Forex trading is a very profitable and lucrative investment option. But it is also a very risky investment alternative. For people who do not exactly know what they are doing, the advantages of investing in currency trading may lure many individuals to invest their hard-earned money on forex trading, only to find out eventually that things are not as simple and easy as they have thought it to be.

While it is true that forex trading can give an investor huge amounts of profits in a short span of time, there are accompanying risks involved. As any investor would know, high yielding investment alternative normally carry with them a corresponding high amount of risk involved. And forex trading is no different. The promises of high returns on one’s investment can turn out to be shocking losses for any individual investor who does not fully understand the business of forex.

Trading the forex markets involves leverage. Forex leverage makes it possible for an investor with a relatively small amount of capital to control fund which are usually 100 times the amount which he exposes with his trades. Leverage multiplies the effects of the changes in the prices of currency pairs that investors trade.

This characteristic of forex trading should warn investors that, just as profits can be quick and easy to come by with trading, losses can just be as easily absorbed, with the same amount of swiftness and magnitude.

That is why trading platforms have features to provide extra protection for investors who trade the forex markets. These are called stoploss levels. For every trade that an investor makes with his account, he can set a certain stoploss level where he instructs his broker to close that particular trade should the market go against his position and reach a certain level. This is also called “cutting losses”. Anyone who trades forex knows that no matter how diligently a trader studies the market and prepare his trading plan, losses are bound to occur. It becomes a matter of discipline for a trader to accept losses for a trade that goes against his position in the market.

Stoploss levels guarantee that your account would not be wiped out should the market continue to move against your open position. Stoploss levels give a trader the chance to cut his losses. And stoploss levels provide the opportunity to have a fresh new mindset when analyzing the forex market. Sometimes, this is what a trader needs to be able to clear his mind from losses. Cutting losses stops an investor from hoping that the market would reverse itself and follow the investor’s open position. Most of the time, it is that false hope that wipes out the entire account of a stubborn forex trader.

So while stoploss levels effectively reduce an investor’s equity everytime it is triggered, the benefits of using it to ensure that you can survive to open another trade with a fresh new mindset should be emphasized. Use stoploss levels to reduce the risks of an investment which is characteristically risky in the first place.

Forex is a speculative form of investment. Add to that, leverage is allowed with forex investment. And this combination makes investing in forex trading a risky type of investment alternative.

But with the high risk characteristic of forex investments come the lucrative profit potentials that can be achieved when done correctly and wisely. Maybe you have heard of the scary statistic that 9 out of 10 forex investors lose their money on forex trading within the first few weeks of trading. And similarly, you may have also heard of the success stories of forex millionaires who trade for a living using forex investments.

So maybe you want to try your luck with forex trading. Of course, you would not be going into forex investments with just luck as your weapon. Maybe you have already done your research and your training. You may have already developed a profitable trading strategy using a demo account. And now, you want to test it on a real, live account.

But you are not sure as to how much would be the initial deposit that you should invest when you open your real, live forex account.

In order to come up with a figure, you should first ask yourself a few questions.

1.) How much investment can I afford to lose?

Let’s face it. Forex is very risky. And if 9 out of 10 investors lose their money in forex, better be prepared to be one of those nine unlucky investors. But of course, you would not be investing with a losing mindset. This is just to determine an amount which you would not lose sleep over should you lose entirely. Think of it as money that you would not be needing for the college education of your children. Or money that you can afford to splurge for in a vacation. This should be money that, once you lose, you can always get back without much heartache and hardships.

2.) How much is the minimum investment with the forex broker that you chose?

Whether you are targeting to open a standard account, or a mini account, or even a micro account, you should know the minimum investment that you forex broker allows. Then compare it with your answer to the first question of how much you can afford to lose. See where your amount can be accepted. It is usually advisable that you do not invest the floor minimum amount required by the forex brokers. For example, if the minimum for a mini account is USD 300, and USD 1,000 for a standard account, and you have exactly USD 1,000 in funds that you can invest, it is advisable that you choose a mini over a standard account even if your funds are sufficient to open a standard account. The reason for this is that you can have more margin to maneuver from with a mini account than with a standard account with the amount that you have. Surely, you know about margin requirements and proper capital management if you have already done your homework in these areas.

