Intro to Forex Trading
Forex is an Abbreviation for Foreign Exchange. Foreign exchange is simply the changing of currencies to meet economic needs that drive demand and supply. It can be for travel, trade, policy, hedging… This demand creates fluctuations in the exchange rate. Investors then look to take advantage/speculate on these changing rates for profit. Thus the buying and selling of currencies. The Foreign exchange market is by far the largest of all financial markets with a daily turnover of over $5.3 Trillion.
Forex Trading is the speculative holding of currencies for their gain/loss over other currencies. Just like any tradable asset, the investor makes money when he buys an asset(currency) at a cheap price and sell it back at a higher price. He uses technical and economic data streaming in to quantify the demand of the currency. With this much demand, the market has a lot of liquidity and there is always a willing buyer/seller to match your price. In forex, you are simply holding currencies and changing them back at a higher rate to the same market.
Forex or FX , is the buying and selling or exchange of currencies for other currencies at set exchange rates.
You are — buying/exchanging one currency for another – i.e buying Euros with Dollars and changing back the Euros to dollars again when the value of Euro rises against the dollar. In this scenario, you are selling back euros at a higher rate than you acquired them. Thus in turn getting back more dollars.
All this is done for monetary gain and speculation. The goal of Forex Trading is to profit from the changes or Ups and Downs of currency rates. Traders speculate on the direction of an exchange rate valuations.
Let`s Look at a trade Scenario EURUSD
|Trader’s Action||Euros||US Dollars|
|A trader Buys 10,000 Euros when the EUR/USD rate was 1.09900.||+10,000||-10990|
|Later the trader Sells his 10,000 Euro back into US dollar at the market rate of 1.12200.||-10,000||+11,220|
|In this example, the trader earned a gross profit of $230.||0||+230|
In this trade, you don’t have to put up the whole 10,000 Euros for the Trade. The broker just requires you to put up a security/margin deposit and he will secure the trade for you. It can be as little as 100 times less the actual trade size.
This is called leverage/margin trading which is among the advantages of trading Forex.
Make sure you understand your margin requirements and working with leverage before you begin trading.
How to learn FX Trading
There is no shortcut when you immerse yourself in the Global World of Financial Trading. The theory is that all market participants are logical, calculating and well informed investors and you should strive to join this definition.
Being a Financial Markets Trader needs determination, skill and resilience. But all these are acquirable traits.
Here is our take on how to begin;
- Demo Practice Account. Learn the technical bit of using the MetaTrader 4 software and the markets you`re in. This includes chart reading, margin calculation, different market types, Forex vs CFDs. This should not be mistaken with learning how to trade, it is not. It`s simply the basics 101 as you try to grasp the theoretical bit.
- Still On Demo, start with Market Observation. Observe and look out for repetitive patterns and rhythms price action in both fundamental and technical scopes. Observe and document fundamental and technical analysis. Develop and hold individual but informed decisions in asset direction ie. A Buy a Sell or No trade. Then come back and qualify these decisions after the market has proven you right or wrong. Repeat, Repeat and Repeat.
- Create a Trading Plan. Follow it to a tee. It must have a quantifiable, unambiguous trading schedule that specifies the Pairs to trade, conditions for entry and time frames. Back test and Improve. Try it out and stretch it to its limits, the target here is perfection, even though you won`t achieve it. You can`t control the Market but you should have your reaction documented beforehand.
- Go Live. Start humble at first until you feel you are in control. Start with the minimum available lot size of 0.01… Once your strategy survives the Live Stress Test, you can adjust your lot sizes to your liking.
Be in the know. Always have a reliable Economic data news feed.
Most Importantly, Measure your Risk.
For every trade you make, ask yourself how much you are risking.
How to open a demo account.
Opening a demo account is the first step towards becoming a professional trader. Actual market prices and variable deposits depending with your financial capabilities prepare you psychologically and tactically to tackle the forex markets and also grow professionally.
The demo account is a rite of passage for any aspiring trader, it is risk free and you can practice for as long as you like.
