Are you interested in trading currencies but don’t know where to start? Don’t worry, you are not alone. Thousands of people are entering the forex market every single day. The market is massive, and it can be tricky to navigate when you’re a beginner. That’s why I’m writing this post – so that I can help guide you through and give you some helpful tips on how to start trading Forex markets.
Looking at the number of people who have turned themselves rich through Forex Trading, it seems worth giving a try. But still, there must be some real reasons, if most of the people (95% to be precise), lose in Forex. Whether you are just starting with it, or are experienced with Forex, it’s the best idea to keep yourself updated with the underlying market conditions.
The rest of this post will contain information about what exactly forex trading is. We will discuss some general information and also try to dig some dirty little secrets on how forex markets work and how to belong to the winning 5%.
Getting started with Forex
Forex trading is a market highly accessible, much unlike any other Financial markets. There are fewer and less substantial barriers to entry for traders looking to get started trading forex, so this form of trading appeals to new traders even more than nearly any other.
First, I’m going to tell you a little bit about how Forex markets and currencies work. Then we’ll talk about how to start trading them in a correct way.
The Forex market consists of multiple currencies from different countries. This is a global market where traders can buy and sell different currencies, generally known as currency pairs. The most popular form of currency trading is the exchanging of foreign currencies across borders(“spot trading”). Another form of forex trading involves buying futures contracts (or options on futures contracts) that have been traded by the International Monetary Fund (IMF).
There are some popular currency pairs for foreign exchange trading, while some others are not that popular. You will learn about these pairs later on. For now though, let’s talk about some of the risks associated with Forex trading. Like most markets out there, forex is not a 100% safe place to invest and trade. There are some things to watch out if you want to start trading in this market.
- The first thing you need to be aware of is that Forex is unregulated. There are no specific governing bodies in place to monitor and regulate the trading on the market. Thus, Forex traders have more freedom when it comes to doing what they want. (for example, trading when they want and how much money it will cost).
- There are no laws in place for Forex traders that protect them from losing money. While this may sound like a bad thing, it actually allows forex traders more freedom than other financial markets. If you are an experienced and confident trader, there is nothing stopping you from partaking in forex trading.
Risk and Reward in Forex
The major risk that a lot of people fail to realize is that there is no guarantee that banks will cover your losses in the event of a currency trade gone bad. This means that if you choose to invest in a particular currency, there is no guarantee that the money you put down will be protected, even if your investment ends up going south.
Of course, these are just some of the major risks that people fail to realize when they venture into Forex. There are other things you will want to be aware about Forex trading, to discuss later in this post.
Ok, so now you know what forex trading is and the risks involved with it. As a beginner, you should understand that trading forex will involve some risk. However, if you take your time and learn the technicalities correctly, you won’t be concerned about the risk as much.
The other important thing to realize before we get into how to start learning about FOREX trading is that there will be a lot of reward involved as well. Forex is a very profitable market to trade in for those willing to put in the time and effort.
It’s just like any other market out there. You have your long term investors and your short term investors. You have your medium term traders that are somewhere in between these two ends of the spectrum. Regardless of the category you fall into, you need to know that you will not make money on every single trade you make when it comes to forex trading. This is because forex trading has high volatility. And therefore, there is a lot more risk involved with it than with other markets out there – including the stock market.
This means that while Forex trading can be highly rewarding, you also need to be prepared for losing some money on some trades. The only way you can make a profit at forex is by letting some of your investments go. That’s just a fact of the game and something that most people have trouble understanding when they first start out in the world of Forex. They don’t realize that even though there is a lot of money to be made in forex, it takes time and experience before you can actually make it big in this market.
“Risk to Reward ratio” in Forex
Now that you have a better understanding of how Forex markets work and what the risks associated with trading in the markets are, let’s talk about one of the most important topics to cover when it comes to learning about Forex trading. This topic is risk-to-reward.
More about “Risk to Reward ratio” in Forex
When it comes to trading foreign currency pairs, the Risk to Reward Ratio is one of the most important things you need to focus on. Most people like a bigger Risk to Reward Ratio, such as 2:1 or 3:1. However, the reality is that it shouldn’t exceed 1:1.5. In forex, which is a risky market, it’s best to play as safe as possible.
Money Management in Forex
When you first start out trading foreign currency pairs, you will want to make sure you take all the precautions that you can in order to avoid losing money. One of the most important things that you need to look into when it comes to this is money management.
