As a newbie forex trader, you are now part of a massive global network that is responsible for $5 trillion in daily trading activity around the world. The Forex markets dwarf all other markets combined and it’s thanks to the actions of speculators that we have so much money exchanging hands every second of every day.
To get started with FX trading, there are a few things that need to be understood from the get-go. A cursory look at the Forex markets may prove a little discouraging to the novice investor, but if you follow a structured approach to trading and investing in currencies you will most certainly benefit over the long-term.
Effective Money Management
The Forex markets are money markets. Without liquidity, or access to credit facilities, your blossoming FX career will ground to a halt. Therefore, careful money-management is imperative in Forex trading. Since we are working with huge volumes of currency at any given time, survival is foremost. While you’re going through the learning curve, you will invariably lose a couple of trades.
Be sure that your money management skills are such that you can absorb these initial losses before you start turning things around. Stay invested to stay profitable. Once you exit the FX arena, there are no profits to be made and you will watch from the sidelines as everyone else capitalizes off things like Fed interest rate hikes, asset purchases by the Bank of England, or the geopolitical uncertainty created by European elections.
The importance of an effective trading strategy cannot be understated. However even the best strategy will fail if there isn’t any money to grease the wheels. Effective money management is your lifeblood in currency trading. This is why it’s important to carefully manage all monetary allocations to individual trades.
The golden rule is to limit the size of any individual trade to just 3% of your available capital. That way, if the trade ends out of the money it will not adversely affect your bankroll. As a novice FX trader, you will want to be able to have enough cash for at least 30 – 50 trades in your bankroll.
What Are Your Expectations in FX Trading?
As a currency trader, you need to set parameters for your trading activity. A win/loss ratio of 80/20 is unreasonable. Nobody can expect to hit that amount of winning trades all the time. Traders are unlikely to convert a $10,000 bankroll into $100,000 in short order.
It is best to establish a set of parameters that makes sense for your current understanding and expectations. The Forex markets are intricately connected with macroeconomic data. Currencies can change direction on a dime, reacting to speculative sentiment, interest-rate announcements, employment data, GDP, business, and consumer sentiment etc.
Take a look at how many pips you have won and how many pips you have lost during an average trading session. Once you have accounted for the spread – how much you pay the broker – you can easily calculate your net revenue. It is important to evaluate your trading activity based on a statistically significant sample.
While you are working on your trading strategy, consult with other traders and experts in the field. The feedback you receive from other Forex traders is invaluable. It’s the type of stuff you will not find in FX trading manuals. Other Forex traders will refer you to forex chart patterns to make informed decisions about currency pairs. Don’t disregard the importance of technical and fundamental analysis in your trading strategy.
Why Are Stop Losses So Important to FX Traders?
When you’re trading currencies, you cannot possibly know how low or how high a currency pair will go. For example, nobody could have anticipated what happened with the GBP after June 23, 2016. That it plunged to a 31-year low in short order was remarkable. Currency traders who were going long on the GBP expecting a no vote to a Brexit would have found themselves in a lot of trouble in the aftermath. Fortunately, most every Forex broker takes full advantage of stop loss.
Think of it this way: You’re playing a high-stakes game of Texas Holdem Poker, and the player next you is holding the nuts (best cards). You could try and play a weak hand, but chances are you will not fare well. Instead of throwing good money after bad, your best decision is to fold your hand and wait for a new round. And so it is with currency traders. The option to limit your losses with a stop loss is always available, and it should be used regularly.
Never chase your losses in Forex trading. Use the stop loss feature to think about the winning trade/losing trade percentages. If you are unable to manually close out your trade, a stop loss will prevent significant losses and close it out for you automatically.