Forex Trading: A Top Ten List of Things to Know When You're Ready to Start
Apart from the recent surge, returns in the stock market over the past twelve months have been abysmal, leading many investors to consider other investment vehicles as a greener pasture for their hoped-for gains.
As a guideline for aspiring traders in currencies, the following ten items should be foremost in the mind of every successful trader in forex:
1) Knowledge: The first of three key factors, extensive knowledge must be accumulated before ever risking one dollar of real money in the market. Read books, websites, and articles on the topic to familiarize yourself with terms, and then enroll in a class. Amateurs need mentors to learn the basics of the market, fundamental and technical analysis, risk management techniques, fraud prevention, broker selection, and trading strategies.
2) Experience: Your best friend will be your forex demo account. Your broker with provide "virtual" cash to use with real time quotes to practice, practice, and practice some more. This experience is invaluable to test your trading plan, learn the nuances of your forex trading software, and gain confidence and consistency in acting decisively under stressful conditions.
3) Psychology: The third factor, your ability to control your emotions, is imperative. You must treat forex trading like a business, making decisions based on rules, not emotions. Practicing the steps in your trading plan until they become habitual is the accepted way for achieving this objective. [You cannot be emotional when holding onto your investments. Find out if your're showing one of the 5 Signs Your Emotions Are Taking Control of Your Investing.]
4) Trading Plan: Your mentor will guide you in designing a personalized plan. The steps will include assessing risk/reward before a trade is made, using technical indicators to optimize entry and exit points, and employing risk management tools to guard against adverse movements in the market.
5) Risk/Reward Assessment: Observe your chosen currency pair for volatility using an "Average True Range" indicator over 20 trading periods. Apply a percent to this figure and apply that to your intended lot size. This calculated amount is your potential loss in the trade and should not exceed 3% of your capital position. Your reward target should be twice this amount.
6) Technical Indicators: You will live and die by these technical signal generators. Choose ones that you feel confident in, and remember that leading momentum oscillators usually require trend confirmation from another source. No indicator is perfect, but over time they can give you an edge where none exists. Experience aids in their interpretation.
7) Risk Management Tools: Never enter a position without also entering a stop-loss order at the risk level determined in Step #5. Remember that there is no that stops will be filled or executed. If your profit target is reached, enter a trailing stop-loss order to lock in your paper gain.
8) Leverage: Leverage is like "trading with margin" with stocks. Use with caution since losses, as well as gains, can be multiplied, meaning higher risk. Remember that a forex trader on average has three losing trades for every winning one. You must cut your losers, and allow your winners to run.
9) Backtesting: Most successful traders swear that testing their various trading plans with historical trade data and software designed for this purpose has paved the way for their success. Just remember that past performance is not the same as the future one. Perhaps, in-depth knowledge of the nuances of the market and their disciplined approach was gained from backtesting efforts, another form of experience.
10) Timeframes: Find a trading timeframe that suits your personality, either daily, weekly or longer. Trends can often be verified over multiple timeframes, and remember that, "The trend is my friend!"
Capital allocated for forex trading should never be money that you cannot live without, but should be substantial enough to allow for losing periods in anticipation of those times when the market moves in your favor. Impatience and inexperience are your enemies, consistency is your objective. Never enter the forex market without risk management tools at your side.