There are numerous reasons why most people are attracted to trading currencies. The Forex market, or FX for short, is the most liquid market. As a result, spreads (difference between ask and bid price) is very small. In addition, liquidity brings active fluctuations and traders get many trading opportunities.
Forex pairs are not like physical shares, crypto tokens or precious metals. They are CFDs, which is an acronym for Contracts For Difference. CFDs can be traded in both directions, upwards and downwards by going long or short respectively.
Forex trading involves leverage. Leverage helps traders increase their purchasing power using borrowed funds from their broker. Access to high leverage is one of the upsides that attracts investors and traders.
Moreover, the FX market is open 24/5. The stock market is centralized, meaning you can only trade stocks when certain markets are open. The FX market is decentralized, traders can buy USD/EUR pair during the Tokyo session and sell during the New York session. The flexibility of currency trading is also a huge motivation for beginner investors to get started trading FX.
FX trading is for speculating in financial markets. It requires attention and active trade management. Investing is a better way to keep your funds safe, as high inflation can eat up your savings if left dormant. Even the US dollar is not safe nowadays as global economies are trying to find alternatives, including Russia, China, Iran and other countries. Investing in financial markets can help diversify your portfolio and limit risks.
When starting out, beginners have a lot of information to digest. They need to understand terminology, trading platforms, learn what indicators are and how they work, learn about probabilities and trading edges, develop a trading plan and work tirelessly to keep their strategy up to date. To make the process easier for you, let’s take a look at the three easy steps on how to get started currency trading.
The first step is to learn terminology, get a clear understanding of what currency trading actually is and learn how to use trading platforms, read the news and communicate with other traders. Traders have their own language, for instance, going short means selling an asset, and going long means buying. When you go long on EUR/USD, it means that you buy Euro against the US Dollar and bet on the price to go up. It’s essential to learn what bull/bear markets are and how to define them, you also need to understand what pip, spread, stop loss and take profit orders are. Learning the terminology as fast as possible will help you communicate with other traders and the learning process using various sources (videos, e-books, articles, social media) will be much more productive.
Trading can feel very lonely in case you are trading from your bedroom. Some even say that trading is the best job for introverts. However, us, humans, are social animals, and we need to communicate with each other. Social trading, communicating with other traders online and in person, can greatly boost the learning process. What you will find out in social trading forums is that a lot of traders use the contacts they developed earlier to become signal providers. Providing trading signals to other traders can become an addition source of income for you too once you become professional.
Develop a trading plan
Developing a trading system is a bit more difficult than learning the basics of trading. The reason is that a trading plan involves a lot of components that need to be working well together. Even if one component fails, trading will result in gradual account balance decline.
Trading plan makes trading easier. You don’t have to overthink, worry too much on your trades or be doubtful. Your trading plan should include several essential topics.
- What currency will you trade? Every currency moves differently, you need to study what effects the valuation of your chosen currency, what is the volatility like and when is the most liquid hours for that currency pair.
- What setup will you use? There are technical and fundamental traders. Technical traders use charts, trading indicators and patterns to make sense of the market. Fundamental traders use market news such as economic announcements, political events, etc. to plan their future trades.
- What are your rules for entering, exiting and managing a trade? There are many occasions when entries are obvious before you open a trade, but there are no exit points available. For instance, when you join a trend, you know when to get in, where to place a stop loss, but take profit target often depends on the strength of the trend.
- What are your risk management strategies? Failure to manage their risks is the number one reason why most beginner traders fail. In general, professional traders tend to limit their risks to lower than 1-5% of their trading balance per trade. And risk to reward ratio is generally 1 risk to more than 1 ratio. It’s critical to use sensible leverage. Which is below 50:1. How leverage in Forex is extremely dangerous, especially for novice traders.
- How many hours will you spend on trading, analysing the markets and on your personal life? Trading needs to be a part of your life in order to work long term. Work-life balance is essential for success in any field, and trading is no exception.
- How will you evaluate your progress and know when something needs to change? In general, the best tool for learning from your own mistakes and growing as a trader is to use a trading journal. Trading journals helps spot patterns that produce unsatisfactory results. And at the same time, help spot things that work. To be successful in trading, you should do more of what works and less of what doesn’t. Trading journal should include technical information on your trade, such as date, reasons for entry/exit, profit/loss, etc and your emotional state. For instance, you might find the pattern that when you feel down or tired, the results are overall negative and avoid trading during such occasions. Trading journals also helps increase accountability. When traders know that at the end of the day they will be saving info about their trade, they tend to be more calculative and careful.
After you develop a trading plan, the next stage is to test it. You can use a backtesting tool and test your strategy automatically or manually, or use a demo account. Keep in mind that demo trading is more time-consuming as you are testing your strategy on live market charts. Backtesting eliminates time from the process as you can place an order, fast-forward and see how that order would turn out. There’s one more way to test your trading plan. Many traders test trading plans live, using micro trading accounts. Testing helps further upgrade your trading plan and make it efficient. Keep in mind that market conditions often change, and your system will require upgrades in the future as well.
Work on your psychology
As you develop a profitable trading system, the hardest part begins, managing your own emotions. Humans are filled with emotions. And in trading, human emotions are considered as flaws. Emotional trading exposes you to unnecessary risk, and typically it ends with decreasing trading balance.
Here are some forms of emotional trading:
- Revenge trading – Revenge trading usually occurs after a series of losses. Traders are trying to get back what they’ve lost and increase position size or overtrade. Such an approach typically wipes out the trading account.
- Greed – Greed makes traders overtrade or stay in a training position longer than they should. Greed destroys clear judgment and traders open positions that are not worth the risk.
- Fear – Fear prevents traders from taking great opportunities when they present themselves. Fear typically occurs after losses. What traders need to be prepared for is that losing is a part of the process. The key is to have an edge and let your winning trades cover the losses.
- Hope – Hope is for the unprepared. When you are prepared, meaning already tested a strategy and know that it works long term, you do not have high hopes on individual trades.
- Boredom – Boredom makes traders overtrade. There are intraday and position traders. Position traders aim 99% of the time and trade 1% of the time. If there’s no trading opportunity, trade should not be opened. The problem is that when traders are not in position, they feel that they are wasting time, while the opposite is true. The best trade is the one you don’t make. Sitting on your hands and waiting for the best opportunity is critical in this business. It’s recommended to have a side hobby or a side business to avoid feeling bored.
The biggest challenge for novice traders is learning how to trade. The biggest challenge for professional traders is discipline. Once you learn how to manage your emotions, you’ll be able to start growing your account.