Type www.fxjst.com on your browser.
Click on demo tab on Just Start Trading website
Enter you details as shown below
On completion an email with the login details and the MT4 download link will be sent to you.
Click on the link to download the MT4 then follow the instructions below to install it and log in with the credentials sent to you.
Go to Play Store/Apple Store >> Meta Trader 4>> Install
Run the App>> New Account>> Open a Personal Demo Account >>search JustStartTrading-US07-Live
Complete the App Form and Start Trading
Business Approach in Forex
Yes, you can. Your biggest problem is that you want success now, you can’t have it. The market requires you to put in some serious brain time before it will reward you. You did not become a professional rugby player the first time you picked up the ball, you had to work at it and still do every day. Trading is just that, it takes time and devotion, there are no shortcuts.
Becoming a success in trading takes time, devotion, diligence and patience. You will get knocked down a few times and will need to dust yourself off. At the end trading will reward those that appreciate it and have learned its nuances. Pick a strategy and practice, practice, practice.
From the answer above, Forex is a business but “is it the right business for you” is the better question.
Before choosing a business, you consider your expertise, cost, initial capital etc. The Forex Trading scene is a bit different, it saves you the hard work; cost of start-up is nearly nil, initial capital can be as low as $200. This is because you need all the time to demo test and back test yourself and build your expertise. Once you are confident with your knowledge and skill, you go to the next stage of trading live and from here you learn about your emotions and psychology.
The live account is where you equate losses to the cost you had foregone earlier and strive to better yourself and have better control.
From this point of view, Forex can be a good business if you also take the challenges that come with it, some of them beyond your control, and run your trading like a business.
How to trade Professionally
Professional traders keep the following aspects sacred in their trading. More or less, they observe the laws below and understand that their trading is a calculated and predefined process. They plan ahead and adhere to a set of rules that they have defined and do not contradict themselves.
The first thing you need to understand is that trading is a discipline. It is a long-term game of probabilities, you will win some trades, you will lose on some trades, but as long as you a disciplined enough to stick to your trading strategy, to not be emotionally attached to your losses, or worse your wins, you will tend to make more winning trades than losing trades and nett a profit.
Master your art just like a Ninja is good with his knives.
You need to know what your trading strategy is and you need to master it. All the intrinsic workings and parameters and logic and theory behind your trades. You have to know it inside and out and have absolutely no doubts or questions about what the market needs to look like before you risk your money in a trade. Once the market conditions match your strategy criteria, you place your trade, with confidence and no second thought. At this stage, you already have a plan in order and a failsafe built for market inefficiencies.
ALWAYS manage your risk on EVERY single trade. The moment you loosen your control on risk, you allow emotion to creep in and it’s a downward spiral of emotional Forex trades that are most likely losing trades. Only risk the money you are prepared to lose in every trade. In fact, you should go in expecting to lose on any given trade, that way, you’re constantly aware of the very real possibility of it happening. Make sure that your win is bigger than your risk; that way, you are winning overall.
You need to be very organized. Have a trading plan and journal to track your trades consistently. Think of Forex trading as a business rather than placing a bet in a casino. Invest with your calculator and not your heart, stay calm in your dealings with the market. Spend the weekend going over the fundamentals of your trading assets and gauging economic climate for the coming week.
Again, keeping your Forex trading mindset right is the outcome of always taking a conscious effort to practice, manage, and control your emotions when it comes to trading.
Is Forex Real
The Foreign Exchange market exists as part of the Financial market.
Arbitrage/Trading exists in the financial market as investors seek to make money from change in asset price.
That said, one of the first things you must learn about the forex market is that although it is enjoyable and exciting and provides a lot of advantages in flexibility, ease of access and “the sky is the limit” attitude, there is no magic button that will instantly turn your pennies into millions of dollars.
You may have already heard about forex scams that are littering the forex world.
With the relatively new availability of the forex market, people aren’t as familiar with currencies are as they are with stocks and bonds. Dishonest people take advantage of this fact and give misleading information and false promises.
