Personal Finance Journal

Right out of the 2008 gate, the bad financial news begins, shaping this new year to be a continuation of things from 2007 in the FOREX as the US dollar continues its fall against the Euro and other foreign currencies.

The Institute of Supply Management (ISM) Manufacturing Index was released today and the release was not good. This ISM report measures the activity level of purchasing managers in the manufacturing sector, with a reading above 50 indicating expansion. We’ve been keeping our head above 50 for awhile now, and forecasters expected a number of about 50.7 or so. Instead, we got a numbing 47.7!

The news was immediately met with a drop in the dollar. After finding some strength by mid-December, the dollar had continued its fall to end the year. Now, the dollar has fallen further against most other major currencies, especially the Euro. The currency pair EUR/USD was trading at about 1.4740 this morning and looks to continue its rise. We may see 1.500 before long!

This last week has been another rough one for the US dollar. We saw it sink to an all-time low against the Euro, hitting 1.4318 briefly before settling to just under 1.43 for the weekend. The news was pretty bleak all week for the dollar with pretty poor economic releases and some discouraging words from Fed Chairman Ben Bernanke. And what about oil? Oil has been skyrocketing lately, hitting the $90 a barrel earlier and settling to around $88 today.

So, can the dollar recover?  And if so, when?

Well, it doesn’t look like much of a rebound is in the works this year. Most economists feel the housing slowdown will last most of next year, if not longer. This has largely not leaked into the rest of the economy, but we’re starting to see signs of a slowdown. Employment figures have been mixed and deficit numbers are up.

Although a week or so ago there was about a 50-50 chance we’d see another interest rate cut, that number seems to be about 90% now. If we do see a cut in October, it’s probably likely another one is on the way before the end of the year.

I wouldn’t be surprised to see the Euro shooting up to 1.45 within the next couple of weeks…and from there….who knows?

Are you keen on starting FOREX trading? Why would you not be? Many beginning FOREX traders are captivated by the allure of easy money. FOREX websites offer ‘risk-free’ trading, ‘high returns’ and ‘low investment’ these claims have a grain of truth in them, but the reality of FOREX is a bit more complex. As with anything in life, what you put in will determine what you get out.

There are two common mistakes that many beginner traders make trading without a strategy and letting emotions rule their decisions. After opening a FOREX account it may be tempting to dive right in and start trading. Watching the movements of EUR/USD for example, you may feel that you are letting an opportunity pass you by if you don’t enter the market immediately. You buy and watch the market move against you. You panic and sell, only to see the market recover.

This kind of undisciplined approach to FOREX is guaranteed to lose you money, and have you waste your time. FOREX traders need to have a rational trading strategy and not allow emotions to rule their trading decisions.

The two emotions prevalent in the above example is greed (entering the market immediately) and fear (selling when the market temporarily moves against you). Investing and these two emotions do not gel at all. Keep them out of your trading and you will see results.

To make rational trading decisions the FOREX trader must be well-educated in market movements. He must be able to apply technical studies to charts and plot out entry and exit points. He must take advantage of the various types of orders to minimize his risk and maximize his profit.

The first step in becoming a successful FOREX trader is to understand the market and the forces behind it. Who trades FOREX and why? Who is successful and why are they successful? This knowledge will allow you to identify successful trading strategies and use them as models for your own.

There are 5 major groups of investors who participate in FOREX � Governments, Banks, Corporations, Investment Funds, and traders. Each group has varying objectives, but the one thing that all the groups (except traders) have in common is external control. Every organization has rules and guidelines for trading currencies and can be held accountable for their trading decisions. Individual traders, on the other hand, are accountable only to themselves.

If you do not keep yourself in check, nobody else will. Why should they worry if you aimlessly waste your money?

This means that the trader who lacks rules and guidelines is playing a losing game. Large organizations and educated traders approach the FOREX with strategies, and if you hope to succeed as a FOREX trader you must play by the same rules. That is studying these strategies and rules before starting to trade is so important.

FOREX Trading Philosophy – Money Management

Money management is part and parcel of any trading strategy. Besides knowing which currencies to trade and recognizing entry and exit signals, the successful trader has to manage his resources and integrate money management into his trading plan. Position size, margin, recent profits and losses, and contingency plans all need to be considered before entering the market.

This may sound like Greek now! If it does, you have more reason to get to know these terms. Knowledge will empower you on any investment market, including FOREX.

There are various strategies for approaching money management. Many of them rely on the calculation of core equity. Core equity is your starting balance minus the money used in open positions. If the starting balance is $10,000 and you have $1000 in open positions your core equity is $9000.

When entering a position try to limit risk to 1% to 3% of each trade. This means that if you are trading a standard FOREX lot of $100,000 you should limit your risk to $1000 to $3000 � preferably $1000. You do this by placing a stop loss order 100 pips (when 1 pip = $10) above or below your entry position.

As your core equity rises or falls you can adjust the dollar amount of your risk. With a starting balance of $10,000 and one open position your core equity is $9000. If you wish to add a second open position, your core equity would fall to $8000 and you should limit your risk to $900. Risk in a third position should be limited to $800.

By the same principal you can also raise your risk level as your core equity rises. If you have been trading successfully and made a $5000 profit, your core equity is now $15,000. You could raise your risk to $1500 per transaction. Alternatively, you could risk more from the profit than from the original starting balance. Some traders may risk up to 5% against their realized profits ($5,000 on a $100,000 lot) for greater profit potential.

As you can see, the novice needs to get through quite a bit of education, understanding and planning before those ‘risk-free’ trading, ‘high returns’ and ‘low investment’ promises will come into play. What are you waiting for? Get yourself a decent FOREX Trading Education.

Article by Dries Cronje Investing-Smarter.com.

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