Almost 90% of the traders in currency markets are speculators. Most of the investors start forex day trading as a speculating venture to make capital gains. Once you have made the positive decision to start currency trading, you need to choose the right forex broker. The right choice will greatly influence the success of the whole enterprise.

These days, the market is overcrowded with companies and banks offering online brokerage services to individual traders and investors to access the currency markets. It is not easy to make the right choice without a certain set of criteria. These criteria will mostly depend on the interests, preferences and means of each individual trader depending on his/her trading strategies and tactics.

What is the best method to choose the right forex broker? Compose a list of questions to ask the forex broker before making a final decision. The following are some of the suggested questions. You should ask the forex broker these questions before making a final decision.

What is the amount of the interday and overnight margin and corresponding leverage? Many good online forex brokers offer margin between 2-5%. They provide leverage ranging from 20:1 to 50:1. Higher margin requirement means lower investment efficiency.

However, beware of lower margin. It means that most of the time the forex broker will be against you as a trader and will do everything possible to prevent you from winning. You will face many trading problems with such a broker. It will become difficult for you to work under such conditions.

What is the minimum contract size offered? Now days, the standard contract size is a $100,000 lot. This contract size is quite affordable. This contract size also allows small individual investors to participate in currency speculation. It allows for reasonably effective money management with limited capital.

What are the requirements of minimum deposit? The investment and financial means of traders differ. It is common that many new traders dont have sufficient funds to open an account. In my opinion, the optimal minimum amount is $10,000 with 2% margin requirement. I think $10,000 is the required minimum amount corresponding to the forex market conditions.

What are the terms of setting and executing stop and limit orders by the forex broker? The ideal condition should be the execution of the stop and limit orders at the fixed price. This should be regardless of the market conditions, its speed and its direction. Some forex brokers provide this type of execution. Other brokers reserve the right to fulfill an order with slippage under unsteady market conditions mostly defined by the broker themselves.

The value of slippage depends on the current state of the market. It can fluctuate from a few pips to tens of pips. Although it is practically impossible to arbitrate the price received from the broker during the transaction. The slippage creates favorable conditions for the abuse of the trader by the broker.

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Gold is the ultimate global currency. At one time US Dollar used to be pegged to gold. But with the collapse of the Bretton Woods System, US Dollar was unpegged from gold.

Now US Dollar is only backed by the full faith and credit of the US Government. Most of the currencies in the world are free floating now. Many countries are also purchasing gold in the open markets as a hedge of their foreign reserves most of which are in US Dollar. In the present financial crisis with the global economy in recession, many investors are trying to take refuge in gold as the ultimate safe haven of their wealth from financial turmoil.

The Australian Dollar is known for its strong correlation with gold prices. Most of this is due to the amount of gold that Australia produces and exports. US Dollar has an inverse relationship with gold prices. When gold prices rise, US Dollar falls in value. This causes the currency pair AUD/USD to rise in value.

The opposite is also true. When US Dollar gains value, gold usually loses value and the pair AUD/USD depreciates. So when gold prices are rising, we can execute long trades on AUD/USD. Likewise, when gold falls in value, we can sell short AUD/USD currency pair. This relationship provides us with a method to take advantage of the fundamental factors that affect the currency markets. This relationship may be due to the fact that gold is considered to be the ultimate safe haven of their wealth by investors in times of financial crisis.

We now know that AUD/USD pair reacts strongly to gold prices. How do you follow gold in currency trading? We will trade AUD/USD following gold. You should use RSI (Relative Strength Index) as the technical indicator to trigger the trade. If you have read the previous article on how to follow oil in currency trading, I had talked about using the CCI (Commodity Channel Index) to trade USD/CAD pair.

Why is that we are now using RSI instead of CCI when both gold and oil are commodities. It all comes down to how quickly the two indicators react to volatility. CCI gives a quicker signal which is good for relatively less volatile pairs. On the other hand, RSI gives slower signals. This is ideal for more volatile pairs like AUD/USD.

Use a moving average to confirm if gold is in an uptrend or a downtrend. Use the seven periods RSI on AUD/USD chart! Watch when it enters one of its reversal zones, then move back out of the reversal zone in the same direction as the gold is trending.

Enter a long trade on AUD/USD if the gold prices are rising and the RSI is crossing back above the 30 line. On the other hand, enter a short trade on AUD/USD pair if the gold prices are declining and the RSI is crossing below the 70 line.

You should set a limit order of 200 pips. You should also put a stop loss order of 50 pips for the trade. This risk to reward ratio is good and is (=50/200). The chances are you are going to make $2000 profit (200 pips is equal to $2000 on a standard lot) if the trade goes as you had anticipated. And if the trade does not go in your favor you should be prepared for a $500 loss (500 pips equal $500 on a standard lot). It is not uncommon to have a trade go against you. Only to find yourself right back in trade that goes your way after sometime.