These Scams can be avoided first and foremost by understanding that these kinds of low risk, high yield returns simply do not exist in the financial markets.
There are three major ways that that brokers make money.
A spread is the difference between the bid price and ask price. Brokers who don’t give their clients the straight through processing (STP) advantage markup the spreads given by the liquidity providers so that they can take care of their cost and also make some profits. Most brokers markup the liquidity providers’ spreads by about 15 to 30 points.
A commission is a fixed cost of trading charged on any position placed. The commissions vary between brokers and between different asset classes offered by a broker. The most legitimate brokers offer 0.0 spreads for EUR/USD in ideal market conditions and a commission of not more than 7 dollars per 1 standard lot size.
A swap is a cost of holding a position overnight. Currency swaps are mostly affected by interest rates, but different brokers have different swap packages for their clients. Swaps might be charged daily or rolled over and charged once per week depending with the broker.
Psychology of Trading
The complexity of an activity is witnessed by the stages involved before you get the finished product or you have a service done. Using the above definition forex trading can be rated among the easiest activities that hold an immense potential to provide good returns.
The statement can be supported by the fact that trading involves looking at a chart (technical) or reading articles or financial magazines (Fundamental) and making a decision(sentiment) whether to buy or sell a currency, commodity or index. The operations involved are easy and the conditions of entry are predefined. The outcome is the hidden factor
The ease of trading also comes with the huge responsibility of managing risk and emotions of trading which can be a major impediment to good returns.
Be willing to make sacrifice. Put in the hours looking at the chart, making analysis, understanding theory. This Sacrifice itself means that your self-discipline and most importantly, you are informed and up to the task.
You will have a lot of losing trades, you have to be ready for the disciplined manner and continue to trade with the adopted goals and trading strategies until you adopt and overcome. Every day, your opinions will be challenged and just when you change your mind, they are validated again. The most important thing is to look for stronger theories and find practical applications for different market outcomes. I will reach a point where you will be courageous.
How much much you dedicate depends on which of the three types of traders you are.
– Intraday trader– Needs more time as the trader is constantly on the screen looking for trade setups
– Swing trader– Less demanding as the trader is looking for a swing setup to form. The set up does need some time to form and provide a confirmation. Once in a trade, the trade will look to only exit once the swing come to its end.
– Long-term or position trader– Less time consuming. This trader will probably be looking for fundamental confirmations on his trades. He will also look to stay until the end of the fundamental sentiment and has made the most from his analysis. Will probably be using the monthly charts and hold trades for long.
A trader must equip themselves with relevant information regarding the assets they are trading. They must learn to qualify and disregard market info as it streams in. The best learning in Forex is through self-education and experience. On the Internet, you can find many e-books and audio books about trading and lots of webinars of professional traders and forums where other traders posts different trading strategies, technical analysis and other materials about trading. Forex information if free to come by that this also means there is plenty of sifting involved. You can invest in a Forex education to bridge the gap and get you there quickly; just make sure your educator is at least and active successful trader.
The first thing you need to do is to set realistic goals. When setting goals, we should first ask ourselves what is achievable in a normal ideal world, preferably comparing what other investment other that Forex offer. This will keep you in check and prevent you from having unrealistic goals. Goals should not only be quantitative, i.e. how much I want to earn money in this period, but must be qualitative, i.e. What skills and techniques of trading should I learn? For what period we should read books about trading? we want to acquire the mental ability and strengthen and affirm what we already know.
Look to set optimistic attainable goals that are graded/set apart. Humans are creatures of gratification. Your inner self wants to see progress. Once you pass a certain grade, it is you stepping stone to the next goal/grade. If you fail on the next grade, you still have your previous grade/ stepping stone to fall back to as you regroup and try again. This is very important in human psychology. Always have simple attainable goals at first as you work upward to the big one.
Creating a trading strategy
Creating and perfecting trading strategy will follow you over time as long as you trade. This is a process in which you need to investigate and analyze strategies, back test and forward test. No strategy will ever be perfect but at least you should trust in enough to ignore your emotion while trading since you know what works.
