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Beginner traders are often recommended to start with a demo trading account before risking real money on a live account. However, there are also many who question whether this step is necessary as demo trading has several stark differences with live trading, particularly in the trading psychology aspect.

Despite that, demo trading is a good way to practice one's newly learned trading skills without the risk of losing real money. It is also an effective method of putting a new trade strategy to the test and monitoring its results before making adjustments. While demo trading does not exactly replicate the emotions and stress involved in live trading, there are several ways to make the most out of this experience.

The main difference in demo trading and live trading is that the latter typically has more pain involved when one loses a trade. Not only did you have a wrong or poorly implemented trade idea, but you also lost real money in the process. When it comes to demo trading, even though there is no real money involved yet, you can try to feel the pain by coming up with real-life penalties when you lose a trade. For instance, you can have a small jar wherein you put a dollar for every lost trade so that you are reminded that trading decisions have a real money aspect tied to it.

Another way to make the demo experience feel more like live trading is to assign grades to each aspect of the trade. You can evaluate your entries and exits, whether you were able to press your advantage or cut your losses, or if you stuck to your risk management rules. Deductions can apply if you gave in to emotions and deviated from your plan in the middle of volatile market movements. From there, you can be more conscious of your decision-making and apply the same kind of self-assessment when you are trading live.

Bear in mind though that the temptation to give in to fear of losing or greed is much stronger when real money is on the line so it is important to master this aspect of trading psychology on a demo level then simply repeat the process even when real money is being traded.

As discussed in the earlier section, it is crucial to keep a trading journal even as you are trading demo. This way you can easily identify your usual mistakes and weaknesses, then be able to work on them before transitioning to live trading. You can list your emotions involved when you make a trade decision or change in plans, then be in a better position to evaluate if you made the proper action or if you just had a panic reaction.

When you are able to take the leap and start trading live, just remember all the lessons you learned in demo trading and don't be too overwhelmed about risking real money. As mentioned earlier, it is crucial in trading psychology to focus on the process and not the profits as you are learning the ropes.

If you're a new trader trying to make sense of forex market movements and making money while you're at it, the whole experience can be exciting and overwhelming at the same time. This is why it is important to work on your trading psychology from the very start of your trading endeavor.

Perhaps one of the most important things to remember when you're starting out is to just take it easy. It can be tempting to try all technical indicators all at once or trade every single top-tier news release out there, but you might run the risk of overdoing it and feeling burned out later on. Stick with what you're comfortable with and just add what you learn along the way.

Another thing to keep in mind is to know yourself. Make sure you come up with a trading strategy that is in tune with your personality and your risk preferences. For instance, if you thrive in fast-paced movements and if you're comfortable with managing many open positions at once, then you could look into scalp trading techniques. On the other hand, if you get easily stressed with quick price movements and would rather just check your charts every now and then, swing trading might be better for you.

Lifestyle considerations must also be taken into account when coming up with a trading strategy so as to not set yourself up for stress or failure. If you are planning on trading part-time while holding on to your day job, then you could look into trading techniques that won't require you to be in front of your trading platform all the time.

Easier said than done is the trading psychology recommendation to stay on top of your emotions. After all, we are human and we can't help but sometimes give in to poor decision-making when our minds are clouded with fear or greed. The trick in forex trading is to keep an objective mindset to be able to focus on what the market is telling you instead of letting emotions cloud your judgment.

This particular skill takes time to master and even experienced traders can still be guilty of being too emotional, which is why it is also important to constantly remind yourself to isolate these emotions when trading.

Staying disciplined goes hand in hand with trading psychology, as this enables you to stick to your strategy and risk management rules. After all, it can be tempting to deviate from your plan when the markets are going haywire but with the right mindset and discipline, you should be able to focus on the right action steps to take.

Lastly, it is important to note that keeping a trade journal is one of the best ways to work on your trading psychology, and this is a habit that must be started by beginner traders from the very start. This allows you to keep track of your profit and loss, trading decisions, trade strategies, and even the factors that influenced your decisions. In analyzing these, you can be able to identify your strengths and build on them while working on your weaknesses.

