The forex market is the largest financial market in the world in terms of daily transaction volume which is approximately USD7trillion, according to a set of business data as of 2019.
Online forex trading is quite popular among retail investors around the world due to its low barrier to entry, a wide range of instruments, easy accessibility via the internet on mobile devices, personal computer, and 24-hour availability.
Retail forex trading involves opening account by individual retail traders through online brokers that accept forex & CFD traders. Some of these brokers are licensed with Top Tier foreign regulators. Covid-19 pandemic has further strengthened the interest in online investing & trading as more and more people are looking for quick returns on their investments or a side income.
However, there are some risks associated with trading forex, CFDs & other financial instruments. Without adequate knowledge and proper risk management strategy, it can become very risky for newcomers.
If you are new to forex market or looking to optimize your returns on your investments, here are a few things you may need to know.
Do Your Research Before You Start Trading
Forex market is a market where national currencies are traded in pairs such as EUR/USD (Euro/US Dollar/) or USD/JPY. It consists of mainly seven types of financial instruments – Exchange-traded funds (ETFs), Forwards, Futures, Options, Swap, Spot and CFDs – which you must understand before trading in currencies.
There are many resources on the net where you can learn the basics of forex trading and prepare yourself before risking your money.
Understanding Market News
The Forex market is a very volatile market. Any financial news can cause a dramatic effect on price movements of a currency pair.
For instance, the US Federal Reserve’s monetary policy announcements have a major impact on whether the USD will appreciate or depreciate. And this can affect all currency pairs like EURUSD, GBPUSD, USDZAR etc.
Similarly, election results, unemployment data, bilateral/regional trade deals and other major world events also cause price changes in a currency.
Like, upcoming US Elections results could impact global currency markets, similarly, Covid-19 also had an effect on currencies, commodities & stocks.
Thus, keep an eye on the major financial news at sources like Market Watch, WSJ, Bloomberg, Reuters, CNBC, ForexLive, as it can affect your trade.
Trade Only With Reputable Brokers
Retail investors require a broker to trade currencies & CFDs. Thus, it becomes highly important to choose a trusted broker for your investments.
Online forex trading is comparatively new and not completely regulated. It is best to select a forex broker that is licensed by trusted foreign financial regulators such as UK’s FCA, EU’s ESMA, US’s CFTC or South Africa’s FSCA.
These foreign regulators have strict rules, reporting requirements and standard practices which licensed brokers must follow, otherwise, their licenses can be revoked. Thus, ensuring the safety of investors.
The next thing to consider before picking a broker is to know the overall cost of trading.
The cost of trading is simply the overall expenses paid by FX traders to their broker for using their trading platforms. These costs can have a detrimental effect on a trader’s earnings. Thus, it becomes important to know the various types of fees in trading.
Forex brokers generally have two fees models: Spread model and commission model.
Most brokers charge spread without any commission. But low-cost brokers charge a commission for their trading services. While zero commission account may sound lucrative, but be wary to check if the bid-ask spread is on the higher side.
Start With A Demo Account To Learn And Test Your Trading Strategy
This is the best way to learn to trade. Most of the online brokers provide a Demo account for free which can help a trader to get the experience of trading without risking your real money.
To get started you need to sign up for demo account on any trading platform of your choice. After signup, your account will have virtual money to place orders in a closed demo environment. Use a demo account to learn about the broker’s platform & build your strategy.
Keep a record of whatever strategy you apply in trading. This will help you to evaluate your strategies which you can later use in real trading.
Learn & Use Risk Management
Every capital market trade has some inherent risks & forex market is no different when it comes to risks.
The volatility in the currency market provides ample opportunities of profit to traders. However, the same volatility makes it prone to investments turning sour. Thus, it becomes highly important to have a trading plan and knowledge of risk management to minimize the losses.
For traders, it is important to learn about Stop loss, Limit orders, Risk to Reward ratio. Also, check if your broker offers Negative balance protection as this will ensure that you don’t lose more than your invested capital.
The availability of very high leverage is one of the main reasons why so many people choose Forex trading. Usually, brokers provide leverage to traders where investors can trade larger capital with a small amount of money, called margin requirement.
The leverage at most brokers vary from 20:1 to as high as 1000:1.
Example: Suppose Ojonugwa is a newbie in online trading and he wants to use a leverage to maximize his gains. He currently has $1000 in his trading account. He is interested in selling his position at 0.8675 for EUR/USD. His broker provides 100:1 leverage.
By using leverage, he now would be able to trade $100,000 worth of EUR/USD. Suppose the price changes to 0.8700. In this case, Ojonugwa would lose 25 pips (0.8675-0.8700) on this trade, which is equivalent to $250 loss.
In this example, Ojonugwa would have lost 25% of his capital on a single trade. We can clearly see how Leverage can be dangerous for retail trader if not used properly.
Majority of new traders lose money due to improper risk management. So, it is advised to never use more than 5:1 leverage.
Evaluate Your Past Performances & Continue Learning
If you are successful on demo then all the trading strategies you have learned on demo accounts, you can eventually start implementing those strategies on a live account.
As a beginner, you might have been able to get a few profitable trades, but there is no guarantee this will continue. In a constantly shifting forex market, a trader must keep evaluating his performance to remain competitive.
Conclusion
Online trading in forex market & CFDs is very risky like any other investment. You must understand that more than 90% of retail traders trading CFDs lose money.
If you jump start without knowledge and skills, forex trading can become a very risky pursuit and result in substantial losses.
Remember that, it is not a sure way to earn money and is suited to professional & experienced traders only. It’s best to learn, research more &gain experience, and devise strategies that work in different market conditions before investing any serious money.
Always start with a demo account to test your strategies before investing. Don’t follow advise from others, and use your own wise judgement before making any trading decision. Use only safe leverage of less than 1:5 and risk to reward ratio of 1:2.
With proper risk management strategy, knowledge, and a good trading plan, there is a higher chance to becoming a profitable trader over time.
Comments
Post a Comment