Five Things You Must Know if You Are Considering Forex Trading
By: Hillel Fuld
The Forex market has been around since the creation of man. People always traded their own currency for others, but their currency was not in the form of coins or bills, rather commodities such as food, animals, or other natural resources. Since the creation of modern money, people were always trading one currency for another. Coming back to modern times, the world's major financial institutions began to trade currencies of the different countries amongst themselves. Then, in the mid 70's, the retail Forex market was born, allowing non commercial players to trade Forex. However, the most significant change to the Forex industry came in 1996 with the launch of the online Forex trading world.
As of now, the online Forex world is growing at a very rapid rate, and new brokers are opening shop daily. Unfortunately, as I have written on many occasions, the Forex industry is headed down the wrong path judging by its reputation. If you ask a random person, who knows nothing about Forex, what their impression of the market is, chances are you will get an answer related to the spammy nature of many Forex companies.
With the endless potential the Forex market presents, and the option to make tremendous profits, if you are not careful as a trader, the danger is just as great. So how does one benefit from all the advantages of Forex without becoming a statistic of yet another trader who lost it all in the Forex market?
Here are five basic steps to ensure you will be able to reap the benefits of a market that is larger than the stock and bond markets combined, by far:
Ignore the Hype: It is very easy to become swayed by all the hype surrounding Forex. It is extremely tempting to believe that with one trade you can make millions. After all, this is what is being broadcast by all the brokers every chance they get. Ignore it, none of it is true. Now, don't get me wrong, the potential to strike it rich in Forex is there, but without discipline, preparation, and patience, the likelihood of achieving this, is comparable to winning the lottery. It is possible, but highly unlikely. Enter the market with a balanced and responsible mind frame, while defining your goals, and working to achieve them. Do not pay attention to the noise, it will only hurt you in the long run.
Skip a Vacation: You are probably thinking “What does a vacation have to do with Forex, and why should I skip it?” What I mean is this. Before risking a cent in the Forex market, make sure you are able to risk that cent. Take money you would otherwise spend on a vacation, make sure you are OK not taking that vacation, and invest it in the Forex market. Do not, under any circumstances use money that you need to feed your family or to live on, and invest it in the Forex market. At the end of the day, as much as we do not like to admit it, 90% of our trades will lead to losses. If you use money that you cannot afford to lose, not only will you get burned by the Forex market and never try it again, it will have a devastating effect on your life, and might cause irreversible damage. So, if you are considering entering this huge market, put aside money you can afford to part with, say your goodbyes, and jump in. If you follow these steps, you will hopefully be reunited again very quickly.
Read, Listen, and Learn: I cannot emphasize the importance of this step enough. Would you dare buy a house without researching the resale value, the neighborhood, or the building's infrastructure? I would hope not. In the same sense, it would be complete and utter foolishness to enter this volatile and risky market without extensive research. This includes all aspects of the market, but to name a few, I would recommend reading up on the history of Forex (the introduction to this article is not enough), how it has developed, and where it is going. I would strongly suggest you listen to what other traders are saying; listen to what they are saying about best trading practices, listen to what they are saying about top Forex tools and services, and listen to what they are saying about the most effective way of predicting the market's next movements. In addition, learn how to read the charts, learn how to understand the Forex news, and most importantly learn your own personal strengths and weaknesses and how to work with them and around them.
Use Many Baskets for your Eggs: The trick to success, if there is such a thing in the Forex market, is to not put all your eggs in one basket. As a continuation to ignoring the hype, do not use more than a certain percentage of your total equity on one trade. The exact percentage is up for debate and I am not going to give a number here, but whatever number you choose, take a loss into account, and think where your account will be if you indeed lose this trade. Trade a lot of smaller trades, use Stop Losses and Take Profits, do not be greedy, and do NOT under any circumstances, try to overcompensate your losses. If you lose, you lose. Do not extend your Stop Losses thinking the market will reverse itself, it usually doesn't. The trend is your friend, until it's not, and then it is your worst enemy. On a different note, trading a single currency is also not a recommended practice, it was not long ago that the USD was the safe haven of the Forex world, and we all know how that is going, so the best idea is to branch out and spread out your risks both in terms of trades and currencies.
Don't Let it Go to your Head: I alluded to this before when I said not to be greedy, but this is a very important point that must be emphasized. One of the strong points and advantages of the Forex market is that no one person or institution, no matter what the size of their bank account, can really affect the market, it is just too big. On the flip side, no matter how good of a day you are having, do not get too excited and anxious with your trades, it can reverse at any given second. Letting your Forex successes go to your head will of course have a major effect on your trading philosophy and might cause you to take risks you might otherwise not have taken. Take one step at a time, be grateful for your successful trades, and the best advice is to continue doing what you are doing. Stick to the plan, implement you strategy to its fullest, no matter how much your hunch tells you to move that Take Profit or extend that Stop Loss.
The Forex market is huge, and it offers quick and large returns on trades, this is all true. However, if you are not calculated in your trades, and you trade based on instincts, you are bound to find yourself in the group of many Forex traders who lost it all, and fast. On the other hand, if you act responsibly, the same way you do in other areas of life, and you address the Forex market in the same way you would view the purchase of a new car or house, you will quickly learn that the potential the Forex market presents, is nearly endless.