The foreign exchange (forex) market is the largest and most liquid financial market in the world, with a turnover of more than USD 5 trillion every day . This is far higher than the stock market, which is estimated to have a turnover of around US$ 200 billion every day .
Additionally, due to its decentralised nature, the global forex market offers 24-hour trading on weekdays, but rests on the weekends . These features are among the reasons that attract investors to become forex traders.
If you’re thinking of trying your hand at forex trading, pay attention to these 10 essential forex tips.
1. Choose the right broker
The first step is often the most important and the same goes for forex trading. Thus, the first tip to note is to choose the right broker.
This means you shouldn’t simply just go with the first online broker whose ad you happened to click on. Instead, take some time to explore different brokerages and familiarise yourself with their offerings. Shortlist the ones that appeal to you and evaluate them against each other to see which one is the best match for your needs and preferences.
To help you get started, here are some things to look out for:
- Is there a good range of different forex pairs?
- Does the broker offer competitive spreads?
- Is this a reputable trading platform and does it have the proper licence to operate in your jurisdiction?
- What is the level of leverage offered?
- How does this brokerage manage client fund security?
- Is there excellent customer service?
- What educational resources are provided to clients?
2. Develop a trading plan
A trading plan will go a long way in forming the foundation of a l forex trader. It needs not be something complicated or ambitious, but rather, your trading plan should outline your goals, risk tolerance, trading strategies you will use, and your trading rules and limits.
You should try to make your trading plan as clear as possible, as a well-defined trading plan will help you maintain discipline, reduce emotional decision-making, and provide a roadmap for consistent performance.
3. Keep things simple
Given the highly volatile nature of the forex market, keeping things simple will help you maintain a focus and trade in a deliberate manner. In practice, you may consider sticking to a few forex currency pairs to build your understanding and gain deeper knowledge about their historical trends, volatility, and fundamental factors affecting their value.
You should also keep things simple in your trading analysis, by focusing on the fundamentals instead of overcomplicating things by taking in too many indicators.
If you’re using forex copy trading, consider focusing on a few signal providers at a time. This will help you avoid being overwhelmed or confused by conflicting information.
4. Stay on top of the news cycle
The forex market is heavily correlated to world events and many forex traders have learnt the importance of keeping up with the news.
In particular, you should learn to interpret the economic calendars of major economies such as the US, as they provide a comprehensive overview of upcoming economic events and data releases.
By analysing how these events may affect currency pairs, you can make informed decisions about when to enter or exit trades.
5. Learn to use technical and fundamental analysis
You can think of technical and fundamental analysis as two prongs of the same fork. Both are essential for successful forex trading, and allow a trader to cover different aspects.
Technical analysis involves studying historical price movements to identify patterns and predict future trends, while fundamental analysis focuses on economic indicators and news events that influence a currency’s value.
By combining these two methods, you are poised to make informed decisions and develop a more well-rounded trading strategy.
6. Learn from your mistakes
Every trader experiences losses, so it’s important to be comfortable with losing trades. The sooner that you accept you are going to be wrong from time to time, the quicker you can get to the next, more important stage.
What sets successful traders apart is their ability to learn from their mistakes. You can do the same by keeping a trading journal to document your trades, including the rationale behind your decisions and the outcomes. Record everything honestly, wins or losses.
Then, regularly review your trading journal to identify patterns in your decision-making and refine your trading strategy. In particular, pay attention to incidents leading up to mistakes so you can course correct next time.
7. Practise emotional detachment
Emotions can wreak havoc on your trading performance, leading to impulsive decisions and poor risk management. As such, it is a good idea to develop emotional detachment, which is essential for long-term success in forex trading.
Here are some tips to help you keep your emotions out of your trading:
- Stick to your trading plan. Trust your strategy and resist the urge to deviate from it.
- Take regular breaks. Step away from the markets once in a while to clear your head and maintain perspective.
- Limit exposure to market news. Overconsumption of market news can heighten emotions and lead to impulsive decision-making. Stay informed, but avoid obsessing over every market development.
8. Learn risk management techniques
Learning to manage risk is crucial in forex trading to protect your capital from unexpected market fluctuations, limit losses and improve your trading outcomes.
Here are some basic risk management techniques forex traders should learn:
- Stop-loss orders. These automatically close your trade once a specific price level is reached, preventing further losses.
- Position sizing. Determine the appropriate trade size based on your account balance and risk tolerance.
- Diversification. Spread your risk by trading a variety of currency pairs or assets.
9. Invest in your education
While you will naturally gather experience as you continue trading, being successful in forex trading requires continuous learning and improvement.
You should allocate time and resources to expand your knowledge, whether through online courses, books, webinars, or mentorships. The educational resources offered by your online broker can make for a helpful jumping-off point. For example, the Vantage Academy provides free educational resources to both new and existing clients.
10. Be aware of trading costs
Forex trades come with a variety of different charges and fees, and these can impact your overall results. When choosing a broker, here are some common fees you should check:
- Spreads. This is the difference between the bid and ask price of a currency pair, and typically provides the bulk of a brokerage’s profits. Note that spreads may be fixed or variable.
- Commissions. Some brokers charge a commission on trades in addition to the spread. Commissions can be a fixed fee per trade, a percentage of the trade size, or based on a tiered structure.
- Swap Rates. Also known as rollover rates, these are interest charges that clients may incur when holding positions overnight.
- Deposit and Withdrawal Fees. Some brokers charge fees for depositing or withdrawing funds from trading accounts.
- Account Maintenance Fees. Certain brokers may charge account maintenance fees, such as inactivity fees or account management fees.
Note that apart from the above, your brokerage may levy other fees or charges. It’s important to find out what trading costs you should expect to avoid any nasty surprises.
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- “Forex Market: Who Trades Currencies and Why – Investopedia”. https://www.investopedia.com/articles/forex/11/who-trades-forex-and-why.asp. Accessed 29 May 2023.
- “Forex vs Stocks: Which is Better? – Statrys”. https://statrys.com/blog/forex-vs-stock-market. Accessed 29 May 2023.
- “Forex Market Hours: Can You Trade 7 Days a Week? – Investopedia”. https://www.investopedia.com/terms/forex/f/forex-market-trading-hours.asp. Accessed 29 May 2023.