Forex trading is the process of exchanging currencies with the goal of generating a profit. The industry has grown parabolically over the years, as evidenced by the many forex and contracts-for-difference (CFD) companies in existence.
Most traders are attracted to the industry because of the large profit potential and the fact that one can do it anywhere. As a forex trader with almost a decade in the industry, I have seen it all. In this article, I will highlight the four things you need to know before you start your trading career.
It takes too much work
Most beginners believe that forex trading is a relatively easy thing to do. Furthermore, all you need to do is to open an account, deposit funds, and then start making money.
While actual trading is a relatively easy thing, doing it well is a long and complex process. It takes between a few months to several years to cover everything relating to forex trading.
In my tutoring job, I always recommend my students take between three to six months before they start trading. They should spend the initial weeks learning about how forex works and how people make money in it. I recommend that they spend time reading popular books like ‘Forex trading’ by Kathy Lien and ‘Welcome into my trading room’ by Alexander Elder.
They should spend the next few months reading various aspects like fundamental, technical, and price action analysis. Most importantly, they should spend a lot of time on a demo account. This is an account with fake money and the live data that they can use to test drive their strategies.
Taking time before you move into a real account has several benefits. First, you will have experience and knowledge about how the industry works. Second, you will have real experience on how to analyze currency pairs before you enter a trade. Third, you will know the risks involved in trading. In fact, statistics show that more than 80% of new traders lose money in their first month in the industry.
Fourth, it will help you come up with a good strategy and back-test it. Further, you will become aware of the popular risk management strategies.
Copy trading is an option
Unfortunately, many people don’t have the patience to learn about forex. Others don’t have an interest in the industry. Additionally, some people don’t have the time to learn and even come up with a strategy.
Fortunately, there is a shortcut that is offered by many forex brokers. Copy trading is the process where you make money without doing real trading. It is a feature that is offered by several reputable barkers like OctaFX and eToro.
Copy trading is the process of copying trades from other professional traders automatically. It works through a relatively simple process. First, you need to create an online trading account with a broker who offers the service. Second, you should navigate to the copy trading section and read the firm’s terms and conditions.
Third, you should look at the profiles of the leading master traders on the platform. You should only select people with a long history of generating strong returns. Finally, select a few traders and follow them. In this case, you will be making money as long as they are making money.
A good thing about copy trading is that master traders are incentivized to do their best since they make money when they trade. Also, it is relatively easy to exit from a copy trading arrangement.
While I am an experienced trader who operates a personal account, I have diversified some of my cash in copy-trading accounts.
Leverage is a double-edged sword
All forex brokers offer leverage to their customers. For starters, leverage refers to a certain amount of money that a broker offers you to trade with. For example, if you have a $1,000 account, it means that you can buy a small number of lots of a given currency. Therefore, if the price rises, you will make a modest return. However, if someone loaned you an extra $1,000, it means that your returns will be much bigger.
In the European Union and Australia, the size of leverage offered by forex brokers has been capped to 1:30. If you live outside these places, it is possible to see some brokers offering unlimited leverage. Unfortunately, many new traders opt for big leverage. While such leverage can make you a lot of money when things go well, they expose you to substantial risks when things go south. Therefore, I recommend that you start with small leverage and increase its size as you gain more experience.
Treat trading as a business
The next thing you need to know before you start your trading journey is to take it as a business. Most successful traders do this. This is where you take all aspects of trading as a business. For example, like all entrepreneurs, you should come up with a plan about how you want your trading to work.
Further, you should have excellent money management and risk management strategies. Additionally, you should develop a record framework where you take time to document all your transactions. At the end of every month or quarter, you should sit back and review your performance and assess whether you see any substantial growth or not. If not, you should take measures to rectify the situation.
There are many other things that I wish I knew before I started my forex trading career. For example, I wish I knew the important role that patience plays in trading. At times, you will wait for several days before a setup you are waiting for forms.
Also, I wish I knew the role of having a good and affordable broker. Early in my career, I used a broker who did not charge a commission but one who had some of the widest spreads I have ever seen. Additionally, I wish I understood more about teamwork in trading.