Top 10 Things That Beginner Forex Traders Should Know

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It is a known fact that the stock market has not been giving the best of returns over the last one year in spite of the surge that happened recently. Many investors have been on the lookout for other investment options to make their money grow.

Forex trading has been growing in popularity as an investment opportunity lately all over the world. However, this is not recommended for those that are frail-hearted as it involves frequent handling of high-risk situations and these need to be overcome only with specialized training, diligent practice and detailed preparation for a novice trader. Forex trading thus may not be a vocation or business opportunity that is suited for everyone. Given below are ten points that can be kept in mind by aspiring forex traders to become successful in their endeavor.

understanding what is forex trading

Point #1: Gain sufficient knowledge

This is the most important among the key factors. The novice trader should be keen on accumulating as much knowledge before starting to trade with actual funds in the market. Familiarizing oneself with the jargon by reading books on the subject is of extreme importance. The trader can involve in training or class of some kind if required. Newcomers can choose mentors or experts who they can learn from. Trading tools such as fundamental and technical analysis, techniques for managing risks, selection of suitable broker, trading strategies, etc., should all be looked into in detail.

Point #2: Practice diligently

It is important that any beginner trader chooses a broker that offers a demo account where they can practice trades with virtual money. They can use this cash to practice with real time quotes and this would bring about more knowledge and confidence. The traders can put their trading plan to test and learn the finer points. They can also build up their consistency by repeatedly taking the right decisions under stressful situations.

Point #3: Emotion control is vital

It is compulsory for the beginner traders to control their emotions to achieve success in forex trading. Decisions should always be based on set rules and not on one’s emotions. The trading plan that is set by the forex trader should be followed every time and there should be no diversion any time for the best results. Following the trading pain that is laid out eventually becomes a habit. Forex trading should be treated like a business for the best results.

Point #4: Start only after preparing a trading plan

If you are guided by an expert or mentor, prepare a trading plan with advice from them. The trading plan should clearly list your financial goals, the time when you want to achieve them, the steps you are going to use to assess the risk associated with a trade, the optimization methods of entry and exit points, the technical indicators and charts that are to be used in times that decisions have to be taken, tools to manage risks that occur due to adverse market conditions, weekly and daily charts and specific time frames.

Point #5: Assess your Risk/Reward ratio appropriately

Once you have chosen a currency pair to trade with, determine volatility by using an ‘Average True Range’ indicator for about the time spanning 20 trading periods. Get the percentage value and apply it to the lot that you have intended to trade with. The amount that you have calculated is the potential loss that you can incur in your trade. It is recommended that this amount should not exceed 3 percent of your capital outlay. The reward target that the beginner trader should keep in mind is always twice this amount.

Point #6: The beginner should practice using the appropriate technical indicators

It is important that the beginner forex trader should choose the right technical indicators to execute the trades profitably. It is recommended that the traders should choose an indicator that they are most confident to work with. None of the indicators can be called as perfect. However, consistent use improves the confidence of the traders and gives them the edge. Experience helps the traders to use the indicators to interpret market conditions in a better fashion so that it works to their advantage.

Point #7: Do not fail to use risk management tools

Once the trader has calculated the potential loss that can occur as indicated in Point #5, any trade position is to be assumed only after entering a stop-loss order. In case the trader expects to reach the profit target a trailing stop-loss order has to be entered to lock in the gain. It is also vital to keep in mind that stops will either be executed or filled.

Point #8: The traders should learn to use the leverage facility that is on offer with caution when trading. It should be understood that higher the leverage, there are higher chances of gain and higher potential for loss as well. According to statistics, it has been observed that there exist three losing trades for every trade that the trader wins. It is recommended that the trader tries to cut down on the potential losing trades and increase chances of the winning trades.

Point #9: Backtesting with older data pays

Testing the traders’ plans with historical data and using the software platform yields results that add to the experience of the traders. It is also required for the traders to keep in mind that the past performance will never be the same as the future performance. However, backtesting can teach them how to make the best of certain market conditions that have happened in the past and are likely to occur in the future.

Point #10: Choose the right timeframes

Traders should choose to view the market through appropriate timeframes that will help them to enter or exit a trade profitably. They are free to view daily/weekly/periodical charts that give them the best results. The charts should be synced properly and multiple timeframes are to be viewed to interpret the trend correctly.

Final thought

As a closing thought, it is important that traders do not invest living money for trading forex. The money to be invested as capital outlay should be big enough to see the trader through the initial losses that are bound to occur when learning to place the trades. The most important objective is to be consistent during the entire endeavor.

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