Forex can be a tough nut to crack for new and veteran traders alike. The potential for fiscal misfortune, however, is due mostly to blunders made by unorganized and impulsive traders rushing in headlong with dollar signs in their eyes. In this article we’ll look at 7 Forex trading tips that can help newcomers to find their feet and veterans to examine the nuances of the market.
1. Manage & Define Risk Tolerance
Trading requires a certain level of discipline. A successful trader has to know their own tendencies and tolerances, including their capacity to deal with various levels of risk. Once you understand some of your own basic qualities as a trader and have acquired a realistic picture of your assets and capabilities you can set about creating appropriate initial investments of capital.
2. Goal-Oriented Trading
To ensure responsible trading a trader needs a set of ground rules to govern their behavior. Remember that a trader is a mathematician, a risk-assessment professional, and not a gambler.
Be mindful, when outlining your goals, to include safeguards like time allotments and definitions for failure and success. It may seem a bluntly obvious statement, but many traders don’t know when they’re failing simply because they never sat down to give the term a personal definition in terms of their own resources and goals. Know your resources, know your aims.
3. Finding the Right Broker
The right (or wrong) broker can define your entire experience with forex trading. There are questions you should ask yourself and your potential brokers when seeking an appropriate partner for your trading venture.
First you need to know if the broker’s goals for their clients match your goals as a trader. Compatible levels of ambition are essential for a good working relationship between broker and trader, and factors like your comfort level with broker software and the level of customer support provided are also crucial.
4. Leverage Ratios & the Different Account Types Available
Choosing the right package with forex trading is a natural extension of finding the right broker. You want the services you purchase to be the ones that best advance your goals.
It may seem initially that the array of available options is confusing, but with a basic understanding of leverage (generally, lower is better) you can find the right account options. Traders with a working knowledge of basic trading logic and of leverage in particular should feel comfortable with most standard options.
Beginners, however, should strongly consider trial periods with mini or micro accounts in order to get their feet wet. With small sums the risk of high proportional losses is consequently great, which helps to teach fiscally responsible thought.
5. Grow Accounts Organically
Trading forex is best done with a small initial investment and low leverage. A low-leverage account makes for low trader stress and a non-vital level of financial investment in the trading account.
Growing an account organically from a reasonable seed is the best way to ensure that you as a trader don’t get in over your head. If you do well then the account will grow naturally, and if you don’t do well then pouring more money into the account is irresponsible and counterproductive.
6. Avoid Areas of Ignorance
If you don’t know the harbor, don’t sail in it. Traders getting out of their depth with unfamiliar systems, software, and markets is probably the foremost cause of failure.
Though it might sound hopelessly general, try to take note of when you don’t know what you’re doing. When you’re unsure about what your actions mean, don’t take action. Always assess your information, its quality and provenance, and avoid acting on rumor no matter how tempting individual pieces of hearsay might seem. Assessing the best and worst-case scenarios that might result from any given trade is also a good rule of thumb.
7. Don’t Give in to Sunk-Cost Thinking
Perhaps the most vital tip for aspiring forex traders is a strong understanding of the sunk-cost fallacy, a common mental misstep made by investors and traders. When a car breaks down car-owners tend to fix it rather than replace it, reasoning that they’ve already invested capital in it and thus must “protect” their investment.
When a car keeps breaking down, though, and the cost grows to exceed the cost of an entirely new car, you’ve entered sunk-cost territory. This is 101 stuff for anyone who’s gotten their feet wet in economics, but it’s a surprisingly common mistake for new traders. Don’t keep trading when you’re hemorrhaging money, because the situation won’t improve.