First 5 Steps to Take Before Trading Forex
By: Hillel Fuld
The foreign exchange (Forex) market is the biggest market in the world. Depending who you ask, there is anywhere between 2 and 4 trillion dollars traded daily in the Forex market. Not only is it the biggest, it is also the safest market due to its size and accessibility. What that means is that you, a small retail trader, can have as much or as little of an effect on the market’s currencies as the biggest bank. No one factor, person, or institution can really determine what the dollar will do today, which is what determines your Forex trading success.
The fact that we are now in a recession and the world’s economy is in the worst shape it has been in years, just makes the Forex market more attractive. If one currency is losing its value, that just means another is gaining, your job is to make sure you are on the “correct” side of that equation. The Forex market has so much to offer anyone who is looking for a supplementary income or a new primary income for that matter.
Having said all that, the Forex market can also be quite intimidating to the inexperienced trader. Where does one start Forex? What are the first steps one takes before jumping into the deep water of Forex? Perhaps there is nothing to do besides jump in and hold your breath! The following Forex guide should answer those questions and give a comprehensive list of all the steps one must take before trading even a single penny in the Forex market.
1: Read, Read, Read: It does not matter what kind of trader you are or intend on becoming, you need to do your homework. You need to read up on the history of Forex, which might seem unimportant and irrelevant to your trades, but it is not. Just like you would read up about the history of a stock you are looking to buy, you should understand all about the Forex market and its foundations.
Read about the different philosophies of Forex experts. How do they analyze the market? Understand the difference between the technical and fundamental schools of thought. Research the primary differences between the various types of brokers, namely market makers and ECNs. Determine which one is right for you.
Read about the fundamentals of trading Forex, what are the big mistakes most new traders make, understand the tips given by the experts, and implement them. In today’s world, this task is a lot easier than it was 10 years ago. Any resource you need to better understand the Forex market is available to you online. Take advantage of this and absorb as much information as you can before you start trading Forex.
2: Play “Trader”: You have read for tens of hours and are now dreaming in words like leverage, spreads, pips, and Fibonacci, now what? Now, you need to choose a select number of brokers, it does not matter if these are the brokers you intend on trading real money with, and open up demo accounts. Download their trading platform, and start playing pretend. Open up positions, close them, and analyze the results. You cannot do this for enough time. Trade on demo accounts for as long as you can, until you see steady profitable results, and feel completely confident that you are ready to trade.
It is important to keep in mind that many brokers offer demo accounts in order to pull you in and get you trading, so their demo accounts are faster and more responsive than the actual trading platform. Just because you succeeded when trading a demo account, does not necessarily mean you will see the same results when trading real money. On the contrary, every trader loses some and wins some, you just need to learn from mistakes, and make sure the “some” you win are more than the “some” you lose.
3: Read More: Once you know that you have reached the stage to begin investing money, you need to do some more reading. This time it is a different type of reading. You might find this reading easier as it is sure to present clear consequences. Now is the stage that you choose how you will trade. Are you the type of person who feels anxiety when there is a lot of money on the line? Alternatively, do you know about yourself that your strength is your ability to “keep a cool”?
Read all about the different trading options available to you. You can use an auto trading system if you do not trust yourself to control your emotions and keep them out of the trading. You can go the traditional route and choose one of the many Forex brokers who offer various types of highly advanced trading platforms. No matter what you decide, you need to read. Read reviews of brokers, read techniques of auto trading, read user forums in which traders discuss their experiences with various brokers, and most importantly, visit the brokers’ websites and see whether it speaks to you.
4: Jump In: Congratulations on reaching this stage, but here is where you need to proceed with the utmost precaution. You did your research, you traded with a demo, and you decided on a broker. Now, you need to obviously become acquainted with the trading environment offered by your broker. Is their platform downloadable or is it Web based? Become familiar with the different screens of the platform and how each one helps you in your trading. Pay close attention to the integrated charts, trading history, and the actual trading screen.
It is recommended to also have another screen open with your favorite financial news website. You do not want to trade without knowing of the latest events and developments in the world’s financial markets. In the beginning, make sure not to be lured in by the flashing screens offering you to trade with high leverage. It is tempting to trade hundreds of thousands of dollars, but remember, the greater the leverage, the higher the risk. Trade small.
Once you are making consistent profits in your small positions, increase them gradually. Take baby steps, and whatever you do, do not invest all your money in one trade.
5: Perform a Weekend Summary: So you traded for an entire week. Now, step back, and analyze your trades. Use the history tool in the platform in which you traded, and try to determine how your losses could have been prevented or minimized. Did you stick to the plan? Did you let your emotion get the best of you? Look at the different trades you did not open during that week, and determine whether you made the right decision. It is important to remember that a week is an insufficient time slot in order to really reach any conclusions about your trading habits. However, it is enough time to write down some initial impressions of your trading experiences and learn from them in the following week.
Pay attention to the level of importance you attributed to the charts and technical analysis during your week as opposed to the fundamentals. It is important to ensure that you use both these tools. The most important factor is to objectively and scientifically analyze your trading activity by looking at the numbers and recording them. You might even want to ask a friend to assist you in this process, so as to leave out any emotional involvement.
These are just some initial steps to be taken by any individual before embarking in trading currencies. There are many more Forex tips and recommendations given by market experts, but if you follow these tips, you should be seeing steady profits from your trades. These profits might be small but they will eventually increase as time goes on and you become a more experienced and confident trader.