Trading on the foreign currency exchange market can be incredibly lucrative. The Forex market is a truly global market, allowing you to trade currencies online from your computer at any time of the day or night.
When compared to the stock market, the Forex market has several distinct advantages. You don't have to factor in the trading costs for placing trades as you would with the stock market. The cost of your trade is factored into the spread between the buy price and the sell price. The Forex market also offers investors the highest level of liquidity of any financial market. It's estimated that approximately $4 trillion per day is traded on the Forex market.
Forex trading also offers you considerable advantages in terms of leverage. When you use your leverage wisely, it has the ability to significantly increase your gains. Of course, if used incorrectly there is also the risk that leverage may compound your gains.
Despite all the advantages, Forex trading requires a lot more than just following the crowd or the latest hot pick in currency pairings. It's important to take time to learn how the market works for your own purposes.
Learn the Ropes with a Demo Account
Many newer Forex traders will jump directly into the market with a false sense of confidence. Rather than risk your own money while you're still learning the ropes, take advantage of a free demo account. Using a demo account familiarizes you with the trading platform. It also lets you see how currency pairings appear within your account and what actions to take when entering or exiting the market.
Develop a Trading Strategy
Every trader will develop a trading strategy that suits their needs. Some adopt day trading systems that allow them to enter and exit the market relatively quickly. Others prefer to develop longer term trading positions.
Regardless of the trading strategy you choose, always stick to your plan. Many new traders will close out winning trades too soon, which reduces your returns. Other traders sit on losing trades too long, refusing to cut their losses in the hopes the market might rebound and gain back some of those losses. Set your trading plan before you enter the market and then stick to it. Don't allow greed or fear to drive your trading decisions.
Choose Your Broker Carefully
Spend time checking Forex broker reviews and ask other traders if they can recommend a reliable broker. You may also want to check out what type of trading software different brokers offer. It's vitally important to choose a broker that suits your trading goals and aims.
If you're just starting out in the Forex market, set yourself a study period and stick to it. You might start out by using a mini account that allows you to trade with smaller amounts of capital initially. As your profits grow you can increase the size of your trades by reinvesting your profits, rather than depositing more funds into your own account.
Master One Currency Pairing
Lots of new traders spread their trades across a variety of currency pairings. They hope to snag some winning trades by spreading their risk. Yet currency prices can be affected by a myriad of things, each of which can lend to the volatility of the market. Choose a currency pairing you're comfortable with and focus your attention on that. By sticking to the most liquid currencies and following the pricing movements closely, you're in a much better position to recognize emerging trends as they occur.
Use Your Stop Loss Wisely
The Forex market can be notoriously volatile, which can see prices plummet without warning. If you remember to set a Stop Loss, you protect yourself against any losses getting out of hand if the market turns against you. One of the biggest reasons people stop trading on the foreign currency exchange market is due to heavy losses. Unfortunately, the single largest cause of losses on the Forex market is forgetting to use a Stop Loss.
Adjust Your Stop Loss When Necessary
If you're in a situation where the market is going your way and your trades are showing a profit, you can most your Stop Loss forward. If the market has trended upwards far enough you can move it forward to your entry point, which secures your investment. Any money you make on that trade beyond that point is pure profit, but you also protect yourself from allowing your position to move back to a loss.
Use Leverage Carefully
The leverage ratio you choose for your trades can dictate the level of profit or loss you achieve on each trade. However, a lower leverage ratio is a much safer trading strategy overall. If you leverage your trades too highly in the hopes of maximizing your profits, you could also be compounding your losses if the market moves against you.
Automate Your Trades
One of the primary reasons so many Forex traders lose money is that they let their emotions control their trades. You can remove the risk by automating as much of your trading activity as possible. Automating your Forex trading does not mean go out and buy expensive Forex robots or other trading software. It means set your stop losses and use your trading platform to pre-determine your timing to exit the market.
You don't have to be a mathematical whiz to generate profits on the Forex market. However, you do need to spend time learning the intricacies of the market if you hope to succeed. Learn as much as you can about your trading activities and seek ways to improve your strategies. If you're patient during the learning process, you should find it becomes much easier to pick winning trades on the Forex market as you progress.
Disclaimer: Forex trading involves significant risk of loss and is not suitable for all investors. All trading involves risk and losses can exceed deposits.