Emotional trades are as a result of failed strategies or no strategies that leave the trader to rely on his gut feeling rather than fact and predefined rules
Analyzing and Revisiting goals, Strategies and Results
Analyze the goals and revise them if necessary. Always analyze the results you have achieved and how far they deviate from set goals, seek the causes of both positive and negative deviation. Make sure you isolate trades made outside your strategy. Check your loosing trades – were they the wrong set of fundamental or technical analysis, or did you emotionally execute them. Analyze positive trades, could they have made even greater profit, based on strategy. Remember to synchronize your trading with current economic sentiment and identify that a strategy may have been built at a certain time but that economic sentiment may have passed and a need for re development may be needed.
For a first timer, the forex markets might feel a bit daunting. Keep these currency trading tips in mind and choose to trade forex for the right reasons.
The Forex markets are for traders who are interested in the investment not for betting or gambling. Study and analysis will prove a far better ally than long odds or luck. If you are in it to make a quick buck, you will probably use impulse and poor or no analysis- you might be right in the short term but never in the long run.
- Practice makes perfect. Before you start trading live, practice with a demo account. This the most critical of all Forex tips for the new trader. Get good at analysis and actual trading. Learn the MT4 in and out and practice consistently. You yourself will know when you are ready.
- Find a good broker. Do your homework and choose a broker that offers the features and services you want. Look for a broker who has account segregation. We recommend Just Start Trading www.fxjst.com
- Don’t go against a trend. Trends mean that more of the same is up ahead. Keeping with a trend will help you continue to make a profit. Generally, when the trend is up, don’t sell; when the trend is down, don’t buy. Look for safe entries to ride the wave.
- Keep your emotions in check. Forex is about methodical analysis of the market trends, not about searching for the next hot trade. The trader who lets his or her emotions take control will not last in the market.
- Overwhelmed traders make mistakes. Avoid information paralysis. If you find that the data sitting in front of you is too much to handle, take a break. Good Trade setups are easy to spot.
- Guarantees are a fallacy– they don’t exist in this world. If someone tries to tell you that they have Forex secrets, like a system, trick, or bot that guarantees a profit, you have only one thing to do, walk away.
- Most Importantly Patience really is a virtue. Of all currency trading strategies, Don’t expect to make your money all at once. Build it slowly over a large spread, by using consistent money management, and you’ll be able to weather almost any Forex storm.
How to read candlesticks in forex trading
- A candlestick is a chart that displays the OHLC Open, High, Low and Close prices of a security for a single month, week, day or even minute.
- Candlesticks help to describe the price action during a given time frame.
- The basic recommendations of all candlestick patterns are:
- Always be keen on the timing since two different timeframes can give two different trends
- Analyze the candlestick according to the prevailing trend
Construction of a candlestick
Core Candlestick Patterns
There are multiple forms of candlestick patterns; here is a brief overview of the most popular and widely used single and multi-bar patterns commonly used today.
On Market Open, the bulls have an advantage to be courageous and move prices higher. Prices opens low, moves Higher and Continues to gain over the course of time. Bears have no strength to push prices Lower.
Signals uptrend movement, they occur in different lengths; the longer the body, the more significant the price increase.
On Market Open, the bears have an advantage to be courageous and move prices Lower. Prices opens low, moves Lower and Continues to lose over the course of time. Bulls have no strength to push prices higher.
Signals downtrend movement, they occur in different lengths; the longer the body, the more significant the price decrease.
The Doji is a candlestick in which the session’s open and close are the same, or almost the same. There are a few different varieties of Dojis, depending on where the opening and closing are in relation to the bar’s range.
Dojis are mostly visible during trend reversals and they help in detecting when to exit or enter a move. The different dojis candlesticks signify different moves which traders can take advantage of in their trading.
A candlestick depicts the battle between Bulls (buyers) and Bears (sellers) over a given period of time.
- Long white candlesticks(Bullish) indicate that the Buyers controlled the market
- Long black candlesticks(Bearish) indicate that the Sellers controlled the market.