Now that you've studied the basics of technical and fundamental analysis, as well as the importance of proper risk management techniques, it's about time to take a look at another crucial component of forex success: trading psychology.

While the basic forex concepts allow you to spot profitable trade setups and risk management enables you to limit your exposure or maximize your gains, trading psychology ensures that you maintain the right mindset during a trade and throughout your trading career.

Trading psychology allows you to stay focused even in the middle of a long losing streak and gives you confidence to bounce back from a large drawdown. It enables you to keep a clear head and manage your expectations when you're having a good run. This is what separates seasoned trading pros from beginners, as proper trading psychology makes you focus on the process and not the profits.

As with professional athletes that also have a sports psychology mentor that helps them keep their head in the game, traders also need guidance when it comes to having the right frame of mind, especially during ever-changing market situations. In a fast-paced trading environment, one can easily get distracted or stressed in trying to make money, but trading psychology ensures that one is focused on staying disciplined or keeping a level head.

With the right trading psychology, one can be able to step back and take a look at the bigger picture of one's trading endeavor instead of zooming in to winners or losers. Too often, a losing trade can dampen one's confidence and destroy one's focus for the next trade setups. Similarly, a winning streak can lead to overconfidence and also ruin one's focus moving forward.

What's interesting about trading psychology is that it is a constant learning experience. While mastery of basic forex techniques such as market analysis or building on winning positions is possible, trading psychology takes a long time to master and even the best traders out there do need a little guidance every now and then.

It doesn't matter at what stage you are in your trading career. Even if you're a beginner just learning the ropes or an expert trader managing multiple trade positions, one's trading performance and overall well-being could benefit from trading psychology tips.

With the growth in popularity of mechanical trading systems and algorithmic or "black box" trading, there have also been one too many instances of forex scams offered by firms claiming to give signal services.

Of course this is not to assume that forex signal services are automatically scams, but proper caution must be exercised in deciding to purchase one. The importance of learning the basics of forex trading and how the market moves must be emphasized even if one decides to use a forex signal service.

Online trading and the ease of opening an account these days have also opened up the case for fraudulent activities, so it is imperative that you do your proper research and read the fine print in any contracts you enter.

Another piece of data worth looking at is the back test results of the system you are looking to use. Although past performance is not a guarantee of future results, you can be able to gauge using the back test results if the system needs adjustment or stands to gain consistently profitable results in the future.

The availability of system back test results is already a point in favor of transparency for the signal service. Still, bear in mind that you should take these figures with a grain of salt as the owner can modify the numbers to his advantage. As the cliché goes, "better safe than sorry."

Not only are scammers present among signal services, but they could be lurking among forex brokers as well. With that, it is important that you park your hard-earned money with a reputable and regulated forex firm in order to prevent losing it completely to a scammer.

It is also important to take a look at the terms and conditions when opening a trading account, as this might contain important information regarding spreads and transactions costs. You don't want these factors to be eating up most of your trade profits later on!

Again, you should verify with the local financial industry regulators in your country to see if you are doing business with a registered broker. In Australia, the regulator is the Australian Securities and Investments Commission (ASIC), which aims to maintain fairness in the financial market environment, which also includes insurance firms and lending companies.

Another way to check up on your potential broker's reputation is to do a quick online search to see the feedback of clients. Forex forums can also be wealthy sources of information on certain brokers.

Before opening a live account and trading real money, it might be better to start with a demo account first to get a good feel of how trades are executed. If you are comfortable with the platform, bid-ask spreads, and the speed of execution, then you could consider opening a live account with the same broker.

In the unfortunate scenario that you fall victim to a forex trading scam, you can be able to file a report to regulatory agencies in your country.

For some traders, the idea of having to think about risk management for every single trade can be tedious. This is why some traders opt to incorporate risk management rules in mechanical trading systems, which can automatically calculate stop losses and position sizes.

