Many new forex traders ask: How can I learn forex trading and make money with it? And the truth is, forex trading is difficult.
Let’s say you place a trade and a stop order with it to limit your losses. Your bet about the direction could be right, but due to random volatility, some of your trades will get closed by the stop you placed before the trend goes as you predicted.
On the other hand, if you don’t place a stop, you’re risking being wiped out. With leverage, only a small percentage move in currency’s price can wipe out your account.
So, what to do? First of all, you need to learn as much about forex as possible. Then, focus on just few currency pairs to understand their dynamics. There are different factors influencing currencies.
Australian Dollar, Canadian Dollar, Japanese Yen, or Turkish Lira are all influenced by their governments and central bank policies. All in addition to regional dynamics such as political events.
Once you learn much about the currencies, it’s time to test your strategies. See, successful forex traders have their own systems. When they set up their charts, they rely on specific technical indicators. One trader may rely mostly on Japanese Candlesticks, while the other will go for Ichimoku Clouds.
Most traders, no matter what their system, look at chart formations and points above which the currencies have trouble rising (resistance) or falling (support). Then, traders add their own few technical indicators, among dozens, to the charts. That’s their system.
There are many systems. Each trader should find out which one is the best for him or her. A good way to do so is by testing. But, you don’t need to do it with your own money. Many online forex brokers offer free demo accounts where you can test your strategies with virtual money-all before committing real funds.
Yet, trading with virtual money isn’t exactly the same as doing so with your own hard earned cash. There comes a time when you need to face the strong emotions which come with real money forex bets.
Yes, you will need to put your knowledge to the test and make real currency trades. What is advised is that you do so on a small scale at first-using micro and mini lots rather than standard lots. This way, your risks are smaller.
Another important factor to look at is the risk/reward ratio. Your potential reward on each trade should exceed the potential loss (risk). If the risk/reward ratio is 3-1 in your favor, you can be right only 50% of the time and still make money.
A way to find out the potential risk/reward ratio is to look at currency charts and see where the current price is in relation to the past and the current trend. Then, you might be able to guess how far the currency can go in your favor (reward) or how much it can turn against you (risk). In most trades, the risk is set by your stop price.