There are many opportunities to make money by trading currencies. New entrants to trading on the Forex market face a lot of options, platforms and terminology! One of the reasons Forex trading is so popular with investors is markets are open 24 hours a day, 5 days a week. The volatility in prices give many a chance for technical traders to profit. Question is… what should you learn to ensure you take advantage of these opportunities?
Currency prices are influenced by traders making judgments on interest rates and what each currency is worth. Prices can change at incredible speed in response to news and global events. Retail Forex traders should look at political and economic stability, currency intervention, monetary policy and major events such as natural disasters before trading on the Forex market.
Currencies trade in pairs, for example, sterling/US dollar. If a trader believes that US dollars will strengthen against the pound then they buy dollars. This means they are also ditching their pounds. When they are right then the value of their currency rises and they can sell for a profit. Yet if their hunch was wrong then they lose.
Trading on the Forex market is risky. You should only risk what you can afford to lose. Learning about risk management techniques such as diversification and starting with small positions should ensure you do not make painful mistakes. Making mistakes is part of the process. Learning from these and knowing your limits will help you grow into a profitable trader. It’s a good idea to create a record of mistakes and how they came about. This way you can review them to ensure you don’t repeat them!
First time Forex traders usually have a lot of faith in their Forex trades. Far too many first-time traders hold on to a losing position way too long. When trading on the Forex market it can sometimes be hard to keep expectations realistic. High expectations can lead to impatience. Impatience leads to traders going from strategy to strategy, trying to find the big money trade. Strategies take time to learn and tweak – there is no easy solution that will make you a great Forex trader in a day. Be patient and disciplined until you find the strategy that works for you. When you do, stick to it, do not let your emotions break your own trading strategy rules. Sometimes letting your subconscious mind take over can work wonders!
A common reason to start trading on the Forex market is noticing that there is a predictable pattern that follows certain news events such as an economic announcement. You get a few right and next thing you know, you are signing up for an account! While trading around news is a good start, it is not a plan. If you start trading on the Forex market with just an idea, you won’t know when to take profits or cut your losses. Ideas drive instincts which is good. These need to be backed up by analysis which should lead to the creation of a trading plan. Once your trading plan starts to work, resisting the temptation to increase the risk you take, i.e. loosing discipline, should be stopped at all cost. Emotional control is paramount, especially when you are winning!
It’s easy to go all out and bet the house on a position you believe is a guaranteed winner… until it all goes wrong. The best Forex advice is to start small when trading on the Forex market. 1/2% of your trading account should be a maximum and focus on one, maybe two currencies. Learn them, make mistakes, learn from your mistakes and develop that emotional control which is so important to a trader.
Stop losses are optional but highly recommended for trading on the forex market. Experienced traders have found that setting a stop loss can set you up for long-term success. Setting the stop loss will limit your losses if the market moves against you. If you can limit your bad trades, your good trades will start to tally up in your P&L account. Crucially once your stop loss is set, let it do its work! It is not advisable to change them several times a day. They are there to take the emotions out of trading. They are part of your trading strategy. If the trade hasn’t worked, it hasn’t worked and its best to walk away.
It isn’t only Sir Alex Ferguson who has those moments, it happens to all traders too! It is one of the most difficult concepts in trading on the Forex market: letting the trade play out. Whether that means walking around the block, turning off your computer or reading a book, find a way of distracting yourself. If you are checking your trade every 5mins, you won’t discover new ones and will lose the emotional detachment a trader needs!
Maybe not quite literally but leverage magnifies losses as well as gains. Just because you are offered a large amount of leverage doesn’t mean you should take it up. Many brokers will rope you into using some leverage (they make money by lending to you) in the initial trade. A way of keeping your risk low is to close off the leverage part of the trade. Do so immediately or as soon as the trade is in the money. Either way be very wary of leverage.
Whether you’re learning to trade for the first time or a veteran, mistakes will always happen. Not every trade you open on the Forex market will be profitable. Fortunately, you can fix these mistakes with discipline and preparation. Keep aware of fundamental news as sometimes it’s best to sit on your hands if events are too unclear. Also checking the details on the account opening form and the order confirmation slip will help stop or limit mistakes. Most importantly, developing a solid trading plan with the discipline to implement it, this will soon turn you into a profitable trader.