Mechanical trading systems have gained in popularity, as these can be capable of reducing the effect of human emotions in trading. It simply makes use of technical indicators set at pre-determined parameters and complying with entry and exit rules to generate trade setup signals.

More often than not, stop losses are also based on hard numbers or the volatility of the pair being traded. In some cases, stop losses can be based on technical indicators as well. For instance, some systems set an initial 50-pip stop or one that allows the trader to close the trade when a new crossover takes place.

This way, mechanical system traders no longer need to take a few minutes to map out their risk management decisions for every scenario of price action. Not only does this prevent human emotions of fear or greed from interfering, it also saves time for the trader.

This has given rise to the development of algorithmic trading systems, which are constructed using computer codes that can execute trades right on the platform without the trader having to constantly monitor price action. Of course this takes time and knowledge to develop, although the process can be outsourced to freelance programmers.

If you are interested to create your own system, you can start with figuring out which technical indicators you are most comfortable trading with. Note that it is not imperative that you know how these indicators are calculated, but it is important to have a basic understanding of what it reflects and how it helps predict price action.

From there, you can look at the time frame you'd like to trade. If you are comfortable with several trades being entered and exited in a short span of time, you can work with a scalp trading system on the 5-minute or 15-minute charts. If you'd rather stick to longer-term price action and would rather have few trade signals every now and then, using the daily or weekly time frames might work. Or if you're a mid-term trader, you can set your indicators on the 1-hour to 4-hour charts.

You also have to be able to decide if you want a trend-following or mean-reversion system. Moving averages are generally used for most trend-following systems yet the concept of mean reversion is applied using the oscillators. Again, what matters is that you are knowledgeable of the technical indicators you are using and that you are able to make adjustments if necessary.

Entry and exit rules must also be determined, and this can be based on hard numbers such as a 50-pip stop and 100-pip target for instance. You can conduct back tests and forward tests in order to figure out the optimal number for these exit points, so that you can also base your risk management rules on these as well.

Another tricky component to risk management is the ability to control exposure with correlated trades. It's not uncommon to see similar technical setups among pairs with the same base or counter currency, so there may be instances when you'd wind up taking correlated trades.

For instance, you spot a rising channel on AUD/USD and you decide to set a buy order at the bottom of the channel. At the same time, you also saw an ascending trend line and bullish divergence on AUD/JPY so you also decide to take that trade. Meanwhile, EUR/AUD has shown a head and shoulders pattern and a possible neckline break, so you also set a short order below the support area.

When these three trades are all opened, then you will have three correlated trades that could either triple your win potential if the Australian dollar keeps rallying or triple your losses if AUD suddenly sells off.

In addition, you should also take note of currencies that share correlations with other majors. For instance, the euro and the Swiss franc tend to move in tandem, so a long EUR/USD and a short USD/CHF trade are often seen to be correlated as well.

It's not that traders are discouraged to take correlated trades, but it is imperative to be aware of how such currencies can move in the same direction. If you'd like to be cautious, then you can divide your risk for the number of correlated trades you are taken or simply scale down your position sizes if you think the pairs you are trading have close to the same probability of winning or losing.

Forex websites may contain correlation tables for major and exotic currency pairs, which can help one determine if any risk management adjustments must be made. Another option could be to hedge these multiple correlated positions with an opposite trade so that the losses can be minimized if the trades all don't go in your favor.

Something else to take note of when weighing currency correlations is the volatility of the pair you are trading. Bear in mind that some might move in your direction faster than other pairs, and when the move appears to be exhausted for some pairs, you could also think about reducing your exposure for the remaining trades that are still open.

At the end of the day though, these currency correlations are not set in stone. For instance, EUR/USD might be in for strong moves while EUR/JPY is in consolidation. In this case, one might conclude that the move was spurred by dollar action rather than euro movement.

These changes in correlations can be explained by shifting interest rate expectations or monetary policy biases, but it is always important to keep these at the back of your mind when you are taking trades with the same currency.

