So, you’ve done your research on the Forex market, and you’re ready to get your feet wet in Forex trading. Congratulations! Now, take a deep breath, because you’re about to discover a whole new world of opportunities.
It’s easy to get overwhelmed by all the options, strategies and tools available. The good news is you can get started right away with some simple steps.
Here are 10 beginner trading tips:
1. Research brokers
The Forex market is traded on the “interbank,” which means there’s no central marketplace for trading, such as the stock market. So, you need to select a Forex broker to help you conduct your trading activity.
How do you know a Forex broker is reputable? Check its status with the National Futures Association (NFA) and registration with the U.S. Commodity Futures Trading Commission (CFTC) as a Futures Commission Merchant and Retail Foreign Exchange Dealer. These institutions regulate the industry, protect traders and foster financially sound markets.
2. Open a demo account
Many brokerages allow you to open a demo account with virtual money. Since you’re not committing real funds, this is a no-risk way to evaluate the brokerage firm’s services and its trading platform. You can also test your trading strategy before committing funds to a live Forex trading account. Just be aware that these demos usually expire after a given time.
3. Understand commissions and spreads
These two types of fees are how brokers make a living. If you’re paying a broker in commissions, you may be forking over a specified percentage of the spread (the difference between the bid and ask price of the Forex pair). Many brokers make their money with wider spreads instead of charging commissions. Ask about how each of these fees could affect your earnings over time.
4. Understand various levels of accounts
You can choose from standard, mini or micro Forex accounts. Your initial investment amount and risk tolerance will play a role in deciding which one is right for you. Many beginner investors like to start with mini accounts, which allow you to make trades using smaller lots of 10,000 base units rather than the 100,000 units of a standard lot.
Mini accounts offer lower risk, but also lower reward. The percentage in point (pip) movement cost fluctuates based on the base currency funding of your account and the currency pairs that you are trading. So, on a micro account, one pip equals $1 rather than the standard $10.
Once you’ve chosen the right fit, an automated trading system can do a lot of the heavy lifting, even finding trades while you sleep. After all, the Forex market operates 24/5, so it’s humanly impossible to track every change yourself.
5. Create a basic trading plan
You’ve heard the adage, “failure to plan is planning to fail,” and it couldn’t be truer in the Forex market. Your plan should contain three elements: entry rules, exit rules and money management. Entry rules determine when you’ll buy; exit rules determine when you’ll sell; and money management pertains to the amount of risk you’re willing to take on.
While you’re building your plan, keep in mind that many traders are attracted to the Forex market because of the tremendous leverage it offers. Leverage is necessary, as many currency pairs usually move less than 1% per day. But higher leverage also increases your potential loss per trade.
Once you’ve made your plan, follow it. The system only works for you if you put it into practice.
6. Develop an exit strategy
How long do you plan to be in this trade? If the answer is for the short term (a month or less), you’ll want to set profit targets accordingly. But if you’re a longer-term trader, aim to hit profit targets in several years, take profit incrementally and allow for volatility so you can keep trades to a minimum. Either way, set your exit point at a critical price level – whether a company’s yearly target, or more technical points such as certain Fibonacci levels.
7. Determine your risk tolerance
In other words, decide how much you can afford to lose. This will impact the length of your trade and the type of stop-loss you’ll use. If you’re more conservative, you may gravitate toward tighter stops, and the reverse is true for those with more risk tolerance. If you’re unsure, you can experiment with several trades in a demo account using various risk levels and see how you feel about the outcomes. Your risk tolerance may change over time, and you should try to stay within your comfort zone.
8. Protect yourself
Disciplined Forex traders always defend themselves by placing a protective stop-loss order in the market at the time they execute the trade. By doing this, you’re quantifying how much you’re willing to lose before you enter the trade — and ensuring that you don’t lose more than that. If the trade doesn’t work as you expect, you can recover without serious financial consequences.
9. Remove emotion from the trading process
Like any market, Forex contains uncertainties and can seemingly operate in a counterintuitive way. While that can be nerve-wracking, it’s important to keep the big picture in mind. Don’t let fear, greed or emotional highs cloud your judgment. Be mentally prepared to accept loss and learn from it whenever possible. Having a solid plan and proven strategies will ground you in reality and help you make disciplined decisions.
10. Be patient
Forex trading isn’t a skill you master overnight. No matter how much you learn, the market always has something more to teach you. And if you’re in the Forex market for the long-term, you’ll find yourself learning even more. Consider starting a trading journal to track your outcomes. Study it regularly and identify any problematic patterns, so you can refine your techniques. With a little patience and persistence, you’ll pick up what it takes to succeed.