3.) Would the amount that you can invest be enough with the number of trades you would be making in any particular time be enough considering the type of trading strategy that you would use?

Different trading strategies require different types of margin. If your strategy requires that you open several lots at the same time, or that you strategy includes adding up trades at certain levels, you should compute if the money that you can invest is enough to cover the margin required for this type of trading. And not only should it be enough to cover the margin, but it should leave your account an acceptable room to breathe and maneuver should the market move against your position. Again, the reason for this should already be clear to you if you fully understand the value of risk management for your capital.

With those three questions, you should be able to arrive at the figure for your initial deposit for your live forex account. Remember that these guidelines are aimed to ensure that you have room for proper capital management while making sure that you minimize the risks associated with forex trading.

So maybe you have already read all the basics you need to know to be able to trade forex. You have scoured the various internet forums to get some tips and strategies on how you should trade currencies. And you have already started trading using a demo account with your chosen broker. So now, you are already thinking of opening up a real, live account.

But you wonder, how different is a demo account from a real, live account?

Real Live Account Means Real Money

At risk of stating the obvious, you are dealing with real, hard-earned money when you trade real, live accounts. And this alone carries with it a lot of implications as to how it is different from demo accounts.

First, since it involves real money, you do not have the luxury of just opening up another one in case you burn up the whole equity with losses. Well, of course, you can deposit real money once equity dries up. But it would cost you real money that you should be earning, instead of losing.

Added Pressure In Real Live Accounts

And since real money is involved, there is now pressure with every trading position that you open. There are times with demo accounts where you open an account because you want to try a strategy that you have been cooking up in your head. Before you click the trigger by clicking on that mouse to open a new trade, you would have to think things over and review your trading plan thoroughly before you get caught up in a trading position that you would regret later on.

Monitoring The Trades More Closely

And for anyone who has made the jump from demo accounts to real, live accounts, there is a noticeable difference with the way one would monitor the open positions that he has. Unlike with demo accounts when one would open a trade, probably set stoploss levels and profit target, and then just wait for whichever gets hit first, it would become totally different with real, live accounts. Psychologically, even if you know that you already have the target profits and stoploss points in place to be triggered automatically, you would still be constantly checking on how the market s doing and where the prices are going.

While this can actually be a good thing, in the sense that you are always aware of how the market moves in relation to your position, and make the necessary adjustments if you deem them fit, this may also work to your real, live account’s detriment. Changing trading plans more often can lead to weaker trading plans altogether. Simply put, a plan which is not always followed is not really good for the overall system of trading. Forex traders work hard in developing their systems. And constantly changing plans would dilute that system until it becomes unrecognizable anymore. And following the rules of the system is important in evaluating a system’s profitability and effectiveness.

The Forex Broker Factor

With regard to the ways orders are taken in and accepted by your forex broker, there should not be much of a difference between demo accounts and real, live accounts. Although most forex brokers have different hosts and servers for their demo accounts and real, live accounts, we should actually expect that real, live accounts should be technically more dependable. Of course, there are times, especially during extremely volatile market situations when orders would not be filled up instantly as prices move extra-ordinarily fast in these situations. Some brokers add a few pips in their spread to be able to adapt to these times. These mostly happen when some sensitive economic data is released. But market conditions usually returns to normal after a few minutes. If your forex broker gives you a totally different trading environment with their real, live accounts as compared to their practice, demo accounts, then maybe you should try considering looking for another forex broker.

So, with all of these differences between demo accounts and real, live accounts, it is actually up to the forex trader on how he would adapt to the discrepancies. The demo accounts were there for the forex investor to practice trading and develop an effective forex system. Learn to apply the system that you developed and adapt to the changes and pressure of trading a real, live account. It is this ability to adapt and implement your system with strict discipline that would spell out the profitability of your forex trading account.

Forex Drawdown and Forex Strategies

Forex investors should know how to evaluate investment strategies based on the risks that their accounts are exposed to based on forex drawdown. Forex drawdown is the amount, either in absolute value or percentage terms, of decline in a forex account’s equity through the course of trading.

For any given instance that a position is opened in trading account, the value of its equity changes from time to time depending on the current floating profit or floating loss that the open trade is incurring. Even if the said trade has not yet been closed and liquidated, the equity also rises and falls as the price for the traded currency pair fluctuates.

