5 Things You Must Know Before Trading Forex
5 Things You Must Know Before Trading Forex
Forex trading can be an exciting prospect; however it's also possible to lose money, especially if you rush your trades or are not very experienced. Live forex trading is fast-paced, unpredictable and often stressful, largely due to the fact that you are trading with your own money – money that you no doubt do not want to lose.
With that in mind, here are 5 things that you must know before you begin trading forex, whether you wish to trade on a casual, part-time basis or aim to establish a career from the activity:
1. There are different forex brokers to choose from
Since forex trading is extremely popular across the globe, there are now many different forex brokers to choose from, each of which offers different benefits and features depending on what you are looking for.
Choose your broker wisely as this is a decision that will impact the potential success of your trades. Firstly and foremost, ensure your selected broker is fully licensed and regulated to guarantee the complete protection of your funds. Since there are regulatory agencies all over the world that distinguish the trustworthy firms from the fraudulent, it is very easy to check the credibility of a broker.
From here, make sure that your chosen forex broker can match your level of expertise and your trading goals.
Another factor to consider is transaction costs. Regardless of the kind of currency trader you are, you will always be exposed to transaction costs, whether you have to pay for the spread or a commission. Although you may be tempted to seek the cheapest rates it's also important to select the most reliable broker, so instead of focusing purely on affordability, aim to find a balance between security and low transaction costs.
Also, look out for a high level of around-the-clock customer support, which is crucial regardless of your level or trading experience as this can lead to losses if your broker does not respond to calls, emails or live chat in a timely manner. This is something that can be tested and verified when you open a demo account with the broker.
2. Demo accounts offer the ideal transition to live trading
Online trading platforms are fairly diverse in nature as they offer a number of additional services and features. As such, selecting the right trading platform is essential, as this is your portal to the markets.
One essential feature of any trading platform is the demo trading account, which should be used in order to test drive the platform first before deciding whether you are comfortable enough to use it within live trading. It must be easy to open and convenient to set up, with flexible options and competitive technology.
Demo trading first will enable you to familiarise yourself with how the platform functions, how to execute trades and how to set up charts for analysis. It also gives you the opportunity to apply everything you've learned in a practical setting while minimising your risk.
When testing out the platform there are a number of must-haves that should be included, such as easy-to-use software that comes with a selection of fundamental and technical analysis tools. The platform must also visually pleasing with a well-designed interface that includes clear 'buy' and 'sell' buttons, which helps in avoiding costly entry mistakes.
3. Develop a trading plan that works for you
One of the most important steps in achieving forex trading success is to establish your exact forex trading goals, including your timeframe for the trial and error process, as well as how much time you intend to devote to trading. All of this can be outlined within your forex trading plan.
When it comes to your trading plan, simplicity is key. The forex market can be a chaotic, complicated and volatile place filled with unpredictable activity. Keeping your approach to trading simple and streamlined is imperative in keeping a level head amongst all the noise. This also ensures you trade with logic as opposed to emotion.
Establish a clear, simple trading strategy that is easy to follow and understand, and test it repeatedly on a demo account until you are truly happy with it. Also, never abandon your trading plan, despite how tempting this might be. Tweak your plan as necessary as your forex trading develops, but always work with it to remain objective, organised and in control throughout your trades. By trading alongside a plan you will be able to execute your strategy with discipline and consistency under live market conditions. Finally, we recommend keeping a trading journal to track your progress. This is a great way to keep an accurate record of all trades, but it also shows you how patience and discipline pay off over time, which will reinforce positive trading habits.
4. Start small and work your way up
The world of online trading can be particularly bewildering for the first-time trader which is why it's vital that you start off with small sums and low leverage, and gradually work your way up, increasing the size of your account through organic gains, not by bigger deposits.
To keep things simple, focus on one currency pair to begin with and keep track of its current economic status by following the latest forex news, which gives you a fundamental perspective of your chosen currency pair. One area that new traders often overlook is major macroeconomic policies. These announcements, which are usually related to interest rates, fiscal spending and policy updates, can have major implications on short-term exchange rate volatility, so make sure you know when these announcements will be delivered and be prepared for them well in advance.
That being said, it's also advised to analyse your chosen currency pair carefully through technical analysis, and there are plenty of advantages to this approach, including:
- Price movement clearly displayed on the charts
- Easy to find trends
- Plenty of tools and trade signals to choose from
- Less time consuming compared to fundamental analysis
- A reliable way to analyse the market and predict price movements
Whichever method of analysis you choose, it's crucial that you know your selected currencies inside-out, and remember that different currency pairs display different types of behaviour. As such, a trading strategy that works well for one currency pair might not be suitable for another. Only trade currency pairs that you truly understand, and for beginners in particular, it's wisest to stick to the most liquid, widely-traded pairs. Only as you better your skills should you consider expanding your trades.
5. Never stop learning
Forex is not something you learn once and then become an expert of. The financial world is constantly changing, so if you aren't willing to stay up-to-date and constantly improve your trading skills, you will struggle to make a profit. This can only be achieved if you study the market carefully and remain on top of your forex education.
Improving your forex education is fundamental to your forex trading success. There are endless learning courses and trading webinars and seminars that traders can attend to boost their knowledge and increase their success on the market. There are also advanced forex lessons that you can attend in order to widen your understanding. As with any endeavour in life, knowledge is power, so never underestimate the power of a forex education.
Are you ready to trade forex?
Nobody has the 'secret' to successful FX trading; it comes with hard work, passion and dedication. While forex trading might appear attractive at first glance, it's important to remember the risks involved in this type of trading. Yes, there are lower transaction costs involved particular when compared to traditional stock trading, however forex trading does come with greater leverage and counterparty risk, as well as the risk of trading on emotion. As such, you should always trade with caution and never trade more money than you can afford to lose.