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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.

As discussed in the previous section, leverage can get tricky and may lead to margin calls when you don't know how to manage it properly. This section illustrates more examples on the common mistakes beginners make when handling leverage and how to avoid margin calls.

Let's say you have a balance of $10,000, which is initially equal to your equity and usable margin. Without taking any trades yet, your used margin is equal to $0.00. In the course of taking trades, your used margin will vary depending on how much you risk on the trade and your account leverage, but you will not have a margin call for as long as you equity is greater than your used margin.

Once your equity falls below your used margin, your broker will give you a margin call, which basically means that you have to put in more cash to sustain your positions or close your account altogether.

In a trade example, let's say your broker has a 1% margin requirement and you trade 1 lot of EUR/USD. Since you have a mini account, your used margin or margin required is $100 per lot. With that, usable margin is now at $10,000 minus $100 or $9,900 and used margin is at $100.

If you buy 80 lots of EUR/USD, you would wind up with a used margin of $100 multiplied by 80 lots or $8,000. That way, your usable margin is now at $10,000 minus $8,000, which is $2,000.

If price doesn't go in the direction of your trade, you could encounter a margin call once price goes 25 pips against you. This is because your used margin of $8,000 at $100 per lot means that for every pip of movement in EUR/USD translates to $80 in profit or loss. With $2,000 in usable margin, a 25-pip move against you or 25 multiplied by $80 could wipe out your usable margin.

When that margin call happens, you would be out of the trade and take the $2,000 loss on your account. Once the trade is closed, your equity and balance will be at $8,000 for a total loss of 20% on your account.

Bear in mind that EUR/USD can move by as much as 50 pips per day so there's a good chance that risking a large chunk of your account with a tight limit for encountering a margin call is almost guaranteed to lead to a loss.

Another factor you have to consider when avoiding margin calls is the spread offered by the broker. So if the spread on EUR/USD is at 2 pips, then price only has 25 pips minus 2 pips in leeway before resulting to a margin call in the previous example.

When you open an account with a forex broker, you should make sure that you read the fine print concerning leverage and margin. Bear in mind that your open positions could be liquidated by the broker when your used margin exceeds your equity so you should be fully aware of how these situations are handled, depending on the terms and conditions of opening a trading account.

Another way to avoid the dreaded margin call is to make sure that you make use of stop losses when you set your trades up. You should determine a line in the sand wherein your trade will be invalidated, and base your position risk on that value. This will be discussed in the succeeding sections.

One of the biggest advantages to trading in the foreign exchange market is the ability to take advantage of leverage. This enables a trader to use a small deposit to control much larger contract volumes, allowing one to keep risk capital at a minimum while maximizing potential returns.

A forex broker that offers 50-to-1 leverage can allow a client to trade contract sizes of up to $50,000 for an initial capital of $1,000. A broker with 100:1 leverage can enable a trader with a $100 margin deposit to trade $10,000 worth of currencies.

While this sounds very appealing when profit scenarios are considered, bear in mind that leverage can also blow up one's account in an instant when risk isn't managed properly. In order to take advantage of the leverage offered by brokers, you need to allot part of your account to a margin deposit.

As leverage can compound your wins, it can also magnify your losses. This is why traders often call leverage as a double-edged sword or a two-way street. Some beginner traders are often blown out of the water at the start of their trading endeavor due to overleveraging or not completely understanding how to manage leverage or risk.

As mentioned earlier, margin refers to the "good faith" deposit placed with a broker to be able to trade a larger position and have the broker "borrow" the remaining balance. The broker usually pools these margin deposits with that of other traders in order to place its own margin under interbank trade transactions.

While leverage is often measured as a ratio of the amount that can be traded to the amount deposited, margin is measured in percentage terms. When the leverage is 100:1, the margin is 1%. When the leverage is 10:1, the margin is 10%.

These are some of the factors that are taken into consideration by most traders before opening an account with a broker. More seasoned traders and aggressive ones are more comfortable with a larger leverage, as this could allow them to boost their profit potential on their tried-and-tested trade strategies. Those who are just starting out or more conservative traders tend to go for brokers with lower leverage.

Margin is not to be confused with account margin, which refers to the total amount of money you have in your trading account. Used margin, meanwhile, stands for the amount of money that the broker is currently holding in order for you to be able to keep your trade positions open. The broker credits this amount back to your account when you close your position or undergo a margin call, a concept that will be discussed in the next section.