You need to set a limit on how much money you can trade with. You should never risk more than 5% of your overall account on any single trade. If something goes wrong, you will not lose your entire trading portfolio.
For most people though, it’s best to set up limits that are much more conservative. Many people choose to only risk 0.2% on any single trade in Forex markets. This means that if you are risking $1500 on a single trade, then the most money you could lose is around $30. This is much better and safer than risking more money on any single trade.
As long as you can tolerate more risk on trades, it’s a good idea to have a risk-to-reward ratio of at least 3:1. However, you will also need to make sure your overall investment isn’t too high. You don’t want to risk all your funds on any single trade in the Forex market when it’s such a volatile market.
You Might like: Best Forex currency Pairs to trade
How Much Do I Need To Start with Forex Trading?
In terms of capital, the high levels of leverage available to forex traders mean that you only need a small amount to get started, and depending on the level of returns you’re after, your investment in forex could be significantly less than what you’d need to make money trading other markets and instruments.
Forex traders typically trade with leverage as high as 500:1. This means that you, the new trader, can trade with proportionally larger amounts of capital than in other markets and be able to place trades on a larger scale with less capital than would otherwise be needed.
Of course this also means that if you’re wrong about something, and as a result lose money on your trade, then the amount of money lost is proportionately greater too. This high degree of leverage should be kept in mind when beginning trading since it can both help and hinder your progress as a trader.
So how much do you need to trade forex? The short answer is not very much at all. It’s true that even with such great leverage you’re going to need to make sure that your trading strategy is based on the correct fundamentals, but if you can do this then the amount of capital you need for trading forex is likely to be very small indeed.
The key is to ensure you’re comfortable with the amount you have available to put on a specific trade, knowing all the time too that this amount will be inversely proportionate to the chances of any given trade winning or losing. Talking about the exact numbers, it’s best to start with 1000$, regardless of what the “Free Gurus” teach you.
Other things to consider about forex market
When starting out with forex trading, it’s easy for new traders start with very few resources and make their way up from there . Forex traders tend to be young, and trading is an exciting experience for this reason. This means that new traders often start out with little but their enthusiasm for trading, and where it’s possible for them to do so this will be supplemented with some small amount of capital.
Another thing you should know about forex trading is that it’s easy to get started in this particular arena in a way you couldn’t in other markets and instruments. When you first take the plunge into Forex trading, your main concern may well be the choice of broker that you choose as a place of business.
The good news for Forex traders is that there are literally hundreds of brokers from which to choose, and this is one of the things that makes this market so accessible. Once you’ve chosen a broker, you can then deposit whatever funds you have available on your account and start placing trades.
The principle is simple: you take a position in a currency at a certain price with the expectation that it will rise against another currency or use your own country’s currency in place of its own. If it does move in the direction you expect it will, then you know that your trade has been successful and as such can take advantage of the leverage offered by your broker to place further trades based on similar principles.
Of course, there is the possibility that it doesn’t move in the direction you expect it to and this can result in a loss for you. In forex, there are all kinds of trades based on different strategies, so you have to make sure you choose one that fits your trading strategy effectively. If you find that positions are just not working out for you then, then perhaps it’s time to change brokers.
Why most people lose?
The main reasons why traders lose are:
- Lack of patience: Forex trading requires you to be patient, studies show that traders who consistently trade the same strategy over a long period are more likely to succeed in the long term than those who constantly keep on switching their strategies. It’s important while trading not to get emotional; trade what do you see in charts not what you think.
- Early entries: It is better to wait for confirmation that prices have turned into a new direction before entering a position as it is highly likely that you will be wrong and end up losing money instead of making any profits.
- Trying to beat the market trends: Most traders end up bad losers because they try to trade against the market trend. Traders often think that they can make more returns by trying to behave contrary to what the market is doing. This results in many losing trades and in the long term, traders may end up with a loss of 50% or even more.
- Not following their trading plan: Trading plans are important for all kinds of traders whether Short Term or Long Term, it helps you manage your money and has a bigger impact on your overall success than any other kind of planning out there.
- No trading plan: Making a plan to trade is important while you are building a trading account as it helps you manage your money in the long run. You will be able to stick to your plan and develop your trading strategy in the long run.
- No study before trading: You should always know about what you are going for before entering the market. You should understand the market, understand how you will use funds, understand about the position size etc.
