With more than $6 billion in daily turnover, the forex market is one of the most profitable financial markets. So it’s no surprise that people are joining the market daily as traders.
And although forex trading can be very profitable, investors can also lose money. With that in mind, here are five things that every beginner should know before they start forex trading:
1. Keep emotions out of it
Perhaps one of the most important skills a trader can have is managing their emotions. Forex traders have to make quick decisions, and they need enough discipline and logical thinking to do that. When trading, there are three primary emotions that you will come face-to-face with:
Fear or nervousness. Fear is probably one of the driving factors behind losing trades. Overcoming fear in trading takes time; and the best way to deal with fear is to address it square on. Ask yourself what you are afraid of, why you’re afraid, and how you may act due to fear. When you address these issues before you get into trading properly, it helps you to remain calm during trading.
Greed. Like fear, greed is not easy to overcome, and it can make traders hold on to positions longer than they should, which can result in losses. If you are interested in only taking trades that you think will be big winners, this could be a sign that you are greedy.
Excitement. You should feel excited when entering a trade, but excitement can take the place of logical thinking. This is why a good trade can end up becoming a losing one.
The best way to overcome emotions is to have rules. Set some personal rules like profit targets, where your stop-loss orders will be, and your conditions for entering and exiting a trade. In addition, confirm your trades with research and technical analysis and make trading decisions based on that information.
2. Use indicators to minimize losses
Technical indicators are one of the cornerstones of successful forex trading. They help traders understand price movements and predict what might happen next. Indicators remove emotion from the picture because they give accurate information and allow you to see the market as it is.
So, if you believe that a new trend is about to appear or you feel that a currency pair is going to do great within a specific time frame, you can confirm it with technical indicators. For instance, technical analysts can use an indicator like the evening star to predict if there is going to be a price reversal in the near future.
In general, chart patterns are important trading indicators because they show the best entry and exit points and help traders understand price movement which is crucial if you want to make successful trades.
The only catch is that you need to take your time to study these indicators and understand how they can work together to give you the best information. Indicators often contradict each other and can disorient you if you don’t know how to use them properly, which is why it’s important to know basic indicators like moving averages, support and resistance indicators, and the relative strength index (RSI).
3. Create a budget
Despite what others may tell you, you can trade successfully without starting with a lot of money – but this requires discipline and planning.
As a beginner, learn the basics of risk management and if you know an experienced trader with a good track record, find a way to learn about their experiences and how they started out.
In addition, it’s always a good idea to be patient while trading. Determine your risk appetite and set a budget depending on how much money you are comfortable risking. Make sure that you account for your budget in your trading strategy so that whatever action you take can be in line with what you are working with. Start small and, as you become a better trader, you can gradually invest more money.
With budgeting, you can reduce the losses and mistakes you make.The best part about working with a budget is that there are reliable forex brokers that allow you to start your trading journey with $50 or less and then build up from there.
4. Practice makes perfect
Before becoming a trader, take the time to learn the basics of forex trading. Just remember that the learning never stops. Every trading day is a chance to learn something new, and there is something you can gain from both winning and losing trades.
Plus, taking your time to learn as a trader gives you the opportunity to keep building on your strategy until you create something that perfectly fits your goals and trading style.
The good news is you can learn for free with demo accounts, or work with a forex e-learning platform in order to improve your market knowledge. There are tons of great learning videos that you can find on YouTube, and if you can, find a trader that you admire and learn under them.
5. Set goals and define your trading style
Before you start your journey as a forex trader, you need to think about what your destination is going to look like and what you need to do to get there. Each trading style has different levels of risks and rewards attached to it, and they require a certain approach if you want to trade successfully.
For instance, you can go with day trading if you do not like the idea of holding overnight positions. You can also choose scalping as your style of trading if you want to make quick profits and have a high-risk appetite.
Be sure to set realistic goals that can be set weekly, bi-weekly, or monthly. You should also have a trading journal to easily track and review trades whenever the time comes for you to evaluate your goals. Based on your level of success, you can keep changing your goals and raising your expectations.
Over to you
You often hear of how wealthy traders become when trading the forex market, but not a lot about all of the losses and costly mistakes that traders make. But the reality is, forex trading requires a structured and calculated approach if you want to join the top 1% in the market.
Determination, resilience, persistence, knowledge – along with some careful planning before you get started – will tilt the scales in your favor and put you on the path to success.
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