- Small candlesticks(Dojis) indicate that neither team could move the markets considerably
- A long lower shadowindicates that the Bears controlled the Market for some time, but lost control by the end and the Bulls made an impressive comeback for some reason.
- A long upper shadowindicates that the Bulls controlled the Market for some time, but lost control by the end and the Bears made an impressive comeback for some reason.
- A long upper and lower shadowindicates that the both the Bears and the Bulls had their moments in the market, but neither could put the other away, resulting in a standoff and indecision.
A manual backtest is necessary to see how a strategy will fair over time. Back testing is using recorded price action and seeing how to generate and adopt your current strategy to suit market conditions back then. If a strategy tests well from past data, it might probably do the same for the future.
Back testing should not be confused with demo trading. Demo trading is part of a forward test since a trader is participating on current markets even though he takes on no risk. Demo trading takes time, it will take you several days, even weeks to test your day-trading strategy on the demo markets. On a backtest however, say you want to test the 50 Smooth MA. You will apply the 50 MA on a chart and visually asses and qualify how dependable and replicable your strategy is over time. You will check how often if works and when it fails to work. Depending on how thorough you are, the backtest can take you from an hour to a few days.
Steps to Back testing.
- Dress you chart.
Apply on the charts, the indicators you use in the strategy you are testing. 50 MA or our case
- Take a step back in time
Scroll back in time on the charts. Since you want the prices to be new to you as if it were the real market. You will scroll back to a time you want to start your critical analysis.
- Walk forward in time
Remember to lock the chart to prevent it from offsetting to the current time. The chart has a default setting that moves the chart to the most recent price action.
From here, scroll forward as you record your observation. Note how reliable the strategy is and when it becomes unreliable.
Backtest are mainly visual for manual strategies. Backtests will help you eliminate strategies not worth spending time on during a forward test. Once a strategy has passed the forward test, you can now embark on testing it using a forward demo account.
A stop-loss order is an order placed by a trader and its designed to limit a forex trader’s loss in a currency pair. They are a risk mitigation strategy. Before applying any stop loss, it is prudent to know the volatility of the pair you are trading; some pairs move more than others and may be affected by economic releases.
Determining where to setup stop losses
Many traders’ struggle with the task of determining where to set their stop loss levels. Investors don’t want to set their stop loss levels too far away and lose too much money if the currency moves in the opposite direction of their prediction. On the other hand, traders don’t like setting their stop loss levels too close to where they have placed their positions and lose money by being taken out of their trades earlier than necessary.
Where do you set up the stop losses?
There are three primary methods of determining stop losses.
- The percentage or ration method
- The support and resistance method
- The moving average method
The Percentage/Ratio Method for Setting Stop Losses
The percentage method is one of the most popular methods investors use in their portfolios.
One of the main reasons for this strategy’s high approval rates is its lack of complexity. All that a trader does while using this strategy is determine the percentage value of your security that you are ready to lose before you exit your trade. This also goes in line with the percentage you stand to make on the trade.
Support and Resistance method for Setting a Stop Loss
The support and resistance method for setting stop losses is more involving but it also allows you to tailor your stop loss levels to the currency you are trading.
To use the method of support and resistance, identify the currency’s most recent levels of resistance and support. Once you have identified your critical levels all you have to do is place your stop loss just below or above those levels.
Setting stop losses using moving averages
The moving average strategy method for setting stop losses is simpler than the support method. It allows you to choose tailor you own moving average parameters. To use this method, you need to apply a moving average to your currency chart. In most cases, traders despise using shorter-term moving averages and prefer longer term moving averages which help in avoiding setting your stop loss too close to the price and avoid a premature stop loss trigger. Once you have set the moving average, all you have to do is set your stop loss orders just below or above the level of the moving average.
Using stationary stops can bring a vast improvement to new trader’s approaches, but other traders have taken the idea of stops a step further to focus further by maximizing their money management.
Trailing stops are stops that can be adjusted as the trade moves in the trader’s favor, in an attempt to further reduce the downside risk of being incorrect in a trade.