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Develop trading discipline in yourself if you want to become a successful trader in the long run. In a trading session, lets you come to a point in your market analysis when you have no confidence on the accurate direction of the market forecast. Always remember, a lost opportunity is better than lost capital. Choose not to trade.

Wait for the market conditions to become clearer. Increase the probability of success by trading when the trade setups are strong. This is far more important in forex trading than in stock trading. The forex markets move a lot.

You need to learn that high leverage will give you the opportunity to make a lot more money much quicker. But in case you go wrong, currency markets are ruthless. You can get your account wiped out. You dont see an opportunity clearly. Try to sit on the sidelines. You dont have to trade every time. Wait for the market conditions to become clearer. You should learn to be a patient trader. Wait for the market to come to you.

You should understand that leverage is a wonderful money making tool. It is the key to making money in the currency markets as no other markets allow high leverage that this market allows. A leverage of 100:1 means that for a $1000 deposit, you can trade $100,000. This huge amount of leverage gives you the opportunity to make the kind of returns that you want.

However, it also has the potential of making you lose some or all of your capital if you trade foolishly. Think about the credit cards. The bank lets you borrow huge sums of money on the promise that you will pay it back.

But in case you abuse your credit card. It can lead you into heavy debt. It can even result in bankruptcy. You should manage leverage in forex trading like you manage your credit card. You have $10,000. It does not mean that you should trade 10 lots and use all your $10,000 capital. Using all your capital in one trading session would be foolish on your part and highly risky.

A very effective trading method yet very conservative would be to never use leverage of more than 20% on your capital in the account. You should only trade two lots with a $10,000 capital in your account. Use good money management rules. Trade with discipline! You can grow your account realistically in a short period of time.

Dont forget the power of compounding. The compounding factor applied to your capital can make it grow fast. Many people want to get rich quick. They take unnecessary risks while trading thinking that a few big wins will make them rich. They dont focus on proper trading principles. You need to develop the discipline in yourself to follow simple money management rules.

Suppose you are trading a mini account. Start by trading one position of one tenth of a lot. You will not make much money in the beginning. The position size is only one tenth of a normal lot. But the percentage of returns will compound over time. Over time, you trade a much larger sum of money.

As a forex trader, you should make realistic goals. Goals that can be achieved over time! You should not use your life savings. You should never borrow money to trade. You should not use money that you would use to pay monthly utility bills. You should always trade with the money that you can afford to lose! Never ever trade with money that you cannot afford to lose! It is foolish. You should not think like a gambler. Trading is business. It is not gambling.

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Moving Average Convergence Divergence (MACD pronounced Mac Dee) is the difference between the 26 day and 12 day exponential moving averages. A 9 day exponential moving average called the signal line or a trigger line is plotted on top of MACD to show buy/sell opportunities.

Traders use MACD in three popular ways: Crossover, overbought/oversold conditions and divergences. In wide swinging markets, MACD proves most effective. When MACD falls below the signal line, the basic rule is to sell and when MACD rises above the signal line and cuts it from below, it is a buy signal.

MACD is also very useful in telling whether the market is overbought or oversold. When the shorter moving average pulls away from the longer moving average, it is likely the price has overextended itself and it will comeback to the realistic levels.

An indication that an end to the current trend may occur soon is when MACD diverges from the currency pair. A bearish divergence occurs when MACD is making new lows and the currency price fails to reach those lows. Similarly, a bullish divergence occurs when the MACD is making new highs but the currency price fails to reach those highs.

Momentum is an oscillator that indicates the rate of price change not the actual price level. This oscillator is the net difference between the currency pair closing price and the oldest closing price from the predetermined period. The signal is triggered when the oscillator crosses the zero line. The shorter the number of days included in the calculations, the more responsive the momentum oscillator will be to the short term price fluctuations.

Another important technical indicator is the Relative Strength Index (RSI). It indicates a markets current strength or weaknesses depending on where the prices close during a given period. RSI is plotted on a scale of 01-100. A buy signal is triggered when RSI moves up from the lower band above 30. Similarly, a sell signal is triggered when RSI moves down from the upper band and comes down below a level usually set at 70.

Rate of Change (ROC) is another version of momentum oscillator is calculated by dividing the current closing price with the oldest closing price instead of subtracting the oldest closing price from the current closing price as in the momentum oscillator. It is sometimes used.

One of the most popular indictors is the Volume Indicator. A movement accompanied by an increasing volume is more likely to continue in strength than a movement accompanied with decreasing volume which is likely to fade away. It is used to show the strength of an up or down movement.