Forex drawdown is important in determining if a forex strategy is a good strategy. Forex drawdown gives the forex investor an idea of how risky a forex strategy is. If a trading strategy has a relatively large amount of drawdown when compared as a percentage to the account’s equity, that strategy may be considered risky. It is risky because it puts excessive strain of the account’s equity for the open trades it takes before it can make a profit. And an excessive forex drawdown may also eventually lead to a forex account losing a considerable part of its value as a result of risky trading strategies.

Forex Drawdown and Signal Providers

Forex drawdown can also be used to evaluate forex trading signal providers. In the same way that strategies are assessed by the risk factor that it exposes a trading account, forex signal providers should also be evaluated with the amount of risk their signals put on an account. Forex trading signal provider should be able to give profitable trading signals to their clients without taking too much risks. The value of any amount of profit generated by trading signals should be analyzed in view of the risks that were taken during the trade to achieve that level of profitability. As an example, if a forex signal provider suffered a floating loss of 100 pips before the price of the currency pair turned around and hit a 10 pip profit, is it worth it for the investor? The forex investor risked 100 pips to be able to gain just 10 pips of profit.

Risk Factor and Forex Drawdown

While the example above was made using pips as the basis of analysis, the more correct and more accurate way of evaluating forex drawdown and the risks involved should be by using the percentages based on the forex account’s equity. Of course, different forex investors have different appetites for risk. And depending on how much risk you are willing to take, the amount of forex drawdown varies from one investor to the next. But remember that most of the time, the amount of risk that a forex investor is willing to take, based on the relative amount of forex drawdown that he exposes his account to with his trades, usually determines if his account can survive the volatile markets of forex in the long run. The profitability of a forex account is usually correlated to the length of time the account stays alive to trade in the forex markets.

So evaluate the risk factor you are willing to take with your forex account by computing the forex drawdown you are willing to take with every trade that you open. Proper capital management should dictate that forex drawdown be maintained at a minimal amount for an account to remain profitable in the long run.

Volatility of the Forex Markets

For anyone who has ever traded forex, he knows that the market can get extremely volatile at times. An economic data released that is either falls short or exceeds market expectations by a wide margin can trigger massive movements in the market. Or sometimes, without much stimulus to jolt the market, simple technical reasons such as being overbought or oversold in its technical price levels are enough to bring extreme volatility to certain currency pairs.

There are some forex traders who love this. They simple live for these moments of extreme volatility in the forex markets. And why not? These instances provide the perfect opportunities for forex investor to earn money. And earn money extraordinarily.

Big movements in the forex market give forex traders the opportunity to maximize the profit potentials from their trading positions. No one makes big profits when the market is stagnant. That is why many forex traders prefer the action of an active market.

But just as the double-edged sword can cut both ways, volatility in the forex markets can also either give you and your account great profits, or it can also inflict in your account massive losses. If your position is against the market movements, your losses would quickly pile up one the price levels accelerate away from your trading position.

The Use Of Stoploss Points

This is where stoploss points come in useful. Think of stoploss points as safety nets.

Just like the safety nets being used by acrobats in high-flying stunts, safety nets are there with the hopes that you would never have to use them. But once you are forced to use them, you are just glad that they exist because they keep you alive.

In forex stoploss levels function the same way. Forex traders hope that the market does not hit their stoploss levels because it would mean that they would be acquiring losses in their forex accounts. But looking on the bright side, the losses incurred as a result of a stoppage from the stoploss points actually ensures that your account is still alive. The account stays alive to trade in other opportunities. And for anyone who has traded forex, he knows that opportunities are endless in forex.

And in a market where volatility suddenly increases into extreme levels without much warning, stoploss levels are extremely important to prevent your account from being wiped out. The extreme volatility, when not agreeing with your trade position, can inflict huge losses in your account when not checked immediately. And stoploss points are there specifically for that purpose – to check the skid of a wrong trade.

Stoploss To Wake Up The Forex Investor

Stoploss levels can also be a forced wake up call for some investors who hang on to false hope. It is human nature to hope that the position we take is the right position and that the market would eventually agree with us, But sometimes, stubbornness prevents some forex investors to see clearly and cut their losing positions. A stoploss point would force them to do that. A stoploss level, when hit, would force the trader to analyze what went wrong and actually give him a fresh start in analyzing the market. It is easier to study new positions when you are not holding on to false hopes which sway your objectivity astray.

