Forex trading is the world’s most popular form of investing. According to data provided by the Bank of International Settlements (BIS), the forex market oversaw about $7.5 trillion in daily turnover in 2022. However, not everyone who jumps into forex trading achieves success.
In this article, we will discuss things to know before trading forex. But before that, here is a quick rundown of what forex trading entails and why people choose to invest in forex.
Why Trade Forex?
The simple answer is forex trading offers an opportunity to supplement your regular income through profitable trading. It is one of the easiest markets to invest in given the availability of forex brokers across the world or forex trading platforms that can be accessed online via a PC or mobile phone.
Moreover, unlike stock markets, forex can be traded around the clock, which provides flexibility for 9-5 workers interested in trading for a few hours a day. In addition, trading forex allows investors to make profits regardless of whether a currency pair experiences a rise or a decline in the exchange rate. However, profits are not straightforward, which is why we are going to discuss what you need to know before trading forex.
Things to Learn Before Trading Forex
These are the things you need to know before you start trading forex.
1. Try to Gain Some Basic Knowledge
It does not matter if you plan to use a forex trade copier or be an active trader yourself. For the latter, you will require more than just the basics of forex trading. In general, you should be able to understand simple things like how to identify the best forex broker or how to choose a good forex signal service provider. Understand the process of opening a forex trading account, and check that you are acquainted with the deposit and withdrawal methods offered by the broker.
2. Planning and Scheduling Before Trading Forex
You should plan your daily trading calendar properly and assess your risk thresholds regularly. At the very beginning, it is understandable to be more risk-averse, but as you gain more experience, you can then adjust the level of risk you are willing to take on your finances.
3. The Art of Patience
Patience is about two things. Firstly, being calm when things are not going your way. In forex, some trades may appear to be heading south moments after you open a new position. Assuming you did your research properly before opening the position, it is important to trust your initial analysis unless something changes drastically. The second part about patience comes in when you have a winning trade. Be careful not to close your position too soon, or wait too long. And finally, patience also applies to your long-term investment strategy. You cannot turn a few hundred/thousand dollars into millions overnight.
4. Stick to a Methodology
Unless it is necessary (that is something fundamental changes that could affect your initial investing strategy), it is always advisable to maintain your trading strategy. However, minor tweaks here and there are allowed to accommodate the dynamism of the forex market. For instance, if the market is too volatile for the level of risk you are willing to allocate per trade or day, you can revise the threshold downwards by reducing the number of trades per day, or the amount you invest per trade.
5. Practice Your Way to the Top Before Trading
“Practice makes perfect”, or so they say. However, the right phrasing is “good practice leads to perfection”. This point communicates the importance of using practice accounts before investing real money. A forex practice account allows novice traders to learn the ropes before risking their money. Traders can also test some theoretical strategies with a practice account to gauge their effectiveness.
Fortunately for you, you can always open up a demo account. All demo accounts are free, plus they are available by every broker out there. Simply register and download the app to get into it.
6. Time Is Of the Essence
They say “Make hay while the sun shines”. The same applies to forex trading. Timing is one of the things you should learn before trading forex. Given the dynamic nature of the forex market, opportunities wait for no one. Therefore, when your technical analyses signal a buy or sell opportunity you should be ready to pounce. You can make sure the trade is executed quickly by using a powerful server and fast internet. Most brokers provide powerful servers to their traders. Alternatively, investing in an auto trading system can reduce the challenge of timing.
7. Understand the Importance of Bid/Ask Spread
The Bid/Ask spread is the difference between the quoted Bid price and the quoted Ask price. Whenever you open a new trade, you always begin in a losing position due to the impact of the spread on the prevailing exchange rate. Of course, you could be lucky if the price moves in your favor immediately after opening your position. The spread reflects the difference between the highest buy price and the lowest sell price, with significantly high spreads implying a currency pair with low liquidity. This can affect your ability to close the position when your target price is achieved or if you want to get out of a losing trade.
8. Analysis For Success in Trading Forex
Another thing to know before starting forex trading is to analyze the market, especially if you plan to trade by yourself. In this part of learning to trade, it would be good to keep a record of strategies that work in certain circumstances. For instance, some strategies work on highly liquid currencies, while other analyses are only applicable to currencies tied to specific instruments like commodities. This can also help you when creating your trading plan.
9. Trading Tools and Managed Accounts
If you don’t fancy mixing it with the experts in forex trading, you can always try to find an alternative route. This is one of the things to ask before starting forex trading— whether it would be better to use a signal service like the one offered by Telegram. Forex app, or may try a managed Forex account, where you make passive earnings. In the first option, you can gain some experience whereas, in the latter, you will remain a novice forever. A signal service works by offering novice traders or traders who do not have the time to follow the market closely an opportunity to copy the trades of others.
10. Leverage and Margin Trading
Forex trading platforms allow traders to invest several times more than what is in their accounts through leverage. Some brokers offer leverage of up to 500:1, increasing your ability to bet on trades 500 times. Profits on trades also increase 500 times but so are losses. Therefore, if you are just getting started it is often recommended to keep leverage as low as possible. This is one of the most important things to know before forex trading.
In summary, there are several things to know before starting forex trading. If you are looking to trade by yourself, the learning period could be even longer. However, you can always start after learning the basics if you plan to use a signal service, the Telegram.forex app, or a managed forex account.