Foreign exchange trading attracts many amateur speculators. But, it is not an easy market to trade. This article gives you tips about the do’s and don’ts of forex trading.
What to do
1. Get to know the system. Before you start trading forex live, you should get to know your system very well. This will help you avoid blunders that can cost lots of money. Getting to know the system before starting is quite simple nowadays as many online forex brokers offer free demo accounts.
2. Test your strategy. Many successful forex traders have developed their own trading strategies. Often, a strategy is a system set-up based on charts and technical indicators. There are many of these, so it is up to you which ones you use. The idea behind this is to have a system that’ll allow you to see developing trends. To really tell if that set-up works is to test it. Demo accounts are a great way to do so as you get to play your strategy with virtual money.
3. Focus on just few currency pairs. When you focus on just few currency pairs, you get to know well the dynamics behind their price action. On the other hand, by following too many currencies, you spread out yourself too much, and start missing important developments. Focus on just few pairs-at least in the beginning.
What not to do
1. If you don’t know the trend, don’t just jump in for the sake of action. This is an easy way to lose money. Also, if you’re new to forex trading, don’t jump in during periods of great volatility.
2. Don’t overleverage yourself. Many online forex brokers offer leverage of 100-1, if not more. With such leverage, only a small change in the wrong direction can wipe out your account’s equity. Don’t get greedy, or overexcited, and go easy with leverage.
3. Avoid trading when spreads get wide. Although, you may want to avoid periods of great volatility, you may also want to avoid slow periods in trading as then spreads get wider, and a cost of a trade increases. For example, a slow period when it comes to USD/CAD (US dollar vs. Canadian dollar) pair is during the night time in North America.
To increase your chances of success in the currency markets, you should have a good and well tested system, and focus on currencies that you understand well. At the same time, avoid periods of turmoil or times of slowness. Above all, protect your account’s equity, otherwise you won’t last another day. Too much leverage is likely to lead to quick losses.
These are the do’s and don’ts of forex trading that you should keep in mind as you trade the dynamic market of foreign exchange.