Forex trading is one of the great ways to make money online. Only Bitcoin and other cryptocurrencies seem to have seriously challenged forex trading for the top spot in the list of the most popular financial trading channels in 2017. There is still money to be made in forex, but this can only be the case when things are done properly. What follows is a little bit of insight into how to start trading forex the right way.
STOCK AND FOREX TRADING
How to Get Started
Forex trading is a highly technical activity, and it is something that can be done for life. Therefore, a well-structured approach to getting started in forex is required so that the journey can be a smooth one. Most of the problems encountered by retail forex traders can be traced to getting started the wrong way. When people are sent to the forex market using the wrong approach, there is no way that things will end well. A look at many of the forex courses that are on the internet today will show several things:
They contain a lot of incorrect information.
They do not contain the basics that every beginner trader must learn.
Too much focus is placed on forex strategies whilst other equally important aspects of forex trading are neglected.
They mostly assume that all forex traders are equal, and a one-size-fits-all approach is then used to prepare the learning materials.
It is therefore not surprising that 95% of retail traders lose money. However, there are the 5% of retail traders who make money from forex, and this is because they have adopted an approach that is time-tested; an approach which the institutional players use to make billions of dollars from the markets year in, year out.
In order to get started the right way in forex, there is really no need to re-invent the wheel. Simply adopt this approach which is used by institutional traders and successful retail traders.
1. Learning and Mentoring
The starting point of every venture is to try to understand as much as possible, what such a venture is and what it entails. In forex, this would lead to a study of the following:
What are the basic principles that rule the forex market?
Who are the market participants, and how do their activities affect the movement of currency pairs?
What makes specific currency pairs move?
What guides the thinking of the major market participants?
What news moves the markets?
An understanding of these basic concepts will form the foundation on which the core aspects of forex trading can be built. Once these foundational concepts have been studied, the trader can move on to studying the other aspects that form the core of forex trading.
Technical analysis: this will take the beginner on a study of tools used for trading, indicators, support and resistance, chart patterns, candlesticks, basics of chart construction, wave patterns, harmonics, etc.
Study of leverage, margin and money management. Forex is a highly leveraged activity, which means that traders are usually given a “loan” by the broker for every trade. This enables traders to take on larger positions than they would ordinarily have been able to. But just how much is too much, and how does this influence how much of a trader’s capital should be used in trades? The concept of money management is one which should be learnt thoroughly. Most losses in forex can be attributed to poor money management.
A study of how the news moves the markets (i.e. fundamental analysis) is then undertaken.
It is not enough for beginner traders to study these things on their own. They must join social networking groups run by professionals and seek for mentors. Institutional traders trade the markets in teams. That provides a structure whereby experienced veterans of the market can provide guidance to the younger ones to enable their progression. This is one reason why institutional traders (hedge funds, big banks and finance houses) can make and replicate their profits year after year. Retail traders should adopt the same model of learning and mentorship used by the institutional traders
2. Study the Platforms and Payment Systems.
A study of the forex trading platforms, payment channels (deposits and withdrawals) and other preliminaries should be conducted so that the best options are used.
3. Broker Selection
Forex brokers are the custodians of trading capital to be used by their clients, and are also providers of the trading platforms used to access the forex market. This makes the task of selecting a suitable forex broker a very important one. There is no such thing as the “best” forex broker as many internet articles on this subject would have traders believe. It is about the “most suitable”. There are basic requirements that every broker must fulfill (such as regulation and segregation of clients’ funds). But there are other things which must be considered on their own uniqueness of merit. For instance, what payment methods for deposits and withdrawals are offered? In this regard, what works in one country may not necessarily be the best option for a trader in another country. Some of these other nuances must be considered when choosing a forex broker.
Once you have done your learning, got a mentor, joined a trading group and studied the markets, you can go ahead to open an account with the broker you have selected, after which you can fund the account to start trading. As a rule, start small to understand how forex trading with real money works.
Who is it For?
Forex trading is not for everyone. There are people on this planet who are simply not wired to handle the seesaws that the forex market could bring. Such people are better off working their day jobs. But there are some kinds of people who can trade forex. Forex trading is therefore for the following:
You have money “you can afford to lose”. What does this mean? This means that you have money which is not essential for the provision of your basic survival needs of food, clothing, shelter as well as provision of household and family expenses such as school fees for the kids. If you have such spare money, you can trade forex with it.
You are willing to study the markets with patience, can take some losses along the way without dampening your morale, and ready to learn from the masters.
You are prepared to adopt the psychology needed to trade the markets.
You have no debts. Debts bring emotional pressure in trading. You do not need that.
What are the Pitfalls?
Forex brokers are mandated to put up a disclaimer that informs traders of the dangers of losing all their money in forex. It is even possible to lose more than what is in your account, causing the account to hit a negative balance. This is usually seen in times of excessive slippage when there are open positions that are hit by sharp contrarian price movements.
These disclaimers are not meant to scare you. They are meant to get you prepared for what you are about to get into so you can mitigate the risks involved. So what are the pitfalls that you are likely to face in trading forex?
Slippage: When the markets are volatile, it is possible that any trade orders you make will not be filled at market prices displayed on the platform, but at prices which will cause the trader to incur spread costs that are far more than should be the case. Slippage can also occur when the market opens with a gap against the trader’s position. There is also the possibility that a sudden and unexpected news event will swing the market against open positions so hard and so fast that the money in an active trade and even unused money in the account are wiped out. Slippages can be deadly. Watch out for them.
Trading the Spikes: Retail traders do not have the tools to trade the initial price spikes in news trades. More often than not, attempts to trade the spike will lead such positions to be caught out by retracements.
Advice for Readers
Forex is not a get-rich-quick scheme. There are no shortcuts. Even if you decide to participate in forex copy trading, there are techniques to be used in selecting the best performers. Robots are good, but they are not a substitute for human judgment. Learn forex just the way you would study to become a doctor or engineer. You must understand the basic principles to be able to move ahead in forex trading.
To learn more we recommend you get the invaluable Forex Strategies Guide for Day and Swing Traders available here. With this great resource you will be able to learn and implement strategies implemented by the best professional forex traders.