Trailing stops automatically follow a trade on the positive side while maintaining a certain distance that you set, and the trade closes automatically whenever the price goes back hits that price..
Strategies of Setting Stop Loss Orders
Stop losses are a very important in forex and stocks trading. The following guidelines and examples should help you to determine where to place a stop before and after you’ve entered a position.
- Stop losses are used for specifically preventing larges losses and should be set according to how much in losses your account can endure.
- Once you determine the maximum risk your account can absorb, you should look for a recent low (for a long) or high (for a short) and place your stop just below or above those levels.
- It is very important that you take the volatility of the currency into account when placing the initial stop losses and trailing stops. If a currency is very volatile, it will need a little more room to move than a lower volatile currency would.
- In the initial part of a profitable trade, a stop should be moved in the path the currency is moving but at a sluggish rate than the currency pair is moving. For instance, if your trade moved up by 3% on the first day after taking the position you should move your stop loss order up by an amount which is less than 3%. Perhaps, around 1%.
- In the initial stages of a losing trade, a stop should be moved in the reverse direction of the currency but at approximately the same rate. For instance, if your position moved on the opposite of your prediction by 3% on the first day after placing it then you should move up your stop by approximately 3%
- In the final stages of a profitable trade, a stop should be moved in the direction the currency is moving but at a quicker rate. For example, if your currency is approaching the target at a rate of 2% per day you should be reducing your stop at a rate that is slightly higher than 2%. The closer to the target the currency gets the tighter your stop should be.
- Stop losses should always be moved in one direction that is up for a long and down for a short. If you end up been stopped out of profitable trades, then you must be setting your stops too tight. Also, if your stop loss is hit and you book a loss and immediately the price breaks out of the pattern for the second time, there is no reason you can’t re-enter the trade. Many successful traders will take a very small loss on a trade and end up with huge profits on the second, third, or fourth time they trade the currency.
- For a long trade, if a currency does not make to a new daily low your stop losses should not get hit. If they, it means that your stop losses are too close to where you have placed the trades. Automatically, that makes the price the new daily high for a short position.
- One of the biggest errors traders makes setting stop losses that are too tight. This is a direct result of fear of taking a loss or fear of letting a winner turn into a loser.
- If you enter a currency based on a daily chart, your exit should be founded on the daily chart, not on the intra-day charts. If stops are set on the intra-day price action, you can almost be assured that it will get executed early.
A trend is the general direction of the market. Its shows who is in control of the market. When we trade, whether trend trading, counter trend trading or range bound trading. We always have to know what kind of market condition we’re trading in.
Different strategies produce different results in different market conditions; therefore, it’s extremely important to be able to identify the trends on a chart so we know what to use. In determining trend, consider the timeframe you are observing the market from since lower timeframes may give exaggerated or different outcomes compared to higher time frames.
Trend can be an Upward/ Bullish trend, Downward/Bearish Trend or Sideways/ Ranging Trend.
A Bullish Trend= Market Is making Higher Highs and Higher Lows. The buyers/bulls have an advantage in the market and new prices are on average higher than the previous prices.
A Bearish Trend= Market is Making Lower Lows and Lower Highs. The sellers/bears have an advantage in the market and new prices are on average lower than the previous prices.
Ranging Trend= Market has no general direction. There is a tag of war between buyers and sellers. The markets may consolidate as it awaits to break out once one of the participants has an advantage. From higher times frames a ranging market will look like a consolidation of price.
Read more on identifying trends here https://fxinsider.co.ke/4-ways-to-identify-the-direction-of-the-trend/
Forex automated trading is simply trading using a set of rules that are coded into a program. Expert advisors are used to determine conditions for entry or manage and modify manually executed orders. Given defined unambiguous rules, the expert advisor executes if the rules have been met.
An automated trading environment can replicate its actions across multiple markets and time frames. The system is also unaffected by the psychological swings that human traders are prone to. This is particularly relevant when trading on technical analysis, which is typically developed on the assumption that probabilistic outcomes in the past will repeat themselves in the future.