A more complex aspect of risk management is keeping track of several entries across different currency pairs. After all, it can be overwhelming when you are watching various setups with multiple entry points.

However, scaling in and out are practices often employed by more experienced traders, as it allows them to take advantage of price action and not miss out on any moves. Scaling in can also enable them to press their advantage if they are able to add to their winning positions. Meanwhile, scaling out can allow cutting losses or reduction of exposure ahead of market catalysts.

In particular, scaling in is often employed by traders who are seeing several potential points of entry. For instance, if you are using the Fibonacci tool to pick an entry in the direction of the trend but the different levels are in line with major or minor inflection points, you can set orders on each level instead of just having to pick one.

What's tricky about this trading style is that you also have to keep your risk management rules in mind before deciding on the position size to enter at each level. An easy way to go about it is to simply divide your risk percentage by the number of your desired entry levels before calculating the position size based on your stop losses.

Some traders opt to adjust their risk per entry by betting less of their account on the closest possible entries then risking more on farther entries. As mentioned, this depends on your risk profile and whether or not you can keep track of these multiple entries if they are all triggered.

Scaling in can also work to your advantage if you are trading breakouts and would like to add to your position if price keeps making new highs or new lows. For instance, if you predict that an upside break from a 500-pip symmetrical triangle will keep going, you can add to your position every 100 pips and adjust your stops accordingly.

During this course though, you should always be conscious of how much of your account is at risk every time you add. Don't forget to trail your stop if you'd like to protect your profits and if you'd like to stick to your initial level of risk.

Meanwhile, scaling out means gradually removing exposure, perhaps when a top-tier event is coming up or if you think that the price move is overdone. This way, you can be able to hold on to more profits in case price makes a reversal.

As with scaling in, make sure you are conscious of how much of your account is at risk at every instance. This skill takes some time to develop, as it could involve several calculations based on your adjusted stops and entries. At the same time, you should also keep track of your potential return-on-risk to see if it's worth adding or reducing your position.

These aspects must be pre-planned when you're coming up with your trade idea, as it is recommended to have a detailed strategy for various potential scenarios. This way you won't be surprised or caught off guard when markets make a strong move, and that you are in the position to take advantage of the resulting price action.

As discussed in the previous section, the use of an equity stop and a chart stop can be combined to calculate position sizes for each trade. Many beginner traders make the mistake of setting the position size first before determining the stop loss in pips, which can lead them to neglect price action.

Proper position sizing allows the trader to have just the right number of lots based on how much of the account he or she is willing to risk per trade and on the size of the stop based on past price action and volatility.

In order to calculate the right position size for each trade, one needs the following inputs: account balance, pip value of the pair you are trading, percentage of your account balance that you are willing to risk, and the stop loss in pips.

The calculation is simple when your account is denominated in the same currency as the counter currency of the pair you are trading. For example, this means having your account denominated in dollars when trading EUR/USD or GBP/USD. The calculation is also simpler if you have a GBP-denominated account and you are trading EUR/GBP.

In this case, you simply have to calculate the monetary value of your risk on the trade, based on the percentage risk and your current account balance. If you have a $10,000 account and you'd like to risk 1%, then the monetary value of your risk is $100.

From there, you divide the amount risked by the number of pips. If you are trading EUR/USD with a hundred-pip stop, then the amount risked per pip is $100 divided by 100 pips or $1/pip. After getting this figure, you then multiply it by the unit-to-pip value of the currency pair you are trading to get the position size.

There are additional steps involved when your account currency is different from the counter currency. However, you can always make use of pip value or position size calculators available on most trading platforms or educational websites.

What's important is that you use the percentage risk and chart stop as inputs to generate the position size and not the other way around. It takes practice to stick to this risk management habit and discipline to execute it regularly.

While stop losses can help a trader prevent larger losses on his trading account, common usage mistakes might lead to a worse performance. Here are some of the ones that must be avoided.

