Forex is one of the most accessible trading markets and is a perfect entry point for new investors. Still, there are specific lessons that you only begin to learn and appreciate after spending time making trades.
The right broker is important
New traders may not realize that selecting the right broker is crucial to forex success. Traders who ensure they get good reviews beforehand will be able to call on a broker who offers high levels of security, reliability, easy deposit and withdrawal methods, and a feature-rich trading platform. All of these factors can support a better and more profitable trading experience.
Knowing when to use leverage to your advantage
Access to higher leverage is one of the things that makes forex trading unique. You will be able to use some form of borrowed capital after opening an account with a forex broker, but using it judiciously is a lesson that first-time traders have to learn quickly. Getting carried away with excessive leverage early on can lead to traders going “all-in” on certain currency pairs, and just a couple of unlucky breaks can result in them losing all of their money and accounts.
A good rule of thumb to follow is to use no more than ten times the effective leverage during formative trades and then to optimize it moving forward. More experienced traders learn how to use leverage to support a profitable strategy.
Forex takes time and money
Savvy traders can make money consistently from trading currency pairs, but the practice is rarely a shortcut to instant wealth. The adage about trading requiring money to make money rings true here. You can start with a relatively small outlay, but you need to slowly develop your account level over time to deliver a sustainable and regular outcome. Merely opening an account and placing $10,000 on forex randomly without any forethought or research will not make for a successful venture.
You can bounce back from losing streaks
The prospect of a losing streak can be daunting when you first start trading forex, especially if you have turned a small initial investment into a thriving portfolio in a short time. However, as time goes on, you realize that losing streaks are part and parcel of trading currency pairs.
For traders with a healthy 60% “win rate” in forex, during 100 trades it is statistically normal to run up five consecutive losing trades. You are likely to go through these downturns regardless of how effective your strategies are and, more importantly, you will be able to bounce back, go on a winning streak, and continue on the path to profitability.
You don’t need to trade 24/7
Different international time zones mean forex is an always-on market. It is open 24 hours a day, starting with the Australasian region and continuing across Europe and into North America. Newbies often think they need to be entering trades from dawn to dusk, five days a week, but those with experience understand that is not viable.
Rather than actively making moves all day, successful traders know when and how to dip in and out of the market to enter trades. They do so by using online tools and resources to identify favorable trading opportunities. The reverse is also true. If there is a certain period when volatility has surged after “high impact” news such as a labor report, experienced traders also know when to sit out and wait.
With time, you begin to understand that you don’t need to force the issue and that trades don’t have to be taken round the clock. Bad setups can lead to losses. Remember, the aim most of the time is not to lose money and then to take advantage of opportunities where you can maximize gains. The smartest move may be waiting for another day.
You might need short breaks
The realization that making moves, as and when you need to rather than out of necessity is best, feeds into the notion that short breaks can supercharge your strategies in the long term. When trading forex, “chart burnout” can lead to poor decision making and substantial losses.
You may have some form of burnout if you are convincing yourself that certain trade setups are worthwhile even if the evidence shows they are not wise plays. Taking a break can help to recharge your batteries and to get back to making trades that will have a positive impact on your net results. Scheduling a three or four day weekend every month is a great way to reset and then to stay sharp and focused after the break.
Disclaimer: This content does not necessarily represent the views of IWB.