This is part 2 in our series on Forex Currency Trading. Click here to see the first part.
5 Golden Rules of Forex Trading
Forex trading is a learnable skill. Therefore, understanding its fundamentals is essential to your success. Unfortunately, many beginner traders are unaware of most if not all of the basic rules underlying Forex trading. This article highlights five golden rules that every Forex trader should keep in their minds.
- Start with a demo account!
Most Forex trading websites offer free demo accounts which allow you to do live trades with "virtual cash". Use this as a way to make yourself comfortable with the ups and downs of the Forex market, familiarise yourself with your Forex trading platform, develop your own strategies and build up your self-confidence before you trade with your hard-earned money.
- Plan your trades!
To enter a trade without a plan is no different than gambling! Before you enter a trade, you should have a clear aim of profit as well as a clear threshold to cut loss. Once you have reached your target profit, close your trade and keep the profit. Similarly, if the trade hit your cut-loss threshold, close your trade and get out. One should neither be too greedy nor too 'optimistic' to hope that the market to come back your way. Self-discipline is important. For beginners, it is also good to start small with micro- or mini-accounts with smaller leverage.
- Follow the trends!
When your currency pair shows an an increase or decrease, enter a long or short as necessary. Do not go against the trend as it is a fastest way to lose your money. There are experienced traders who make money by trading against the trend, but let's learn to crawl before we try to run!
- Control your emotions!
Being emotional with your money is harmful in Forex trading. Controlling your emotions during a trade can help you to be more objectives in responding to each market movement. Emotion management goes hand in hand with a trading plan, i.e. the better you plan your trade, the better you can control your emotions. Accept that no profit is guaranteed in the Forex market and make sure you are trading your truly disposable income at your own comfort level.
- Review your trades!
Make it a habit to record your trades and review them regularly. Learn from both the good and bad trades. Never mourn your losses! All these priceless learning experiences will ultimately make you a better Forex trader.
On top of these basic rules in mind, do spend time to educate yourself on the market and strategies.
Then you are one step closer to becoming a successful Forex trader!
Why People Lose Money in Forex
While some traders are happily reaping their profits, it is a sad truth that there are more people who are actually losing money to Forex. Ever wonder why is that the case? These are the common reasons why people lose money in Forex:
- Entering the trade with a wrong mindset
Many people assume that Forex is a get-rich-quick scheme which can make them a millionaire in a short period of time with little investment. Consequently, they tend to overuse the leverage and lose their entire account. There are also people who think that making money on Forex is easy, which unfortunately is not the case. To be good in Forex trading, one needs to spend time to educate himself on the market, trading systems and trading strategies. Without proper knowledge, one would be at higher risk of making mistakes and losing money. The fact that you are reading this article shows that you are on the right track. Keep it up!
- Entering without a plan
Unfortunately, there are many who manage their trades based on tips from friends, relatives and sometimes even from rumours! They have forgotten the need to analyse the market themselves and plan before they enter the market, resulting in panic and inability to respond rationally when the trade goes against them. Ideally, one should plan on targeted profit and cutting loss everytime before entering a trade.
- Emotional trading
Sometimes, emotions can easily kick in when we see the trade going the wrong way, especially when we are trading our hard-earned money. Panic and anxiety would lead to bad decisions which harm their investments. As long as you have done your pre-planning before you trade, detach yourself from your emotions and let your logic takes over your trading - leave when you have made enough profit and cut loss when you are losing more than you are willing to.
- Using inappropriate trading platforms
Some traders do not spend time searching for the cheapest trading platform and end up paying a huge amount of commissions on every trade, to the extent it neutralises the profit they make from trading.
If you realise you are doing any of the above, stop it now to protect your investment!
There's more to this series. Continue reading…
Next: Forex Trading, The Need to Be Objective
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