money on the line is not a game. So you need to make sure you have a pretty good idea what you're doing. If your fingers are shaking and your heart is in your throat(I've been there) then read more. I'm serious reading up on all aspects of trading is the only way to do it. Doubt everything, when you think something works try it over a period of time before you use it in your real trading. Definitely paper trade before going real. There are good forex signals out there, mostly bad, but there are some good ones, I'm not making any recommendation that's not the purpose of this post. If you decide to get a signal service read about it, if it looks fishy, don't buy it, look at their past performance, if their performance looks too good then it's not real. If they say they make 10% per month and never have a losing month, most likely they're not telling you the whole truth, while 10% is possible I don't know of a service that can offer this without having some losing months. So look for performance that looks achievable, with up and down months. Also look at who their traders are, google their names and see if the word scam appears too often, if there are no results then this service might be too new and in this case they will have little documented trading performance, so perhaps it's wise to stay away.
Same goes with forex mentors, look for their performance, they must have some sort of performance to back their methods if they don't then how can you know if they're good traders. You need a good mentor, someone who has been profitable and knows what they're doing.
What is risk management?
Risk management, when used in trading means "how much risk am I taking when placing a trade". You need to know how much you're risking in every trade, be it in % or in $, for our previous example we made 75% but in your real trading that will be very unlikely to do. A good risk management is risking 1%-4% and gaining 2%-8% of your account balance. If you risk 1% then you should stand to gain 2%, if you risk 2% you should stand to gain 4% etc. Let's say you use a 2% stop loss and a 4% take profit, this is good risk management. Even if you're very very unlucky, risking 2% per trade, it will take you around 50 trades to wipe your whole account, that's if you had no winning trades.
This is our previous position but now I've applied some risk management, notice that I've put a stop loss(S/L) at 1.3884 and a take profit(T/P) at 1.3973. Here I'm risking $75, and I stand to gain $150, in a $1000 account this will be equal to 7.5% risk and 15% reward. A little high don't you think? If I'm wrong just 13 times I will wipe out my account. So I need to lower my risk, here it is when my risk has been lowered to 2% and profit to 4%.
Note the new S/L at 1.3913 and the new T/P at 1.3936. In this case my stop is only 8 pips away from the market, so a wiser move would've been to open a smaller position and use a larger stop, this way we give ourself more room to be wrong in the beginning but still give the market a chance to turn around.
I will talk about these concepts in more detail in future posts, but for now if something is unclear use the comments section and I will clarify.
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