FX is typically traded on margin. This means you only put up a small percentage of the value of the underlying contract to control a large amount of it.
Forex trading tips
1. Your trades are leveraged meaning that your potential profits, and losses, are magnified. It’s very important to understand this before you begin trading.
2. Without wanting to sound too negative, here’s a wealth warning: only trade with money you can afford to lose. Obviously the reason we all trade is to make money, but it is important to be realistic as well. Every trader gets it wrong from time to time, especially when they are starting out. The trick is to make sure that your losses are limited and consequently won’t take a big chunk out of your risk capital.
3. Work out what kind of trading suits you best. Many FX traders take positions that they only anticipate keeping open for a short time – a couple of hours or maybe even less, and never running positions overnight. This is called “Day Trading” – but it’s not for everyone. After all, you need to devote a lot of time to this unless you fully automate your trading. But it’s quite possible to have a successful and fulfilling trading career without staring at screens all day. So decide how you can fit in your trading around your normal schedule.
4. Whatever the timescale of your trades, begin with small stakes – something that is quite easy to do with FX. Start with the smallest trade or bet size possible, and make sure you understand how much you stand to win or lose with each tick movement (a tick is the minimum price fluctuation).
5. Undertake money management by organising your risk capital. Divide it up into small tranches to make sure you don’t risk too much per trade. Obviously, the more tranches you have the more opportunities you will have to trade. But you have to offset this with the fact that the smaller each tranche, the more difficult it will be to find suitable trades, bearing in mind where you place your stop losses.
6. Follow just a few currency pairs to start with. It may be best to stick to the most popular and liquid ones initially rather than obscure and volatile cross-rates. Keep an eye on the charts and use a combination of drawing tools and technical indicators. Drawing tools can be as simple as horizontal or trend lines to help highlight areas of support and resistance. But then try adding in some moving averages – the 10, 20, 50-day for example. Technical indicators such as the RSI or MACD can help highlight when a currency is overbought or oversold. Back-test, and see what works best for you and specific currency pairs.
7. Develop your own trade ideas and don’t be tempted to take a position on the basis of a tip from someone else. By all means, use tips as the starting point for further investigation, but do your own homework and make sure you’re relaxed about the amount of risk you’re taking on a trade.
8. Plan your trades carefully. Work out how much you’re prepared to risk on each trade and place your stop accordingly. If it looks as if you have to put your stop at such a level that you could potentially lose more than you’d planned for through your money management, then don’t do the trade. This should help to take the emotion out of trading.
9. Don’t move your stops further away, and don’t be tempted to add to a losing position. Stick to your trading plan while your trade is open. Only amend it later when you can study the market dispassionately. Remember: it’s difficult to think objectively when you’ve got a losing trade, so stick to your rules as it helps to impose discipline and keep the emotion out of your trading.
10. Keep a trading diary and take notes on all your trades – the winners and the losers. Try to identify what worked on the good trades and what didn’t on the bad ones. It can be painful revisiting the failures, but often this is the only way to learn and improve.
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