In simple words, forex trading or currency trading is an act of exchanging fiat currencies. Also known as FX trading, you purchase and sell currencies in set pairs with the aim of making a profit. To complete a transaction, you buy a currency by selling another one expecting the price of the former to increase in the future.
It is safe to say that the forex market is the biggest financial market in the world. Retail and institutional investors as well speculators take part in cross-border trades on a daily basis. Since the forex market operates 24 hours a day from Monday to Friday, flexible trade timings also attract many traders.
Currency pairs also known as forex pairs have no central firms to regulate the trades.
How to make money on Forex
Forex markets witness a lot of movement in terms of the traders entering and exiting it. This is because it is a very liquid market that is easy to access and requires minimum funds. If you’ve stepped out of a trade forex soon after entering a trade since you incurring losses, here are some tips on how you can manage this better:
Understand the market
Forex trading plans can only be created and executed when you have a thorough knowledge of the market. You should know how it functions, what factors affect the market and what are risks associated. Trades are conducted online on forex trading platforms that allow investors access to the market. Through platforms such as MT4 and MT5, traders can place orders to buy units in one currency by selling another.
It is a very healthy practice for traders to learn about the fundamentals that can affect forex markets. These could be the economic or political conditions of the nation whose currency you’ve invested in or perhaps the price of commodities. Even though nothing comes close to having hands-on experience in the live market, it is better to be prepared before you actually start trading.
Find the right broker
The forex market may be fairly unregulated but there are certain regulatory rules that govern it. These may vary from country to country and you should ensure that your forex broker operates in compliance with the rules. Make sure that your broker is legitimately registered under the regulatory body that operates in your country.
Other than this, it is also a good idea to conduct a background check on your broker. Read reviews online and try to speak to some of their existing customers. You should also check if your brokerage offers the currency pairs you want to trade. As a customer, you may want to compare different brokers and see who offers better leverage amounts, commissions and spreads, initial deposits, as well as account funding, and withdrawal policies.
Keep a record and keep it clean
Opening a forex trading account can be exciting, especially when you come across all the technical analysis tools at your disposal. Even though these indicators are formulated for the forex market, as a beginner you should take it one step at a time. Avoid the temptation to use all technical strategies at once because that would keep you from reaping their benefits to the fullest. It is also ineffective to use the same indicator twice as it may give you opposing signals. Also, you may want to get rid of the techniques that are lying ‘dormant’ from the charts, if you do not use them often to improve trade performances.
In order to track which technique worked and how much you earned or lost, you can maintain a journal. Make it a practice to review this trade journal from time to time, so that you can learn from your past wins or losses.
Protect Your Trading Account
When we say that forex trading has a lot of liquidity, it implies that there is plenty of scope to make money in forex. While this is certainly true, what traders often overlook are ways they can minimize the losses. In a highly volatile market like the currency market, knowing when to exit a trade is a very important part of any trading strategy. Industry stalwarts would tell you that entering a trade is easy but the skill lies in knowing when it is time to leave.
Two common and effective money management strategies are stop-loss orders as well as setting daily trade limits. Stop-loss orders are extremely helpful when it comes to indicating when you want to exit the trade so that the loss you incur is within a reasonable limit. You can also set a daily loss limit which will automatically close all positions and keep you from initiating any new trades until the next session. Having said that, to be able to do this, you have to first acknowledge that there is room for losses in this market!
Use Reasonable Leverage
Leverage can be a great tool at your disposal as a forex trader when used wisely. It allows you to gain more by investing as little as $50! While it increases the probability of profit without risking a lot of your funds, leveraging can also be a cause for heavy losses.
As a trader, keep a check on the losses by basing position size on the account balance. For instance, when you have $10,000 in your forex account, a $100,000 position (a standard lot) would take a 10:1 leverage. Even though you may have the option of maximizing leverage, opening a smaller position would imply smaller risks.
Treat trading as a business
A business-like approach to forex trading can help you avoid unnecessary stress. When you enter trades for the long term, the short-term fluctuations have almost no effect on your investment. Avoid making hasty and impulsive decisions when you see the prices aren’t moving in your favor. Weigh in the pros and cons, be mentally and financially prepared for the trades you undertake, and take into consideration the risk factors.
Loss, uncertainty, expense, and taxation are part of every business. Understand how these play out in your case and do not run after quick profits. Trading is an art that should be mastered gradually over time.