The average daily trading volume of the global foreign exchange market exceeds US$5 trillion, making it the largest financial market in the world. Its popularity attracts traders of all levels, from novices just learning about the financial markets, to seasoned professionals. Because trading the forex market is so easy - 24 hours a day, with high leverage and relatively low costs - it's also very easy to lose money. Here are 10 ways traders can avoid losing money in a competitive market.
1. Do your homework - live and learn
Just because the foreign exchange market is easy to enter, doesn't mean it's exempt from due diligence. Learning is the key to a trader's success in the market. While most learning comes from real trading and experience, traders should learn as much as possible about the market, including the geopolitical and economic factors that affect a trader's currency of choice. Homework is an ongoing effort as traders need to be prepared to adapt to changing market conditions, regulations and global events. Part of this research process is developing a trading plan - a systematic approach to screening and evaluating investments, determining the current or level of risk that should be taken, and establishing short-term and long-term investment objectives.
2. Take the time to find a reputable broker
There is far less regulation in this industry than other markets, so it is possible to end up dealing with a disreputable broker. Because of concerns about the security of deposits and the general integrity of brokers, traders should only open accounts with firms that are members of the National Futures Association and are registered with the Commodity Futures Trading Commission as futures commission merchants. Every country other than the US has its own regulatory body through which legitimate brokers should register.
Traders should also research each broker's account offerings, including leverage levels, commissions and spreads, initial deposits, and account deposit and withdrawal policies. A good customer service representative should have all of this information and be able to answer any questions about the company's services and policies.
3. Use a practice account
Almost all trading platforms have practice accounts, sometimes called demo or demo accounts. These accounts allow traders to practice trading without depositing funds. Perhaps the most important benefit of practice accounts is that they allow traders to become proficient in order entry techniques.
Nothing hurts a trading account (and a trader's confidence) more than hitting the wrong button when opening and closing a position. For example, it is not uncommon for novice traders to accidentally add to a losing position instead of closing it. Multiple wrong order entries can result in unprotected large loss trades. In addition to the catastrophic economic impact, this situation can be extremely stressful. Practice makes perfect: Experience entering orders before committing real money.
4. Make sure the diagram is clear
Once a trader has opened an account, it may be tempting to take advantage of all the technical analysis tools a trading platform has to offer. While many of these indicators are great for investing in the market, it's important to remember to keep analytical techniques to a minimum in order to make them work. Using multiple indicators of the same type - for example two volatility indicators or two oscillators - may become redundant and may even give opposite signals. This should be avoided.
Any analytical technique that is not regularly used to improve trading performance should be removed from the chart. In addition to the tools applied to the diagram, pay attention to the overall appearance of the workspace. The chosen color, font and type of price line (line, candlestick, range bar, etc.) should create a chart that is easy to read and interpret, allowing traders to more effectively respond to changing market conditions.
5. Protect trading account
While Forex trading is very focused on making money, it is important to learn how to avoid losses. Proper money management skills are an important part of successful trading. Many experienced traders will agree that one can enter a position at any price and make money, what matters is how one exits.
Part of it is knowing when to take a loss and move on. Always using a protective stop loss (a strategy in which a stop loss or limit order is used to protect existing profits, or prevent further losses), is an effective way to ensure that losses remain at a reasonable level. Traders can also consider setting a maximum daily loss amount, closing all positions after exceeding, and not starting a new transaction until the next trading day. While traders should plan to limit losses, it is just as important to protect profits. Money management techniques, such as utilizing a trailing stop (a stop loss order that is placed at a defined percentage outside of a security's current market price), help preserve profitable trades while giving trades room to grow.
6. Invest a small amount of money when starting real trading
Once a trader has done their homework, invested time in a practice account, and has a trading plan in place, it may be time to start real trading—that is, start trading with real money. No amount of practice trading can fully simulate real trading. Therefore, it is crucial to invest a small amount of capital when starting live trading.
Factors such as sentiment and slippage (the difference between the expected price of a trade and the actual price at which it is executed) can only be fully understood and taken into account when actually trading. Furthermore, a trading plan that performs well in backtest results or practice trading may fail miserably when actually applied to real trading. Starting with small amounts allows traders to assess trading plans and emotions, and gain more hands-on experience executing accurate orders—without risking the entirety of their trading account in the process.
7. Reasonable use of leverage
Forex trading is unique in the level of leverage available to participants. One reason the forex market is so attractive is the opportunity for traders to realize potentially high profits with very little investment (sometimes as little as $50). Leverage does offer growth potential if used correctly, but leverage can also easily magnify losses. Traders can control the use of leverage based on the position size of the account balance. For example, if a trader has $10,000 in the account, creating a $100,000 position (1 standard lot) would require the use of 10:1 leverage. While larger positions can be established if a trader uses maximum leverage, smaller positions will limit risk.
8. Keep records
A trading journal is an effective way to learn from your forex trading successes and failures. Keeping a record of trading activity, including dates, instruments, profit and loss, and perhaps most importantly, the trader's own performance and emotions, is very beneficial to being a successful trader. When reviewed on a regular basis, the transaction journal provides vital feedback that enables learning. Einstein once said, “Insanity is doing the same thing over and over again and expecting different results.” Without a trading journal and good records, traders are likely to keep making the same mistakes that make them profitable The chances of successful traders are minimized.
9. Understand the tax implications and treatment
It is important to understand the tax implications and tax treatment of forex trading activities so that you can be prepared when paying taxes. Consulting a qualified accountant or tax professional can help avoid surprises and can also help people take advantage of various tax laws such as mark-to-market (recording the value of an asset to reflect its current market level). Because tax laws change frequently, it is prudent to develop a relationship with a trusted professional who can provide guidance and manage all tax-related matters.
10. Treat trading as a business
It is necessary to treat trading as a business and remember that in the short term individual profits and losses are not important, what matters is the performance of the trading business over a period of time. Therefore, traders should try to avoid being too emotional about profit and loss, and treat each day as a new day. Trading, like any business, entails costs, losses, taxes, risk and uncertainty. Also, just as small businesses rarely become overnight successes, so do most traders. Planning, setting realistic goals, staying organized, and learning from profits and losses will help ensure a long-term successful trader career.
in conclusion
The global foreign exchange market is attractive to many traders because of its low account requirements, 24/7 trading, and high leverage. Trading can be lucrative if you treat it like a business. To sum up, traders can avoid foreign exchange losses by:
fully prepare
Have the patience and discipline to study and research
Use sound money management techniques
Treat transactions as a business
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