Some people’s stomachs churn and their hands shake at the mere mention of currency trading. If that sounds like you, then it might be best to pass on this form of speculation completely. On the other hand, if you’re one who doesn’t mind being awake at 3 am checking foreign markets for opportunities, then carry on.

But before you even get started, let’s examine what currency trading is and how it works. You will need to fully understand this before you risk your hard-earned cash on the volatile foreign exchange market.

What Is Your Currency Trading Risk Tolerance?

No matter what type of trading you do, your goal is to make the most money possible. If that’s not your goal, then perhaps you should find another hobby or profession that makes more sense for you.

However, before you even begin speculating on currencies, it’s important to know your own risk tolerance. Not understanding this could lead to a series of inevitable mistakes and ultimately cost you your hard-earned money.

There are three main questions that will help you understand where you stand:

What Are Your Goals for Currency Trading? What Are Your Abilities as a Trader? How Much Money Do You Have to Lose Before the Trade is Over?

Let me give you an example of how these questions apply to currency trading.

One of your goals might be to generate $5,000 in monthly income for several years while getting out of the game before any losses occur. This is a perfectly fine goal, but it’s quite different from someone who wants to make $50,000 within the next few months, with no concern for any losses.

Another goal might be to make $5,000 per year in profits, but you’re not concerned with when you get out of the market. This is also fine because you’re less aggressive than someone who wants to make (and stick to) a $500 profit per day, no matter what.

These are just a few examples of the types of goals you could set for yourself. I’m not here to tell you what your goals should be; that’s up to you. However, if you feel like your goal isn’t specific enough or if it might lead to problems, you should work on getting it more defined.

There are other questions to consider as well, such as how much risk you’re comfortable with taking on every single day when trading the market. Your ability also depends on how many open trades you have. If you’re juggling five or more trades at once, it will be much harder to make money than if you had one or two trades on simultaneously.