The foreign exchange market used to be the playground of central banks, corporate treasurers, large banks and hedge funds only. But now, retail investors represent about 8 percent of the daily traded volume (compared to only 1 percent 10 years ago according to the Aite Group). The growth is accompanied by the flourishing of the Internet and online forex trading platforms. This is exciting news for retail investors like you. However, big opportunities come with a set of risks. With education, practise, reasonable expectations and evaluations, currency trading can be profitable and exciting. First, let’s review several characteristics of the forex market.
Unique Features of the Forex Market
Currency trading happens not in the centralised exchanges but “over-the-counter” (OTC). Therefore, it is important to choose the right counter party to trade based on agreeable credit terms. The market trades continuously during the weekdays and has tremendous liquidity, offering traders the flexibility to place and execute trades. As currencies are quoted in one relative to another, you can bet on the appreciation of the base currency as easily as you can bet on its depreciation. Also, there are only eight major currency pairs to focus on. Insider trading does not exist in the forex market as the market is very fluid and efficient. Unlike securities markets, which are constrained by the market capitalization, forex markets allow traders to place “unlimited” bet size and use a much bigger leverage, as high as 100 to 1.
Brace Yourself with Knowledge
There are two basic approaches to forex trading. Fundamental analysis involves the understanding of economic factors such as interest rates, inflation, economic growth, the balance of payments and central banks’ interventions that can influence the relative strengths of the currencies. Traders need to be on top of the daily economic data releases that can swing the currencies. Technical analysis involves using charts and tools to analyse the past price movements and patterns to determine the direction of the currency. Traders’ positioning is a critical factor as well. Which approaches to choose will depend on your style, time frame and information availability. The important thing is to pick a currency pair or two and learn everything about the factors driving theses currencies.
Lock in Your Hours
Assuming you are now familiar with the jargon of the forex market, is it time for you to jump in with real money? Not necessarily. Forex trading rule number one: trade with fake money first. Fortunately, your forex brokers can offer you one of the best education tools, a forex demo account, for you to be familiar with the trading platform, practise and re-evaluate your trading strategies without losing a single penny. Experts recommend new traders to practise in a simulated trading environment for up to six months before going live. With enough time, you can experience the various rounds of economic and political happenings to see how your currencies react. The demo version will typically show you how to read the price quotes, enter trades, place stops and limits and check your account balances. Often, the platform is integrated with charts, analytical tools and market news to help you to configure your strategies, the amount of risks you want to take, and how long you want to stay in the trade. In other words, the forex demo account helps you to determine what types of trading will suit you the best.
Trade with Realistic Expectations
Trading with fake money is different from trading with real money because you do not experience a true sense of loss, or your $100,000 profits make you over-confident in your trading, thus causing you to lose big in real accounts. So, it is very important to limit your trading capital in the virtual account to what you can afford to lose as if you were trading with real money. Expect to lose in your initial trades and do not get frustrated or chase bad money with good. Constantly evaluate what works and what doesn’t and why. Beware that price quotes may look a little different in live trading while trading slippages can often occur in real accounts.
The key is, even after trading live, try to go back to demo accounts to re-test your strategies. Although there is no guaranteed profits in trading, experienced traders will agree that to be successful in live trading, you first have to make money in forex demo accounts. Embrace this free training opportunity as this will help you to build the confidence and the necessary skills to become a successful trader.