One of the most common mistakes beginners make in setting stop losses is placing them too tight. Of course the fear of losing is still very much present among beginner traders or those who are just transitioning from demo to live trading, and it's no surprise when some are guilty of putting their stop losses too close to their entry levels.

While this seems to minimize losses in case the trade doesn't go in your favor, you also expose your trade to the possibility of getting wiped out right away before price even gains traction and eventually heads the way you thought it would. Bear in mind that price action for some currency pairs, such as GBP/USD or GBP/JPY, are usually more volatile than others so there's a chance that price could spike around first before picking a clearer direction.

Some traders opt to use a combination of a volatility and chart stop in order to avoid setting stops that are too tight. This comes in handy when trading currency crosses, which tend to be more volatile compared to major pairs. You can take into account the pair's average daily range or average weekly range in ensuring that your chart stops are beyond those pip amounts.

On the flip side, setting stops that are too wide is also another common mistake. While this ensures that the stop loss isn't likely to get hit anytime soon, this can lead you to trade position sizes that are too small and not be able to make the most out of your trade. In addition, this could lead to a small reward-to-risk ratio and negatively influence your trade expectancy.

Another common mistake in setting stops is using the position size as basis for stop losses. In fact, it should be the other way around, as the position size should be based on the stop loss and percentage risk per trade.

When you use the position size as the basis for calculating your stop, you are not able to take price action into account. Using a combination of an equity stop and a chart stop can be better for risk management if these elements are used as inputs in calculating your position size. This means that the number of lots you trade will be adjusted based on how much you are willing to risk and at which point you think the trade will be invalidated.

Perhaps one of the more overlooked stop loss mistakes is setting them right exactly on inflection points. Bear in mind that price could still have a chance at making a turn and heading in your direction upon testing support or resistance levels so it might be good practice to set a stop that's a few pips beyond these levels.

Using stop losses is a recommended risk management practice, as this will allow you to set a point where you think your trade idea might be invalidated. From there, you can be able to calculate your position size based on how much you're willing to risk on the trade.

These calculations will be discussed in a latter section. For now, let's take a look at the different methods in which you can determine your stop loss.

One common kind of stop loss is the equity stop. This is also known as a percentage stop because it is determined as a part of the trader's account that he or she is comfortable with losing in case price action doesn't go in the trade's favor. This percentage value can vary from one trader to another, as this depends on the risk profile.

More aggressive traders can be comfortable with risking 10% of the account in a single trade while conservative ones might rather stick to 1% to 2% risk per trade. This value can also depend on the trader's confidence in a particular trade. Some traders risk a smaller amount of their account on countertrend setups while risking twice as much on trend-following setups since these might have a higher probability of winning.

Another kind of stop is the chart stop, which is commonly used by traders who look at technicals. This is based on price action and where the trader thinks that the trade idea will be invalidated.

For instance, if you are making a trade based on a trend line bounce, then you could set a chart stop below the trend line. Once that support area breaks, you can be sure that the uptrend is already invalid and that you need to get out of your trade. By setting a chart stop, the order will automatically be triggered even if you're not in front of your platform at that time.

If you are making a short trade based on a breakout, then you can set a stop loss above that support zone you thought would be broken. If you are making a long trade based on a breakout, you can have a stop below the resistance area you think might break.

The volatility stop is another kind of stop that is usually taken by more advanced traders. This takes into account how much a currency pair usually moves per day and sets a stop loss in pips based on that amount.

For instance, EUR/USD can move at an average of 100 pips each day so you can set a 100-pip stop loss from your entry, knowing that price doesn't usually go beyond that pip movement in a day. Technical indicators, such as Bollinger bands, can also take price volatility into account and these can be used to set volatility stops as well.

Lastly, the time stop can also come in handy, especially if you are a longer-term trader. This basically sets a limit on how long you plan to keep your trade open. If price is not moving in the direction you thought it would given the time limit you set, then you might be better off closing that trade and using your trading capital in another trade.