There is no remedy for a quick buck or a hard and fast rule that you should follow in the foreign exchange market. It is full of uncertainties. Yes, the foreign exchange market has the most amount of risk as compared to any other form of trading business around the world.
Forex stands for foreign exchange and here, you can buy or sell one currency in exchange for another. This is called trading in the foreign exchange market.
It is the most heavily traded market around the globe because the number of people, countries, corporate houses, and businesses involved in it is humongous.
And the best part is that you don’t even need any capital to start trading here in the first place. Every time the demand for a certain currency rises, its price will go up and you will record a profit if you have already invested in it and vice versa.
It all seems very easy and rosy, doesn’t it? But trading in the foreign exchange market is not that simple. It comes with its share of risks and scams as well. There are a few preventative measures that you should always be aware of whenever getting into trading for the first time.
A few tips and insights are given below that can help you trade in the forex market safely and without becoming a financial burden on your family:
1. Forgetting To Do Your Homework/Research
So, you have entered the forex market for the very first time but have completely forgotten to do your homework. You will have to understand that every currency pair is closely linked to their respective economies.
Before you enter this trade, make sure to do your research and be aware of any upcoming events that are going to affect the value of the currencies you are interested in.
Pay attention to the weekly currency forecasts. Learn about all the critical technical indicators that impact your currency value.
2. Trading From Scratch
If you have created a brand-new trading plan, it is never a good idea to test it out using your hard-earned money. It is never suggested to trade with real money in the first place.
You should always start by opening a forex practice account and utilize virtual funds to try out any potential long-term trading plan that you have in mind.
This is the safest way to enter into the foreign exchange market without risking your actual capital. You can also learn how to react to various trade trends and minimize your losses by getting out at just the right time.
3. Continuing To Trade Even After Losing
It is all about plus and minus, profit and loss. The foreign exchange market is very volatile and regular traders know and understand it well enough.
They brace themselves every morning before the trading begins. If you continue to lose, it is the wisest thing to take a breath and stop trading for a while (or a day).
If you are not able to maintain a win rate of above 60%, it is better to move out for the time being. Some experts believe that a 50% win rate is also acceptable but to be on the safer side, why not keep it to the former figure?
If you are a day trader, you can work to keep your reward risk above 1 and preferably a little above 1.25. You can still make a profit if your win rate declines and your reward risk is a bit higher.
For a better understanding of it, you can use several virtual tools available online. Look for the best Forex simulator platform or a similar tool that can help you create the most practical strategy when trading in foreign exchange.
4. Not Determining A Stop Loss
There should always be a stop-loss. For every forex day trade that you make, a stop-loss is what gets you out of a probable mess that could result from an unexpected price move against you.
By having a stop-loss order on your trades, you can easily take out a major chunk of risk from your investment. The stop-loss prevents you from losing all of your money/investment.
5. Biting Off More Than You Can Chew
It is never a good idea to risk more than you can bear. This is one of the biggest mistakes in your risk management strategy and it is not going to get you any award or reward.
Being brave or acting like a daredevil in the foreign exchange market never pays off well. Experts say that any day trader should risk less than 1% of their capital on any particular trade.
Your stop-loss order is going to close out a trade if it results in a trading capital loss of not more than 1%.
Remember, even if you have risked only 1% of your capital per trade, you could lose a lot of money off your entire capital on a single bad day. So, is reducing your number of trades per day the ideal way to minimize your risk of loss? Perhaps.
6. Going All In
Are you trying to win all your lost money back? This could be one of the biggest mistakes you will be making. Don’t ever try to tempt your faith when trading in the foreign exchange market.
You might have had several losses during the day but that doesn’t mean that you will hit the winning streak at the end of the day just like it happens in the movies. Risking too much is always a big mistake.
This error tends to compound and eventually the traders are left with more losses than they can bear. It is always advised to stick to your 1% risk rule for every trade of the day. Do not deviate from your risk management strategy just to go all in and try to make up for all your losses.
The foreign exchange market is full of risks. If you do not have a trading plan, you do not have the right foundation to trade in this volatile and dynamic environment. Study all the markets you want to trade-in.
Analyze previously successful trades and current market trends. Read about both winning and losing trades before you start risking your hard-earned money.
If you are not careful, you could end up losing a fortune, and then there might be no way to recover from it.