The forex market – also known as the currency market – is the biggest and most fast-paced market in the world. The steady growth of the number of retail traders is attributed to the accessibility provided by the internet and the potential for getting big profits within days.
Although massive profits are definitely possible when you trade currencies, there’s a big chance that you may lose some or all your capital too. This is why you should take time to study how forex trading works.
Trading, by nature, is a risky venture, after all. If you’re interested in starting trading as soon as possible, here are eight things you need to know about forex.
- You trade currencies in pairs
You never trade one currency alone, or else, you will not be able to measure its value. If you can’t measure its value, you won’t know if it changes in value at all. You can only trade currencies in pairs. For example, when you trade EURUSD, you actually trade Euro and you measure its value in terms of U.S. Dollars.
- Forex trading is leveraged, most of the time
When you trade currencies, you gain money when your trade is right and lose money when it’s wrong. Sometimes, your trades can be leveraged so that you can increase the amount of money you can gain (and lose). This is done by exposing more of your capital to risk. This way, you can gain more money when you’re right, but lose more money when you’re wrong. Some high-risk traders are more comfortable with leverage.
- You must never trade without a stop loss
Currency prices fluctuate. One moment, your trade is racking you profits. Some time after, the price movement reverses and gives you a floating loss. There’s a chance that the price will go your way again but what if it doesn’t and your floating loss increases. You could’ve stopped the trade before everything blew up. Stop losses are made so that your trades will close immediately at a specific price so that you can limit the amount of money you’ll lose.
- Scalping will wipe out your account sooner than you think.
Scalping is executing trades that last for seconds to minutes at a high frequency. Scalping will not be as profitable as you think for two main reasons:
- Humans are hardwired to cut losses short when they’re wrong and prolong profits when they’re right. If both conditions are likely to happen at the same probability rate, scalp trades will almost always end with a loss cut short.
- When you enter a trade, you have to pay the spread, which is the service charge of your broker. This means you actually lose money for having the opportunity to gain money. Shorter trades mean less chance to break even.
- Swing trading and position trading are the most popular and profitable trading styles
Swing trading and position trading are trading styles that take advantage of massive price reversals and strong price trends. Currency prices don’t just go up and down in full swings within a day. A currency follows a trend when there’s growth or decline in its country’s economy while reversals happen when a massive economic news appears suddenly. Retail traders use swing trading more while financial institutions prefer position trading. These are also the least stressful types of trading.
- You must trade only the money you can afford to lose.
A wise trader won’t use her life savings for forex trading. Knowing that you hinged your financial security on a risky venture will just mess with your emotions as a trader. Emotion is the number one career-killer in forex trading. Only trade money you won’t cry over.
- There is no secret strategy that will guarantee you profits all the time
You’ll probably encounter forex peddlers who will sell you forex robots and signals that will guarantee you profits. These products are usually fake. There is no way to guarantee profitable trades. Every trader will lose once in a while, due to the unpredictable nature of the market. No one can tell what the market will do, but you can put yourself in a position where you can gain the most amount of money for the least amount of possible loss. Forex can be a good part of your investment strategy and it is best if you strategize forex trading along with other investment vehicles.
- Research shows that women trade better than men
Women are known to be emotional, but women’s performance in trading doesn’t imply this at all. Studies show that women tend to be more controlled, disciplined, and compliant to rules when they are trading. Control, discipline, and compliance to rules are the foundations of healthy and profitable forex trading.
These are just some of the things you need to know when trading currencies. Forex is can be a great venture for anyone with high risk tolerance. Remember to study it extensively before diving into this field.
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