- Trying to beat the system: One of the most common reasons why traders lose money is because they try to beat the system. The market is a very large and complex one, different people have different strategies, which makes it difficult for everyone to aim for the top of the market at all times.
- Trading emotions: A trader should always remain calm and have positive emotions while in trading. When you are in trade, it is crucial that you do not let your emotions take over and ruin your trading results. If you trade with a strong emotional attitude then you may lose more than what good trading results can give you.
- It’s about luck: The final most common reason why traders lose money is because they believe that it is all about luck and nothing else, and hence gamble all their money at once.
- Belief that no trade should be a losing trade: You have to understand that losses are a part of your trading journey. Most people just can not take the loss and make poorer and poorer decisions as the result of a single loss. (Just like a domino effect, or “tilt”, as they call in gambling)
If there was only one secret about Forex trading, what would it be?
The single most important factor in Forex trading is: Leverage
Leverage is a very powerful tool that traders can use to their advantage. However, this doesn’t mean you should use leverage if you’re not adept at using it correctly.
“What makes leverage so powerful is its ability to open the doors for traders to earn competitive returns while at the same time limiting the risks they take with their trades. Leverage comes in many forms and both beginners and advanced Forex traders should understand how it works before they customize their strategies,” says Daniel Ferreira, Managing Director of eToro’s Trading Solutions. “Many know about the importance of risk management, but not many know about the importance of risk control. When you combine the two, you have a potent formula for making winning trades.”
Leverage can be thought of as borrowing money in order to trade. The concept of leverage refers to an investment strategy that utilizes borrowed money, specifically borrowing money, to increase the return on an investment. Leverage may also refer to the amount of debt a company uses to finance assets.
If you train yourself to use the best leverage in each market condition, you will get rich with Forex.
How is Forex market different than Stocks?
- Up and down occurs more in Forex: Everything that goes up comes down, and this is applied more in the Forex market than anything else.
- Orders can be entered at any time: You can place a trade anytime, meaning there are no set time periods for you to wait for the market to open before placing an order.
- It is not as centralized as Stock trading: When you trade stocks you are dealing with some company and sometimes you can be dealing with the CEO of that company and talking to him over phone or by e-mail. In Forex, on the other hand, there is no person who controls all the trades happening in the markets, but it is controlled by middle men called broker companies with whom most traders deal with. Some brokers have a good reputation and many traders do trust and believe in them, but the problem is not all the brokers and some of them have incurred losses.
- Price movement is faster in Forex: For example, while trading a stock you might see that the stock is generally trading at $15. If a trader buys 1000 shares then in one day it can increase to $16, 10% higher than previous price. However, after one month the stock will go down to $6 and next year it will go down to $5. In the Forex market this doesn’t happen as prices move about more quickly than in Stocks and hence you have to be fast to enter exit positions when prices are high or low.
- Leverage: Forex Brokers allow leverage as high as 1:1000. This is just impossible with stocks, where the maximum leverage is often 1:5.
Is forex a game of skill or a game of luck?
There are a lot of people out there who believe that trading forex is all a matter of luck. They simply don’t understand how the markets work and they don’t think they can make money in this market. The truth though is that while luck plays a role in forex, it doesn’t always play a good role.
Are you one of these people? When it comes to FOREX trading, you must also know how to trade correctly if you want to win money. For that, you must educate yourself on the subject and will not just take anyone’s word for it.
Forex is not gambling, unless you make it
When people first start out in the world of FOREX trading, they think that trading is a game of luck. You see, this is because they don’t realize that there are formulas and strategies you can use to help you make money in the Forex market.
So yes, it’s a game of skill if you want it to be. You can choose to trade FOREX for fun or for profit, depending on how well informed you are about the subject and how much time and effort you are willing to devote to making money. That is definitely something that I would recommend doing as well if you think that’s what your personality would be able to handle better.
But, it cannot be overlooked that some people actually gamble in name of “trading forex”. This is a big mistake that most people make in the world of FOREX. You see, when you gamble with money on this market, you automatically take on a lot more risk than most people would when it comes to trading stocks.
To make money in the Forex market, simply understand how the market works and how best to trade it. What’s important is that you have a plan for trading that fits your personality and will help you make money in the markets.
And even more important than to have patience and to stick with your plan, is to look at the other traders: What do they have in common? Because, 95% is not a joke. If that many people lose, there is really something in the Forex market that is probably out of the range of your current thought process. The main goal should be to filter out the information you have been fed, specially in YouTube.