The views of this article are the perspective of the author and may not be reflective of Confessions of the Professions.
Forex trading can be a lucrative endeavour when done right, and as such, it has become one of the most popular forms of trading. Currently, the forex market is the largest financial market in the world, with daily transaction volume of over trillions of dollars. For newcomers to the forex market looking to invest in the market and make money off of currency trading, here are 5 things to take into consideration before placing live trades.
Know the currency pairs
Firstly, the most important thing is to know the currency pairs you are trading. To succeed in forex trading, you must take some time to research the countries from which your currency pairs are issued, understand the basics of their economy, and the factors that create currency fluctuations.
Know the forex market
You should also have a basic understanding of the forex market itself to maximise your potential to succeed. Know when the markets open and close, and spot patterns within historic and current trends to forecast future ones. The market is unpredictable and there is no way to know for sure which way it will go. However, having an understanding of its past behaviour and its current trends can help you find potential trading opportunities in the dynamic markets.
Know your limits
One very important aspect to succeeding in forex trading is knowing your limits as a trader. Even though trading can be exciting – especially when you take profit for the first time – market risk is inherent and you should never trade with more money than you can afford to lose. Know when to pull out of a trade if the conditions become unfavourable and do so unhesitatingly.
Have a plan and stick to it
This takes us naturally to point four – which is the importance of having a trading plan and sticking to it. A trading plan can be adjusted as a trader becomes more comfortable with the markets, but generally, to start out, it should clearly define trading times, budget, markets, instruments, and risk tolerance. Afterwards, traders should be disciplined and stick to their plan to avoid impulse trading, which can have the potential to create a significant dent in your portfolio if you are not careful.
Understand and apply risk management
Finally, as a part of your trading plan, you should be aware of the risks involved in trading and examine them carefully. You should formulate a risk management strategy, and popular techniques include the use of stop-loss orders, which can help you cut your losses automatically if markets suddenly take a nosedive and you are not there to monitor your portfolio.
You can also stay away from leverage as a newcomer. Leverage is a powerful tool that can help you increase your exposure to the markets and amplify your profits, but it cuts both ways and can also cause you to incur great losses. New traders who are not fully familiar with the workings of trading and the forex market should save leverage for a later day.
Having these five things in place before you begin trading is a good way to ensure you do not fall prey to the common and careless mistakes that haunt beginner traders when they first start out. However, do not let this prevent you from getting started at all. After all, while it is good to be careful, traders improve with time and experience, and all of this is based on practice.