Stoploss levels should be carefully computed and analyzed for them to be effective. But they are necessary safety precautions that you should never forget for every trade that you make.

Forex investors are pretty much critical about the performance of their forex investments according to certain factors and benchmarks. The term ROI or Return On Investment and Drawdown are two of the most popular terms that are often used when referring to a forex account’s profitability and performance.

But what exactly are ROI and Drawdown? How can these two financial terms help a forex investor understand his account better? And in relation to free forex signal providers, how should an investor view ROI and Drawdown in evaluating the forex experts that should handle his account?

Return On Investment

ROI, the acronym for Return On Investment, is a performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of investments. To calculate the ROI, the benefit (return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or a ratio.

ROI = (Gain from Investment – Cost of Investment) / Cost of Investment

In simple terms, ROI measures the profitability of an investment, And in forex parlance, ROI is a result of all the pips gained from trading currency pairs. A positive ROI means that the forex investment has gained from trading. While a negative ROI indicates that the forex investment is losing.

It should be noted that when calculating the ROI of an investment, it is the actual value of the capital which should be used, and not the balance. The capital figure represents a more accurate standing of an investment account because it already factors in all past trading profits and gains, including all open positions which are also either gaining or losing.

Drawdown

Drawdown, on the other hand, is the peak-to-trough decline during a specific period of an investment. In forex trading, this is usually viewed in relation to trading positions. When an investor enters a position in the forex market, prices do not necessarily go immediately in the direction of his trade. In fact, whenever a forex trader enters a trade, he is immediately at a loss position because of the spread. Drawdown is the measure of the maximum loss that the forex trader must endure and go through before the position goes positive and turns to a profit, or liquidate. Of course, the lower drawdown, the better it is for the investor since drawdown connotes the risk involved in the trade. If a forex trader can always minimize the risk in every position that he takes by keeping his trading drawdown at a minimum level, then he can achieve an ideal risk-reward ratio for his investment.

Evaluating Forex Signal Providers

ROI and Drawdown are important measures that can be used when evaluating forex signal providers. While a forex signal provider may boast of a skyrocketing ROI for his investment portfolio, it is also important to take note of the drawdowns that he has incurred to be able to achieve his high ROI. If a forex signal provider’s drawdown is excessively high, it should redflag the investor that this provider may be putting too much risks on his trades. And a high-risk type of signal provider may not become effective for everyone, especially for forex investors with only a small amount of capital in the balance. High drawdowns can certainly wipe out small capital which cannot sustain the high-risk trades given out by the signal providers.

So, while a high ROI may be a good indication of the profitability of an account, the drawdown should be given equal importance as well, as it indicates the risk factor and even the resulting sustainability of an investment.

Of course, the best combination would be a high ROI with a low Drawdown type of investment. If a forex signal provider carries this kind of a combination, it improves a forex account’s profitability in the long run. But if such combination is hard to find, the next best solution is to find the perfect balance between the two.

Forex traders have varying styles and strategies in the way they trade. And based on their forex trading strategies, they can be classified into two major groups: short term forex traders and long term forex traders.

Short Term Forex Trading

Short term forex trading is the kind of trading employed by investors who prefer the action and volatility of intra-day trading. Most of the time investors who prefer short term trading would want to sit in front of their computers and wait for the perfect set up according to the technical analysis of their trading strategy. Once the perfect set up is achieved, they enter the market. And once they enter a position in the forex market, they continue to monitor that trade until it gives them a profit or a loss, depending on where the price of the currency pair goes.

Short term forex trading has its own advantages. The most obvious of which is that with the quick entry and exit of the investor in the forex market, he already knows by the end of the day whether he has profited or lost with the trade position that he took. Short term forex trading also takes away the danger of prolonged exposure of an investor’s capital in a volatile market. Since most of the time, a short term forex trader liquidates his position whenever he foresees that he will not be able to monitor the market for a prolonged period of time, he protects his capital from any unforeseen eventuality that may affect the currencies he is trading.

