The foreign currency exchange, forex, or FX, markets are the most widely traded in the world. One reason is the around the clock activity that stretches across all the earth’s time zones and touches every nation in which traders are active. In the past decade, the retail or consumer side of the niche has grown so fast that it’s almost hard to keep up with the staggering numbers. The volume on global forex markets exceeds trillion per day. That’s more capital than is traded in all other sectors in every nation combined.
Of course, a large amount of the FX cash that moves from one place to another is classified as institutional or governmental. Still, something like one-half of all the forex transactions are initiated by individuals who follow and invest for personal profit, fun, or both. Among those who choose to open accounts with online brokerage services or banks, well more than half are dedicated solely to FX buying and selling. There’s something about international currency pairs that attracts people more than any other kind of financial asset. If you’re contemplating a foray into forex this year or next, it’s imperative to know what the current best practices are.
That way, you’ll be more equipped to protect capital, avoid high-risk positions, and increase the chance of earning a profit on the activity. What are the five tactics that are at the top of forex enthusiasts’ list of cautionary techniques? Of course, it’s crucial to start out with a clearly defined plan of action. While it makes great sense to make forecasts and practice as much as possible, it is equally vital to set commonsense spending limits, use stop orders wisely, and build a solid base of knowledge before starting to put capital on the line. In no particular order, the following best practices represent an effective way to get started in forex, whether you devote one or forty hours per week to the endeavor.
Set Reasonable Trading Limits
Without financial guardrails, you might as well be throwing money into a casino game and hoping for the best. What kinds of limits do smart practitioners set? For many, the 2-percent rule makes the most sense. Using it means you’ll never place any more than two percent of your account’s total capital into a particular transaction. Because most FX enthusiasts get into and out of the markets several times per day, it’s essential to use smart capital management to keep accounts from running out of money in a few days or weeks.
Acquire Relevant Knowledge
Knowing how to trade forex doesn’t mean you need to become an expert before playing the markets. Instead, use one of the many tutorials available at a top platform to learn the core elements of making a purchase, monitoring a held position, and exiting when necessary. This is the single most effective tactic for upping your chances of becoming a profitable forex trader. Read about the history of FX and gain an understanding of why so many people take part in the marketplace. Avoid the temptation to just jump in and start opening positions. Like any other field of endeavor, it’s worthwhile to gain a modicum of knowledge before acting.
Setting stops on every position is common among practitioners. Stops prevent positions from catching you off guard and turning a small loss into a big one. They work much the same way as stop loss orders do for stock market participants. It’s possible to set both upper and lower stops, which will either protect further losses or lock in gains as they automatically take you out of a given position.
Use reliable news and financial sources to make your own mini forecasts for the currencies you intend to trade. Don’t worry about being super detailed. The aim is to find the general expected direction of your favorite currencies based on political, economic, and other events. Use experts’ analysis to inform your own forecasts.
It’s shocking that many people dive into FX activity without the requisite amount of practice. Fortunately, top brokerage platforms offer excellent tools for honing your fundamental skills. Take advantage of demo accounts and simulators, which are the best method for learning how to set stops, use capital management techniques, exit a trade quickly, and much more. How much practice is enough? For those brand new to the FX universe, it’s helpful to spend at least two weeks in the simulator, making all trades with demo account funds, not with real money.