Forex is akin to betting – in that you place your trades without being 100% certain of the outcome. Fortunately, there are ways to mitigate losses and capitalize on opportunities. Just like anything else, forex trading needs one to acquaint themselves with the fundamentals before going full steam ahead. Are you a novice seeking to dip your feet in forex trading? If yes, these are for you:
Understand the Markets
The world of forex trading is fast-paced, volatile, complex, and sometimes unpredictable. It takes a trained eye and a thorough knowledge of its intricacies to thrive in it.
The very first thing you should do before you dive into forex trading should be to gain a concrete understanding of the forex market. Investing your time to know the basics of how forex works, market trends, price reactions, the volatility of prices, Take Profit and Stop Losses strategies and other good practices will go a long way to saving you a lot of money and headache down the road.
Also, educate yourself on currency pairs and factors which increase or decrease their value, the dynamics of trading them, the major currency pairs, etc.
Do Research on Brokers
Forex trading is done on the “interbank” meaning there’s no focal market place where traders converge, like the stock market. Forex traders, instead, utilize the services of a broker to conduct their trade.
Just like with any other market, forex is infiltrated with scam brokers who are after swindling money out of unsuspecting beginners. It’s therefore prudent to establish if your potential broker is genuine. Check their status with your national institutions whose mandate is to regulate the industry, protect traders, and foster sound trading environments.
Go In With a Plan
Some new traders want to dive in headfirst into day trading without a solid trading plan, which is a recipe for disaster. Experienced traders always operate with a trading plan and a guideline which they took time to develop. A plan helps you spot new opportunities and to tactfully manage your open positions. Your trading plan should include the following:
- Important information about forex markets
- Your strong and weak points
- Your objectives for trading
- Your next action plan after big wins or losses
- Your capital
- How much you would like to achieve
- How much money you are willing to lose
- What kind of analysis you prefer; technical or fundamental
- What kind of currency pairs you will trade in – will it be majors, minors or exotics?
- Your risk management strategies
Cushion against Extreme Losses
Forex prices can move quickly, and a trader without adequate protection can incur painful losses. While a trade setup can seem strong, or all cues are pointing to a favorable direction, the truth is that future currency values remain unknown, and each trade is a risk.
A Stop Loss order is one mechanism to protect yourself. It enables you to set the amount of money you are prepared to risk and minimizes the chances of losing more than that. Thus, if your trade doesn’t go as expected, you don’t suffer too much financial loss.
Have Realistic Expectations
While forex trading can be very fruitful, it can also be frustrating. Don’t set out with a get rich quick mentality, which may cause you to make mistakes and lose money in the process.
Having a realistic outlook will keep you motivated even when you encounter challenging aspects, which is a part of forex trading. The SMART strategy applies in forex trading too. Your goals should be Specific, Measurable, Attainable, Relevant, and Timely. When you’re starting, at least, this method will enable you to have some structure in your trading effort.
Remove Emotion Out Of the Equation
Like any other market, forex trading has its uncertainties and on top of that, certain behaviors and risks unique to it. Some aspects of forex do seem counterintuitive, and it can be nerve-wracking trying to sidestep all those unforeseen events while maintaining level headedness.
No matter what, it’s important not to let yourself be swayed easily. Don’t allow fear, euphoria, or greed cloud your judgment. Trade within realistic parameters and be prepared to accept loss whenever it happens. Also, don’t let a single win drive you to trade recklessly. Forex trading can open for you a whole world of opportunities – fun, profit, and knowledge. But it also needs a solid strategy, measured steps, and a plan. Following these tips will help you circumvent pitfalls that most beginners encounter when starting in forex trading.