The Forex or FX refers to the marketplace where participants can buy, sell, trade, and speculate on currencies. Two matched currencies, called the “currency pairs” are traded for one another. In trading equities, you are betting on the success of a company; In trading FX, you are betting on the success of a country, which can influence your position on a currency. Forex, which is the largest financial market, might be easy to get into but that doesn’t mean due diligence should be neglected.
While losing in a trade is inevitable, there are smart ways to keep those losses to a minimum while improving your trading portfolio. If you’re interested in FX trading, here are some tips to keep in mind.
- Learn before you burn. Continuously learning about the currency market is integral to trading success. Learn everything possible about the Forex markets, including the economic and geopolitical factors that can affect your preferred currencies. Do your homework so you can adapt to changing market conditions.
- Control your impulse. The ability to contain emotions and maintain discipline is one of the crucial yet most overlooked skills that should be practiced by any trader. Mastery is your gear – if you don’t master your Forex trading strategy and you immediately get in the game without any idea what you’re looking for in the markets, you’ll fall into emotional trading. You tend to overtrade. You end up “shooting” at anything that moves instead of “sniping.”
Greed is another sly enemy. We have the natural instinct to keep trying to do better, which causes us to hang on to winning positions for too long, attempting to benefit from every last tick. You should recognize this instinct and combat it by developing trade plans based upon rational business decisions, not upon emotional whims.
- Find a reputable broker. Since the industry has much less control, it’s possible to end up doing business with a less-than-credible Forex broker. Take your time in assessing the overall integrity of the broker, including whether or not they are registered.
- Use a demo account. Pushing the wrong button when opening or exiting trades can cost money and damage your trading portfolio, so it’s a good thing that almost all trading platforms come with a simulated or demo account.
The “practice” account is designed for the investor to first review and to test the features of a trading platform before funding the account or placing real trades. The demo account is “funded” with simulated money to allow you to place hypothetical positions without putting real money on the line. It helps you become more adept at order entry techniques to improve your trading portfolio and confidence.
- Keep analysis techniques simple. It’s often tempting to take advantage of all the technical analysis tools offered by the trading platform. Yes, most of these indicators are designed for the Forex markets but these techniques are better kept to the minimum for them to be effective.
Less is more when it comes to charts. For example, using the same kinds of indicator, like two oscillators or two volatility indicators, not just become redundant; they can also give opposing signals. Tools that are not used on a regular basis, as well as those tools that have no significant effects on your trading performance, should be removed from the chart. In addition, the overall scheme of the workspace, like the colors, fonts, and price bars, should be kept simple so they’ll be easy to read and interpret.
- Protect your trading accounts. How not to lose money? Lock those hard-earned profits before they get wiped out.
An effective trading plan includes utilization of protective stop and limit orders, which are designed to limit a trader’s loss on a position in a security. A stop order enables you to specify the particular price at which you’d prefer to buy or sell, while a limit order allows you to set the minimum or maximum price at which you’d prefer to buy or sell. They protect gains by allowing the trade to remain open and continue to profit as long as the price is moving in the favored direction and closing the trade once the price changes direction.
In Forex, a trailing stop is set below the security’s current price (for a long position) and a trailing stop is set above the security’s current price (for a short position) to conserve winnings.
- Use leverage prudently. Leverage refers to a loan provided by a broker to an investor. In the FX market, leverage is one of the highest an investor can obtain. With this, you have increased buying power, thus having the opportunity to make potentially huge returns with a very small investment.
Leverage, however, is both a blessing and a curse. The drawback is that leverage can also easily amplify losses of trading positions when not used properly. If the market moves against you and you can no longer meet the minimum margin requirements, then the broker can liquidate assets.
You can, however, control the amount of leverage used by basing your position size on the account balance. Opting for a smaller position and resisting the temptation of maximizing allow you to limit risks.
- Keep track of your trading journey. Keeping a trading journal is essential in growing as a successful FX trader. Details including the dates, instruments, losses, profits, as well as your trading psychology, should be recorded and reviewed. Having a good record keeping of your trading activity allows you to learn from both the ups and downs of your Forex trading journey. It allows you to see where you’ve gone wrong, prevents you from falling into the same mistakes in the future, and raises your chance of becoming profitable.
- Treat Forex trading as a business. Trading is not just some sort of passive income; it’s a serious business so it should be treated as such. It demands time, skill, and emotional stability. It also incurs tax, expenses, risk, and uncertainty.
Like in any business, you shouldn’t overly emotional with either wins or losses. Success isn’t achieved overnight – you have to set realistic goals, plan, and learn from both winnings and losses in order to thrive in FX trading.
Author Bio: Sophie Harris is one of the resident writers for FP Markets, a CFD and Forex Trading provider in Australia with over 12 years industry experience serving global clients. Writing informative content about business and finance is her cup of tea.