Learn how to trade forex with the right mindset
The majority of investors want to learn how to trade forex because of the low barriers to entry and the exciting profit potential of leverage offered.
In the forex market, traders with small deposits have the same opportunities as large financial institutions and with the use of leverage, even a small account can realize big gains since it allows traders to command much larger positions.
It’s a level playing field and the vast amount of trading volume in the currency markets makes it nearly impossible for large investors to manipulate prices by selling or buying enormously high amounts.
That being said, while the market does provide a favorable environment to invest, it’s also carries a great deal of risk. Most beginner traders fixate on how to maximize their profit and fail to realize that large positions that promise high rewards usually come with higher risk exposure.
Focus on reducing risk
If you want to learn how to trade forex successfully, the most efficient way to achieve your goals or at least survive enough to be able to achieve them is by ensuring that you don’t trade more than you can afford to lose. This is true both for the initial amount you invest in your trading account as well as the amount you risk with every trade.
Smaller initial deposits don’t have a lot of flexibility in this respect, and if you play by the rules, it will take a considerable amount of time before you realize sizeable profits. However, a small deposit with proper position sizing can help you understand the fundamentals of risk management without the stress of trading with larger sums of money.
Use stop loss orders
A great method to eliminate market risk is by including stop loss and take profit orders along with all your positions. These parameters are instructions to close a trade as soon as your preferred profit is reached or as soon as you start sustaining losses that exceed your risk profile. Essentially, you select a price point at which your trade will be closed, and this will happen automatically without further input from you.
You can manually close your positions of course at any time without using an automated stop loss order, but you need to remember that the forex market is inherently volatile, and price fluctuations are sometimes too rapid for a trader to able to react in time. Your trade may be running in profit and then quickly turn to a loss if you aren’t fast enough to close the position before the market starts moving in the opposite direction. This is why stop losses are critical in your long-term survival and success in the forex market.
The main reason most traders end up eventually losing their money in the forex market is because of impatience. Some just want to make as much money as possible in a short amount of time which leads to risky traders and overtrading. Others may try to make up for a losing trade by immediately opening another without having a trading plan in place.
One of the best ways to not repeat these mistakes is by developing a trading plan and sticking to that plan of action no matter what.
Being consistent with your trading strategy will translate to more consistent results. If you are consistent in your trading method and it doesn’t work, it will become easier to identify what you need to change in order to improve your performance.
Of course, the markets aren’t consistent in their movements and as such, you need to consider that your trading strategy may not always be profitable. The same is true for badly performing strategies as you may find that they lend themselves better to different market conditions or other currency pairs.
Start with a demo account
A very sound piece of advice for beginners is to start with a demo trading account where you don’t need to deposit any money to trade forex.
A demo trading account gives you access to the trading platform, charts and live price feeds and it typically comes with a virtual balance of $50.000 which you can use to trade without the fear of losing any real money.
Experienced traders recommend that you keep trading on demo for quite a few months until you are familiar enough with the trading platform and how to effectively read a price chart. If you manage to become profitable consistently on a demo account, you can then proceed to make a deposit and trade on live servers with real money to test how your trading strategy performs.
Want to start your forex trading journey today? Open an account and trade on a demo or live account with CM Trading, an award-winning forex broker!