Many traders use volume indicator as their only technical indicator in trading. Other traders use it in conjunction with price charts and fundamental analysis like economic news and geopolitical news. It gives entry and exit signals and helps in overall trading. The Volume Indicator is a great source of confirmation. You should learn to use these technical indicators. You should become comfortable in using them. Every trader has his/her own favorite technical indicators. Use them to discern trends on different currency pairs and time intervals.

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Perhaps the best advice that you will receive in your trading career is live to trade another day. Currency markets are volatile, brutal and unforgiving. You should learn to survive in the markets.

The most common factor that causes many currency traders and investors to blow up their accounts and lose all their money is greed. Once you start taking unnecessary risks you are in trouble. You want a secret formula that never loses a trade. You will start looking for the Holy Grail technical indictor or a forex robot that can make you rich. You will believe that by discovering one, you will become rich.

Unfortunately there is no Holy Grail for anyone in trading. You will win and you will lose. So you must learn not to risk more than 2% of your account on one trade. Grow your account incrementally over time. Never ever be tempted to risk big making one single winning trade that can make you rich.

Now, know how much you are willing to risk in a single trade. I have said 2%. But if you want to be aggressive you can go up to 5%. But stay between 2-5%. Dont exceed it. On the other hand, if you are conservative, you should consider risking between 1-2% only.

Once you have decided on the risk you are willing to take, knowing the rest is simple. Suppose you have a $50,000 account and you decide on a risk of 2%. How much you can risk on a single trade? You can only risk (50,000) (0.02) =$1,000. This is the maximum you should risk on a single trade.

However, if you are trading more than one position at the same time, the amount may become higher. Lets suppose, you are in 3 trades! You risk only $1,000 per trade. So the total money at risk will be (3) (1000) =$3,000. When you have determined your risk, you are can determine the trade size.

Trade size is the number of contracts you purchase in any one trade. To determine the trade size, you need to first determine where you want to put your stop loss. Lets use an example to make it clear. Suppose you are willing to risk $1000 on trading EUR/USD pair. You decide on a stop loss of 50 pips. Each pip on EUR/USD pair is $10 worth. So the number of contracts that you need to trade are (1,000)/ (50) (10) =2.

You have taken the guesswork out of your trading once you have determined your risk level and calculated the trade size. You can sleep well now knowing how much of your money is at risk. You are going to be able to trade tomorrow, no matter what happens today.

Using these common money management rules will help you avoid the pitfall of losing almost all the money in your account. Learning to survive the markets and trade another day is the essence of trading. This can help your trading take the next level of profitability.

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You must read Part I of the Money Management Rules before reading this article. Failure in investing can come in two forms. One is failure to maintain your principle. The second is failure to effectively grow your principle. If you want to become a successful forex trader, you should learn how to grow your principle in the long run.

In case you risk too much, you are going to lose a large portion of your account. You will risk more and try to recover the lost amount. You will lose all your account. There is another form of failure that you should know. You are able to grow your account 20% every year. On the surface, you may appear to be a successful investor. But, if you had made a good money management plan, you could have made 40% in a year. So what do you say was it a success or failure?

You should know before placing each trade how much is really at risk in a single trade? Many traders misunderstand this and dont know what their risk is. Suppose you have a $10,000 account and you buy one lot of EUR/USD contract meaning $100,000. Your forex broker will set aside $1,000 in your account as a margin or guarantee, so how much of your money is at risk? Many would say only $1000 but they are terribly wrong. You have $9,000 left to trade, $1000 was for guarantee. So your risk is $9,000. You can lose up to this much if you are not careful before you receive a margin call from your broker.

A margin call is an order when your dealer automatically takes you out of the trade once you have lost $9,000 and only $1000 is remaining. Once you get the margin call, it means you are out of the trade. How could you lose $9,000 in a single trade?

Each pip on a EUR/USD contract will cost $10. So you need to lose 900 pips (900*10=9000) in order to lose $9,000. Many would say what about the stop loss. You are right! You dont need to risk your whole account on a single trade and trade without a stop loss. You can use stop losses to protect your position in case the trade goes wrong. You could put a stop loss at 100 pips losing $1000 only. You could put a 50 pips stop loss losing only $500.

No matter where you set the stop loss, the amount of money that you set aside with your broker as margin does not tell you anything about the risk unless you plan to get a margin call. Understand these common money management pitfalls. Until and unless, you do not develop your own money management rules, you will most likely slip into one or more of these pitfalls.

Traders who enjoy the greatest amount of success in trading are those who have clearly established money management rules. You need to know these rules; 1) Live to trade another day, 2) Knowing how much to risk and 3) Knowing how to determine the trade size. You should read Part III of this article now where I explain how these three rules are used in more detail.

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