Just like manual systems and other things in life. The system is only as strong as its creator. The trading system seeks to take away human error in trading, but the system itself is built by a human being and thus prone to errors in itself.
The markets are always changing and have different outcomes that cannot be mathematically solved. A system can work today and fail tomorrow, it needs to be constantly updated and monitored, it`s not solution to staying away from the charts.
Auto trading it is extremely attractive to a number of Forex scams. Forex auto trading, as it promises ease and a plug and play solution, albeit this is rarely the case.
The best scenario would be to avoid out of the box solutions, migrate your own successful strategy. All in all, always be prudent and confirm Live Account performances from reputable brokers over a substantial period of time before you make a decision on a automated system
The system is only as strong as it creator. The only way to tell if the system works if it has been cast into the deep end and proved its worth. What you should do is be a good investigator. Make sure you can see Live Trading Performance. The performance should be at least from a regulated broker whose results you can trust. Have the results vetted by a regulated body or ask for an investor password and vet the performance yourself.
Risks in Trading
Benefits Associated with Forex Trading
Before we delve into the risks, let us briefly quote the few advantages that the Forex Markets offer.
24-Hour Market Action: The forex currency markets are a 24-hour marketplace from Monday to Friday. This gives you the flexibility to trade forex full-time or part-time, whenever your schedule or lifestyle permits.
Liquidity: As the largest markets in the world, this financial markets offer excellent liquidity at all hours of the trading day, unlike many other 24-hour markets. This means you can trade large amounts of volume into and out of the forex markets with minimal market impact.
Leverage : Forex Trading allows participants to leverage up to 100 times their account value on most major forex pairs These leverage amounts may change or may not be available at all times due to leverage adjustments in volatile market conditions. For example, with 100:1 leverage, you may control. $100,000, using only 100. Remember that while leverage can help build profits quickly, it can also hurt you.
Trading Opportunities: The market offers many opportunities of entry and trading set ups. They are many assets to choose from spanning different geographical regions and tradable assets.
Risks in Trading the Forex Markets
Trading with leveraged markets can be a smart way to maximize one’s capital. As a trader, leveraging the funds in your account can potentially generate larger profits as compared to the amounts you invest, but with this advantage comes the potential risks because losses can also be greater than the total margin held.
For this reason, Leverage is always considered a double-edged sword. A trader should be aware of how to apply leverage and trade on margin. The smart traders take steps to mitigate these risks and make sure this advantage doesn’t turn around to hurt them. Leverage is thus the most important risk to understand. The rule of thumb is; don’t over leverage.
Other risks involved are;
- Risks of trading multiple marketsAnalyzing thousands of markets in the worlds’ global asset classes can lead to missing the best opportunities simply due to lack of focus, concentration and multitasking.
- The best way to start is to create a shorter watch list of markets. The shorter list helps even experienced traders who can miss serious market moves and become exposed to risk while keeping an eye on several markets at the same time.
- Creating a shorter watch list of the most liquid and volatile markets with tight spreads would be a great place to start.
2. Volatility and Liquidity brought about by Fundamentals and Economic Releases.
In the global economy, news from anywhere in the world can affect the forex markets in many ways. These effects can manifest as rapid price movements or changes in trend direction or long-term outlook. It is prudent when trading either long term or short term to keep your eye on news and other factors like government reports that can affect your profitability
Volatility: When volatility increases, brokers pricing engines widens spreads accordingly and decreases the spreads when the volatility decreases. The dramatic changes in price cause higher spreads and slippage.
Liquidity: Global markets liquidity changes throughout the day and reacts to news events, end-of-day rollover periods, and trading session openings. At times of scarce liquidity, banks act to limit their risks. For example, they limit trade sizes, they may refuse to quote prices, or lower the leverage. During limited liquidity orders may not be filled.
Ways of mitigating risk in forex trading
- Understand the proper use of leverage especially in forex trading
- Use both Fundamental and Technical Analysis and Keep up-to-date with market conditions
- Make trading plans for all your trades and stick to those that work.