Long Term Forex Trading

Long term forex trading, on the other hand, is the type of trading employed by investors who rely more on the fundamental basis of currencies. There may be some degree of technical analysis involved, both it is not as pronounced when compared to short term forex trading where technical analysis dictates the perfect timing of entries and exits. Long term forex trading may take anywhere from weeks to months in order to liquidate a position. An investor who prefers long term forex trading does not really care about the daily volatility in the prices of currencies he is trading. What he mostly cares about is the general direction of the currency pair, and the underlying fundamentals, such as the corresponding countries’ economic conditions, to support and continue supporting the position that they are in.

The main advantage of long term forex trading is that it does not tie up the forex investor in front of his computer just to monitor the trade. This is very ideal for the passive forex investor with a day job who just wants to take advantage of the benefits of forex without the stress associated with price fluctuations affecting the profitability of trade positions.

Depends On Trading Goals and Personality

Being a short term or a long term forex investor really depends on the type of trading personality and investment goals of a particular investor. If he likes the fast-paced, high stress level, and action-packed environment, then short term forex trading may be for him.

However, for some types of forex investors, they do not want the excitement of the live daily action the forex market. They do not care if the lack of action in their forex investment holds their capital. They prefer protecting their capital than exposing them to the high risks of day-trading.

So when deciding on what type of forex investor you would want to be, ask yourself the necessary questions pertaining to your trading personality. The amount of time that you can allot to the actual trading of your investment has a lot to do with it. Can you actually do the monitoring required by day-trading if you prefer to be a short time forex investor? How much time can you actually spare each day to analyze the market and wait for the perfect set up using technical analysis? Maybe you would be better off being a long term forex trader if your investment goal is just to find a more lucrative alternative to your bank time deposit. And it is also important to note that forex investors should take their health into consideration when deciding which type of investor they want to be. The excitement of the daily volatility in short term forex investing may prove to be too much for a person with a weak heart.

And lastly, although it is short term vs. long term forex trading, who says you cannot combine both? There are ways in doing it in order for an investor to get the benefits of both worlds.

Forex signals are warnings that precede a movement in the forex market. Forex signals are used to be able to properly time the entries and exits in trading the forex market.

Forex Signals and Technical Indicators

Forex signals are usually based on technical indicators. In forex trading, charts are often used in analyzing the price movements of major currency pairs. These price charts carry in them the history of price movement for that certain pair. And it is in view of this price history that forex analysts can predict, or at least anticipate, certain pattern formations in the graphs of these currencies. Forex signals can be triggered by the technical indicators which are applied to these price charts.

Forex Signals and Fundamentals

In other instances, forex signals are brought about by certain fundamental conditions. Fundamental conditions include the release of economic data of certain countries which affect the movement of currency prices in the forex market. Data like inflation, employment figures and interest rate decision by central banks usually trigger major fluctuations in currency prices, especially if the released data falls outside of market expectations. Sometimes certain political or economic events, which can be related to a currency’s stability, provide varying degrees of movement in certain currency pairs.

Whether brought about by fundamental factors or technical indicators, forex signals should be regarded as important instruments in trading forex. While it is true that there are only two directions that the price of a certain currency pair can go, either up or down, the use of these indicators increases the probability of predicting the correct direction that the prices would take. A thorough analysis reduces the risk of blindly taking a bet on a certain currency to go up or go down in value. And forex signals give a solid foundation for every trading decision a forex investor makes in his trading. They bring in the scientific and technical knowledge as the basis for taking positions in forex trading.

Thrid-Party Signal Providers

There are various third party experts who provide forex signals as their service. These forex experts employ different kinds of analysis in arriving at the buy and sell signals for forex trading. These providers of sometimes offer their services for a fee. It is usually a recurring monthly service fee that they charge to every client who wishes to receive their signals. They usually release the forex signals thru cellphones, emails, instant messaging, or through their private chatrooms.

However, there are also some forex experts who provide forex signals for free. This does not mean that their signals are inferior or inaccurate when compared to the paid signal providers. Some of these free signal providers just do it to give back to the forex community which has helped them achieve their financial freedom.

You can try developing your own trading system that would eventually provide you with the forex signals that you shall use in your currency trading. But however you choose to do it, and whichever system that you choose to adapt, bear in mind that having the profitable positions in currency trading is just half the battle. Capital management is, without a doubt, just as important in being successful in this lucrative business of forex investments.