The author is an expert in the field of multi-asset trading.
10 Forex Trading Tips for Beginners
If approached responsibly and with preparedness, forex trading can be an exciting and profitable activity. Unfortunately, many beginner traders don’t take the time to learn even the basics and jump straight in without fully understanding the nuances involved in successful forex trading. In addition to reading free forex trading guides and familiarizing yourself with the trading platform using a risk-free demo account, you should follow these 10 forex trading tips to avoid the many common pitfalls beginners fall into.
1. Don’t strive to get rich quickly
Novice traders sometimes make the mistake of seeing forex as a simple way to become rich in a short period of time. You should consider the risks and effort that must be put in to achieve such a goal.
Placing very large trades in proportion to your account balance in an attempt to make a huge profit is unlikely to be successful in the long term because eventually a trade is likely to go against you and that can lead to severe losses.
2. Don’t make decisions randomly
You should know where you intend to open and close a position before entering any market, based on a particular system you are following. Setting this ahead of time helps you focus on your system and eliminate second-guessing.
You can also reduce losses by having stop loss orders in place. It's important to know that the market may not always agree with where you place an order.
3. Be careful not to use too much leverage
One aspect of the forex market that attracts many traders is the opportunity to trade on margin, in other words, leveraged trading. Trading with a small initial deposit can still make it possible for you to open relatively large positions, so it is important not to overdo it when selecting a trade size.
Forex is usually traded with a high degree of leverage, which means you are able to provide just a small percentage of the actual amount you are investing while sustaining profit/losses as if you had invested the whole nominal amount yourself. This can work for you as well as against you.
There is a possibility that you could sustain a loss equalling to some or even all of your initial investment. It is also possible to lose more than you initially invested in your trading account.
We do offer you risk management systems that are designed to help reduce the risk of unmanageable losses. But please know that these measures still require a responsible approach to trading.
4. Use stop loss orders
Some traders hold on to losing positions far too long thinking, or hoping, that the market will turn around. They also tend to get out of winning positions far too quickly to lock in an immediate profit, which eliminates the chance for greater gains.
Although it may be tempting for you to have this mind frame, you must have the patience to enter only those trades which you think are opportunistic and follow this up with the discipline to either cut this trade quickly if it turns against you or run with it because you believe in the trade.
When you open a trade, you can set a stop loss order – this is a point where the trade will automatically close if the market moves to that position.
5. Take emotion out of your trading
Keeping calm and maintaining a balanced state of mind is crucial when trading in order to remain focused on relevant events. You should always remember that the market's actions are not personal.
We realise it’s quite easy to say but very difficult to do, especially in the heat of the moment when you have to make a split second decision. Try not to trade with emotions and remember all the things that you've learnt.
6. Make the most of trading through discipline
There are many different factors involved in successful forex trading, but if you’re disciplined and stick with a tested trading plan consistently, you potentially increase your chances over those who are haphazard. Constant second-guessing can ruin the profitability and may eliminate the benefits of having a trading plan in the first place.
You should plan your trades and trade your plan rather than randomly pick out trades on a whim. The latter is no more than punting with the hope of winning as opposed to having an edge in the markets through the use of a solid, consistent trading system.
You should maintain consistency with your trading system and follow it up with good analysis of your own processes in order to have a better idea of where you are going wrong.
7. Manage your money
The main difference between an amateur and an experienced trader is their approach to money management.
Experienced traders recommend risking a set percentage of capital and never altering that percentage. Risking a set percentage of your total capital on each trade is an advantage in times of repeated losses because it reduces their impact.
Amateur traders often disregard this and increase their stakes as they begin to lose more. This type of scenario inevitably leads to loss after loss.
8. Learn your market
Some novice forex traders begin trading without having sufficient knowledge of their chosen currency pair(s) and how currencies are influenced by global events. You should learn as much as you can about how different financial markets impact each other and how they intercorrelate.
This knowledge will help you make better-informed trading decisions when various economic figures are released. It is also important to identify the type of market that is prevailing to allow you to adjust your strategy accordingly and thus reduce the risk of entering into losing trades.
The more informed you are, the smarter you can trade. Please know that some market participants have different intentions from the ones you have; for example, hedgers will sell into a market that is rising because hedgers often look for good average prices on large orders in order to risk manage their portfolios. This is in contrast to individual traders who seek to maximise profit on each trade.
9. Monitor your positions
It is crucial that you monitor any exposure you have in the forex market. Having a close eye on how your trades are doing will help you maintain control and follow market movements as they happen.
You should stay up to date with market developments. It is a good way to maintain and expand your level of knowledge and understanding of the forex market. You should be aware that the forex market trades 24 hours a day, so making use of pending orders will be crucial if you think you will not have access to internet via web or mobile.
10. Develop a trading strategy
You should spend a significant amount of time on deciding on your strategy before you place your first trade. This will make it easier for you to concentrate on market events.
Some novice forex traders begin trading without having sufficient knowledge of their chosen currency pair(s), how currencies are influenced by global events and how they plan to take advantage of price movements. It is crucial that you observe the market price action and try to identify trading patterns before risking your capital, with your observations helping you formulate a trading plan and a trading style.
Your trading strategy should include:
- Planned frequency of trading
- Time of day when you plan to trade
- Technical indicators you plan to use
- Buy/sell signals you plan to use
- Estimated risk and reward for each trade
- A daily stop limit to protect your total capital base
Your motivation to trade is a key aspect. The most successful traders do not have profit in mind when trading because thinking about the potential future profit or potential future losses will cloud your decisions in the present. Instead, experienced traders focus on the process of trading rather than worrying about the amount they could win or lose in a trade.
Margined Forex and CFD trading are leveraged products and can result in losses that exceed deposits. The value of your contract can fall as well as rise, which could result in receiving back less than you originally deposited. Please ensure you understand the risks and be sure to manage your risk exposure effectively. EGM Securities does not provide any investment advice.