Factors To Consider Before Starting In Forex Trading
Forex market is a global market where currencies are traded virtually around the clock. There are multiple players in the market, such as the government, central bank, major banks, multinational companies, hedge funds, and normal traders (full time or part-time forex traders). With this, there are 5 trillion dollars that go through the forex market per day. And while it is a great venue to invest your money, it also entails risks and as a normal trader, you must carefully study everything before making your first move.
Forex trading can be profitable given the right understanding, preparation and attitude towards the market. We have listed important factors to consider for traders that are new in forex trading.
Understand the market. Trading in any investment market is complex and you need to properly understand how it works. What is your goal in terms of profitability and how much money are you willing to invest in this type of market? Familiarise yourself with the terms, such as, what a bear and a bull market is and know what is the trending. What are the terms that most traders use in this market? How does the forex market work? The concept of trading is simple, you are acquiring a currency at a good price anticipating that it will be disposed of at a profitable price. Understand volatility, the more frequent to change in the market is the more responsive the players are. In effect, it would be easier to acquire and get rid of your currency/commodity.
Understand the commodity. Foreign exchange is the exchange of currency or the conversion of one currency to another. Meaning, the commodity you are looking at is money. Hence, it is very liquid and profit is promising but you should understand the risks and learn how to avoid getting losses. There are 180 currencies in the world and you may start by learning about currency pairs and what they signify. All trading is done in pairs and listed below are the major currencies and crosses (all currency that doesn’t involve USD).
Major currency pair:
EURUSD | USDJPY | GBPUSD | AUDUSD | USDCHF | USDCAD
EURGBP | GBPJPY | AUDCAD
Note that the currency on the left side is your base currency and on the right is your quoted currency. For example, you see EURUSD is at 1.3534, this means you need 1.3534 USD to buy one euro. Research on the most volatile currency pairing and what are emerging market currencies pairs.
Understand the World Economy. Remember that your commodity is currencies from different parts of the world. Know that when you have a better understanding of the global economy you would have a better understanding of the currency you are trading. The main idea here is that you are aware of the economic factors that affect the Forex Market, such as, interest rates, political stability and performance, recession, interest rates and so on.
Start with a small investment. Everyone starts from scratch. Investing in smaller amounts would mean a lesser risk of losing money. While I agree that investing in larger amounts would mean higher profit but you need to get a hang of forex trading first. Be patient and avoid being in a rush to earn big. Be smart and calculate the risk involved because the Forex Market is highly unpredictable. It would be prudent to set a few safeguards by looking at your capital and decide how much of that capital are you willing to lose.
Practice Risk Management. Forex market is highly unpredictable, you should calculate the risk before you start trading. You must set realistic goals when it comes to profit and it isn’t advisable to aggressively trade when you are a new player. Always maintain composure; if you are losing money already, then gracefully exit the trading at the moment instead of making it worse, not to worry you can pause and make another trading when the timing is right. Moreover, it isn’t any different if you are making more money, once you reach your goal, gracefully exit the market and avoid greed.
Set a Stop Loss. Before you start trading, you must consider the fact that when it comes to this type of investment, there will always be risks of losing money and you need to mitigate higher financial losses by creating a stop loss. A stop loss is an order placed on an instrument wherein you will set a specific price and if the market hits that price, traders will execute buy or sell depending on the nature of your order. Say, for example, If you anticipate an upward trend but the market is going down, you need to set a point where the trade will instantly be executed before the market goes down further. Conversely, if you are expecting a downward trend, set a price before it hits the peak. This will prevent you from having more losses if you reach the lowest point
Choose your broker wisely. A broker will help you execute your trade. Hence, play a vital role in your daily trading and it is imperative that you choose your broker carefully.
Determine your analysis skills. Once you have established your playground and you are confident to trade. Know that there are two main types of analysis that you can perform at the Forex Market, such as, Fundamental Analysis and Technical Analysis. The former is where a trader considers the overall state of the economy. If you believe you are a Fundamental type of trader, then you need to closely monitor the news and how the economy in that market is going. This is because Fundamental Analysis is a market analysis wherein a trader would make a position based on a belief that there are resources or information that is not yet reflected in the price. Which is why you have to use your assessment and expertise. You speculate on a price and make a trade; either buy or sell. Whereas, Technical Analysis is a market analysis wherein a trader would make a position based on a belief that all the information is already accounted for. If you believe you are this type of trader, then you don’t need to study the news affecting the currencies because everything you need is in a given data. What you need is to focus on a chart and historical pattern of prices. The trader within you will come out, focus on your capabilities and you will develop a unique trading style as you trade. Practice trading and then evaluate where you are good at. Knowing your strengths and weaknesses as a trader can help you master in trading in the forex market. This is an important aspect because every decision making when trading is yours.
Manual Trading versus Automated Trading
Given the characteristics of Fundamental and Technical Analysis and you are still assessing which trader you are. Familiarize yourself with Manual Trading and Automated Trading. These are two different methods of Forex Trading. Manual trading is a process where a human is involved in decision making when buying and selling; Trades are executed by a live person. On the other hand, Automated Trading is a process of trading your commodity with a computer program based on a set of analyses.
One might think which is a better method when it comes to currency trading. Note that they both have pros and cons and you need to assess what will work for you. Manual trading would profoundly need human judgment. In other words, your decisions in trading are still subjective. Nonetheless, you can use existing platforms and technology available nowadays together with manual trading.
The latter or robotics is highly invested in technology and it can execute trade rapidly. One of the main advantages of this tool is that it will significantly eliminate human error. Although automated trading can be sophisticated and advanced, note that it will not adjust to significant events that may greatly affect the prices of currencies. It may also still need human interference when it comes to monitoring.
In line with that, consider having an Expert Advisor or also known as EA, it is a piece of software that will assist you when you start trading. It is similar to artificial intelligence because it will tell you when to make a trade or even automatically initiate a trade for you according to pre-programmed instruction. This is a powerful tool not just for beginners but also for long time traders because it removes the emotional factor when trading. For a starter like you, it will remove the fear of trading and it will remove greed for experts. The EA will carry out your predetermined instruction. Moreover, there is an available form of web hostings, such as VPS or virtual private server. It features assisting traders handle their EA on a robust server and it will run without any disruption. The server provides and guarantees high network connection. This tool is not just for beginners, it is heavily used by the traders who are in the market for quite a long time already as it offers peace of mind whenever you trade.
In this advanced world, you also need to consider the disadvantages of technology when it comes to trading. It will never respond to real-time news or events. It would ignore fundamental reasons as it will only execute trades according to its program. Even so, it will remove the psychology of trading which refers to the emotional and mental state of trading your commodity.
What are the advantages of living in the forex market where robots are in place? Since the forex market is open 24 hours a day/seven days a week, it will enable you to make a trade and take advantage of trading opportunities while you are doing something else since you have a mechanical system in place. It can also reduce the stress and mentally exhausting world of trading.
Your analysis combined with proper tools is profitable but there must be proper risk control. With that, always practice proper risk management with the use of tools, such as EA, to help you set up a predetermined price for trade execution.
The world of the foreign exchange market offers you an opportunity to trade and earn any time and anywhere. It can be a complex market especially for starters but once you prepare and understand how it works, then you would have an opportunity to profit from this volatile market. You need to utilize the available resources; leverage existing sophisticated technology. Capitalize on the advantages that it features while implementing the best judgment. Also, you must hone your trading skills through education, research and by trading more with the use of advanced tools and devices. These will help you maximize your profit but remember to always practice being prudent in your set goals. Have the right attitude when it comes to trading as a well-balanced trading is healthy and always practice care when you live in this type of investment trading.