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The Right Approach To Forex Trading
Education | 19 July 2013
By: Stuart McPhee
Articles (22) Profile

Why do people trade currencies? For most, the primary motivation is to make money. Secondary reasons all seem to stem from this undeniable desire to profit from trading.

Ironically, this profit-focused approach is the main reason why people fail as traders.

Certainly the idea of making money is important. But far more crucial is the need to preserve the money you already have in your trading account. In the words of the famous American trader Paul Tudor Jones, “Don’t focus on making money; focus on protecting what you have.”

It should be obvious why your first priority is to protect your existing capital. No more money, no more trading!

Such a mindset is difficult for most new traders because when we start trading, most of us can only think about all of the money we might possibly make. Eventually, reality sets in and we realise that trading successfully may be harder than we thought.

To succeed in the long term as a trader we must change our approach to trading. We must do everything we can to protect our capital and become more defensive-minded and conservative as traders.

Losing money early on may actually be a good thing if you learn from the humbling experience. The silver lining is that failing as a beginner will likely compel you to focus on the right approach to forex trading: to make protecting your capital your most important aim. Become protective of your money – believe that only the best high-probability trading opportunity is good enough for your money. Accept nothing less.

Two Actions That Will Help Protect Your Capital
First, you must set stop losses for all of your trades then execute them ruthlessly and without hesitation should they be triggered. Automated platforms greatly assist with this vital action. Ironically, learning to take losses is the most important thing you can do to make money. If you take the loss as a defensive action you are completely eliminating the possibility of further loss in that trade, therefore taking the right steps to protect your capital.

Second, you must position your “size” effectively. Don’t commit a large percentage of your trading capital into one trade regardless of how confident you are of the outcome. Break your capital into small pieces and commit money into trades carefully once all of your entry conditions have been considered. You can develop a simple formula using OANDA’s forex trading profit/loss calculator to determine your optimal position size based on different factors.

There is no doubt that a conservative and defensive mindset is the modus operandi of many highly successful traders – you should adopt a similar mindset and reap the rewards accordingly.

Get a free OANDA demo account and use virtual currency to experiment with setting automated stops and trading different position sizes on our award-winning fxTrade platform.

Stuart has more than 16 years of trading experience under his belt and specialises in technical market analysis of major currency pairs. Apart from being the author of several bestselling trading books, with his most recently released book "Trading in a Nutshell", Stuart contributes to daily newletters and blogs. He also produces articles and videos on the how tos of technical tradings. For more information of Stuart, you can follow him on twitter @stuartmcphee or check him out on Google+.

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