- Manage risk. Know when to close a trade or time to take losses to avoid losing a significant part of your portfolio.
To start off, all financial markets trading carries risk.
The markets are built on tracking an asset and predicting the unknown. Quantifying all information the market has a concluding whether to go long, short or no call. Constructing from logic and probability, the outcome of the value of an asset. It takes guts but most importantly, accepting you might be wrong sometimes. It`s from this acceptance of the unknown that all market participants are born. Individuals who are ready to take the good with the bad. The most important trait in trading is having an inherent understanding of the worst case scenario and how to cope when it happens. Being ignorant/oblivious of risk -and measures to mitigate it -is the worst enemy to a trader, and in life in general.
Don’t fear risk; Understand it .
All fear is born from the unknown. Understand the risk of leverage, gapping, slippage, greed and come up with a working plan of action. Understand the odds of it happening and reason behind each scenario. The most prevalent risk is overleveraging/ taking on too much risk. Forex is a leverage market but you can still use 1:1 leverage. You can seek professional opinion, that way you have a more informed opinion. Once you have a grasp on the risk, then make decision if Forex is ideal for you.
Follow Your Head, Not Your Losses.
Always maintain a cool head. Stick to their strategy, and a well outlined plan of action, and don’t allow emotion to cloud your judgment. Before any position, always minimise your exposure to risk.
There is nothing wrong with a wrong trade, it is the order of the day.
Trade with an Edge, Not Arrogance
From experienced trader who had had overall success for a long time, or newcomers who have never had a single trade, it can be too easy to stop being cautious and engage in riskier trades. Don’t ever be overconfident in your risk. Treat every trade as though it were your first, and remember the strategies that made you successful in the first place or the strategies you have developed. Remember a good plan on paper is only as good as its execution.
In short, trading Forex can be as low risk / boring as possible. It all depends on the speed you can cope with.
A demo account is an account given by brokers to their clients for training. Demo accounts offer the same prices as those offered in live account only that you use virtual cash to trade. Most brokers offer their clients big demo accounts to trade, and clients end up treating the demo account as a kind of a game hence they don’t learn much from them. Below are some tips that will guide you as a trader into making the most out of a demo account.
- Reconstructs your trading circumstances
While the demo account may allow you to trade massive amounts of cash hence making enormous profits because of using big volumes, the psychological effect is simply driving you to a fantasy world of trading. Always trade with a demo account which when it comes to a live account you will be able to fund such an amount. Also, do not trade securities which you can’t trade in live accounts since it will be of no help but will simply turn your trading to a game of numbers.
- Personalize the experience
Personalize your trading by ensuring you keep a trading diary and recording your emotions as you place your positions and while monitoring them. While it’s impossible to fully replicate the feeling of profit or loss on a demo account, you can put a program of rewarding yourself when you win or holding something back when you place a bad trade which will eventually caution you against placing irresponsible trades and will eventually motivate successful and responsible trading.
- Study your trading plans
In a demo account, even if you lose trading funds, in real terms you lose nothing since you only trade virtual money. Hence use this time to enhance your knowledge in specific asset classes that you intend to trade in the live account. The best brokers will give you access to chart, graphs and historical data which ensures you get the best skills to replicate in the live account. The most important thing is for a trader to identify his strong and weak points so that by the time they are transiting to the live accounts they will be experienced in using the different features offered.
- Understand the trading platform
Always open the demo account with the broker you intend to open a live account with. This will help you understand the trading platform well, and all the tools it offers and you can practice on them before you transit to the live account. Familiarizing yourself with the platform also helps you simplify and improve your trading due to the different features that are offered by various brokers. There are different trading platforms, but the best is the Meta-trader 4 platform since it provides a variety of features, it’s easy to understand, provides one-click trading features and can also be accessed through the phone.
The demo trading experience is a major step on the roadmap to live trading since the experience 100% reflects that of live trading but only if handled with caution, expertise and with an intention to learn rather than handling it as a sport.