There are many horror stories related to Foreign Exchange Trading, where experienced traders also lose money and feel like nothing is working in their favor. If you ever face such Horror situations, you shall follow the below suggestions to avoid those nightmare Situations.
- Do not keep trading when you are in a losing Trend
- Make sure you set and follow Maximum Risk per Trade – 1% of your capital shall be the maximum loss you can afford.
- Do not be tempted to put all in and win all it back after you lose a good amount of your money.
- Avoid adding to your positions in a losing Trend with a belief that by increasing your position in a lodging trend, you can average out your acquiring price.
- Always keep a Stop-Loss to minimize the loss in case you need to sell for a loss.
- You already might have an understanding of the Portfolio Concept as part of Risk Management. Trade-in a group of currencies that are divergent.
- Do not trade based on Anticipation of News, rather than Trade based on the direction of the conversion rate changes once the news is out.
- Choose the right Broker for you – Take your time, follow standard guidelines while choosing your broker, and avoid Trading Scams by Brokers.
I do trading in Stock Markets regularly and in Commodities occasionally. I am also fascinated by Forex Trading and was looking at the Pros and Cons of this trading. I realized that a good understanding of the Basics of Foreign Exchange Trading helps to maximize your gains and minimize losing Situations. Unless we control the Losing situations, slowly it can lead to Trading Horrors leaving you nightmare situations. Below in this document, I am trying to put up a few basics that one needs to be very much aware of Forex Trading.
How Does Foreign Exchange Trading Work?
Until the 1990s, the global currency market was only open for institutions. Large banks, hedge funds, and businesses could buy and sell massive amounts of currencies. Now, advanced technologies allow an individual to trade in the same over-the-counter system. There is no physical center, and everything is done online.
Centuries ago, the currency exchange was something only travelers and merchants did. Now, the largest financial market is at your fingertips. Sophisticated apps and platforms give 24/7 access via a live trading account. But how exactly are profits made? Here is an overview of Forex opportunities in India.
Definition of Modern Trading
Today, Forex refers to a special type of investment trading. In essence, you buy low and sell high, like on the stock exchange. Here, any trend can be lucrative if you anticipate it. The biggest brokerage brands serve clients in many countries. They all connect to the same colossal market with a daily turnover reaching 6 trillion US dollars.
All currencies are valued against one another. For example, the rate for EUR/USD shows the price of 1 Euro in US dollars. The latter is the most commonly traded currency. Nothing beats the American dollar: it is the number one currency in the world and also its key reserve currency. Most international transactions are based on USD.
Currency rates are always changing. If you expect a rise, you buy more lots and capitalize on the price hike. If you expect depreciation, sell the currency while its value is high and buy back more lots for less. This seems like a straightforward way to make money. However, Forex is a risky undertaking, and beginners need ample training. So, why don’t all traders make money?
On average, one in three traders becomes a winner. Others wipe out their accounts due to recklessness, inexperience, or both. These people are likely to label Forex a scam. In reality, they simply lack the skills and mental toughness needed to succeed. Anyone can learn how to trade Forex but a few can apply this knowledge to practice.
The market is affected by a wide range of factors. Currencies gain or lose value due to interest rates, diplomatic tensions, trade deficits, etc. Beginners need time to comprehend the inner workings of the exchange. Reliable brokers like ForexTime underscore the importance of training and provide free educational resources.
Basics of Currency Rates
Every pair is classified as Major, Minor, or Exotic based on the economies it represents. These types offer different liquidity and volatility. The most liquid instruments are Major and Minors, which means they are the easiest to buy or sell. Exotics are linked to emerging economies (e.g., the Turkish Lira, the Thai baht, or the South African rand). They are usually paired with the USD, but liquidity is still limited.
A currency pair has two valid prices: Ask (for the buyer) and Bid (for the seller). The difference between them constitutes the ‘spread’ that is a source of revenue for some brokers. Spreads and movements are measured in ‘pips’.
Forex and Leverage
Many traders incur devastating losses due to reckless use of leverage. This arrangement is also known as trading on margin. The broker lends you funds, so you can open large trades with a modest deposit. For example, the 1:100 ratio means you can initiate a trade worth $10,000 when there is just $100 in your account. Sounds tempting, right?
Of course, there is a catch. High-volume traders may bring huge profits, but the risks are also magnified. A single poor decision can leave you empty-pocketed. Your entire deposit may be at stake. The dangers are therefore clear. Many rookies start trading with leverage, which is a fatal mistake.
The Market and Your Emotions
Trading psychology is not a trivial matter. A lot depends on your ability to cope with failure and avoid temptations. All too often, traders start chasing losses after a single bad trade. They hope to cover their losses quickly, but end up losing more.
During economic crises, many investors panic and short-sell what they have. This is a common behavior pattern. Still, it is hardly reasonable.
In Forex trading, mistakes are inevitable. It is impossible to have 100% profitable trades. What sets winners apart from losers is their ability to recover. After an error, they stop and analyze the cause. Every failure is an opportunity to learn and improve one’s strategy.
Positive emotions may also be harmful. Excitement may cloud our judgment just like fear. Quite often, we hear of companies whose stock was overpriced. The same happens on Forex: traders abandon their strategy because they think they’re on a winning streak. Failure is a likely result. Whatever happens, base your decisions on facts, not emotions.