Trading foreign exchange (FX) for a living is a potentially life-changing decision that could usher in financial freedom. The problem is a very small percentage of people successfully become consistently profitable traders and get to live their dreams.
But this doesn’t mean you shouldn’t give it a try yourself. After all, the world’s most successful independent traders started from scratch and worked their way up from trading small accounts.
If you are serious about giving trading a try, ask yourself these three questions in order.
Question 1: Can You Afford To Lose Money?
New traders should approach trading with the assumption they will lose their entire deposit. The worst thing a new trader can do is foolishly lose their rent or mortgage money in one trade. Make sure that you trade with only money you can afford to lose and nothing more.
Forex is an ideal market for anyone that doesn’t want to commit to losing a lot of money. Stock trading accounts might require thousands of euros for an initial deposit but this is far from the case in FX. For example, an FBS cent account requires a mere deposit of €10 to get started. Sure this isn’t a lot of money, but the vast majority of FX trading platforms offer leverage.
Leverage is the amount of capital that a broker lends to you so you can trade larger lot sizes. Leverage is typically denominated by a multiplier, such as 30 times. So anyone that deposits €10 will be able to trade with €3,000 while a €100 deposit gives a trader access to a balance of €30,000.
Once you open an account, it is prudent to employ risk management strategies to preserve your capital. Just because you accept and acknowledge the risk of losing your account doesn’t mean it should come to come to this.
Proper risk management strategies can prove to be the difference between losing a small amount of capital instead of losing it all. Traders that developed advanced risk management strategies understand to never risk more than 2% or 3% of their account on any one trade.
Doing anything above and beyond, with very few exceptions, isn’t trading — it is gambling.
Question 2: Do You Understand FX Markets?
Before starting a business, an entrepreneur makes sure they know the industry inside and out before risking their capital. The same logic should obviously apply to foreign exchange trading.
Do you understand how macroeconomic news releases can influence a currency pair? Do you know what a pip is? Do you know key technical levels in the JPY/EUR pair?
Do you know how to profit from any near-term disruptions from any Brexit-related news, be it favorable or unfavorable for the United Kingdom?
These are all important questions that beginner traders should be able to answer. It’s more than fine if you can’t answer one or more of these sample questions. This just may mean it is important to check out YouTube tutorial videos or buy a few more educational books before giving your trading journey a try.
New traders should also be able to understand how FX markets and others like stocks, commodities, and bonds are all interlinked together. What happens on the New York Stock Exchange or a commodity exchange in Tokyo can impact currency pairs.
Question 3: What Are Your Trading Strategies?
Simply depositing money with a broker with a “trial and error” approach to trading is a recipe for failure and a trading strategy is a must.
A forex trading strategy is simply defined as a system or procedure a trader uses to evaluate the worthiness and timing of buying or selling a currency.
One of the more notable trading strategies across all asset classes is called range trading. This consists of a trader identifying support and resistance levels and waiting for a currency to drift towards any of these two levels.
Support refers to the level where demand is historically strong enough to attract new buyers and prevent further downside. Traders would typically buy a currency when it declines to a level that is at or near the support level in hopes of a reversal.
On the other side, resistance is the price at which investors and traders control the trade and exert enough selling pressure for the currency to fall. Traders that own a currency would typically look to exit the position at or near these levels with expectations of locking in a profit.
One of the biggest mistakes new traders make is to duplicate someone else’s winning trading strategy. Regardless of how much money someone else makes, their strategy is what works best for them. Perhaps they are patient and disciplined and can wait for hours or days before identifying a trade with massive potential.
By contrast, you don’t want to sit around and do nothing and may prefer to enter and exit many traders for small profits that add up over time.
Bottom Line: Trading Is A Journey
Trading FX successfully is a multi-year long journey that will have its ups and downs. The key to maximizing success and minimizing failure is to plan the journey before it even begins.
Traders that want to succeed need to make sure to properly do their homework and understand what they are getting into. This is especially true for anyone that has ambitions to eventually quit their jobs and trade for a living.
The fact is the odds of success are heavily stacked against new traders but for many, it is worth a shot. The only downside of a reasonable and responsible loss is understanding trading may not be for you after all.
The upside on the other hand is unlimited.