Forex's popularity entices traders of all levels, from greenhorns just learning about the financial markets to well-seasoned professionals.
Because it is so easy to trade forex - with round-the-clock sessions, access to significant leverage and relatively low costs - it is also very easy to lose money trading forex. This article will take a look at 10 ways that traders can avoid losing money in the competitive forex market.
There are no specifically forex focused programs, but there are still some advanced education alternatives for forex traders. Check out 5 Forex Designations. Trader's Guide To Forex.
Do Your Homework — Learn Before You Burn Just because forex is easy to get into doesn't mean that due diligence can be avoided. Learning about forex is integral to a trader's success in the forex markets. While the majority of learning comes from live trading and experience, a trader should learn everything possible about the forex markets, including the geopolitical and economic factors that affect a trader's preferred currencies.
Homework is an ongoing effort as traders need to be prepared to adapt to changing market conditions, regulations and world events.
Part of this research process involves developing a trading plan. For more, check out 10 Steps To Building A Winning Trading Plan. Take the Time to Find a Reputable Broker The forex industry has much less oversight than other markets, so it is possible to end up doing business with a less-than-reputable forex broker. Due to concerns about the safety of deposits and the overall integrity of a broker, forex traders should only open an account with a firm that is a member of the National Futures Association NFA and that is registered with the U.
Commodity Futures Trading Commission CFTC as a futures commission merchant. Each country outside of the United States has its own regulatory body with which legitimate forex brokers should be registered.
Traders should also research each broker's account offerings, including leverage amounts, commissions and spreads , initial deposits, and account funding and withdrawal policies. A helpful customer service representative should have all this information and be able to answer any questions regarding the firm's services and policies. Discover the best ways to find a broker who will help you succeed in the forex market.
Refer to 5 Tips For Selecting A Forex Broker. Use a Practice Account Nearly all trading platforms come with a practice account, sometimes called a simulated account or demo account.
These accounts allow traders to place hypothetical trades without a funded account. Perhaps the most important benefit of a practice account is that it allows a trader to become adept at order entry techniques.
Few things are as damaging to a trading account and a trader's confidence as pushing the wrong button when opening or exiting a position.
It is not uncommon, for example, for a new trader to accidentally add to a losing position instead of closing the trade. Multiple errors in order entry can lead to large, unprotected losing trades.
Aside from the devastating financial implications, this situation is incredibly stressful. Keep Charts Clean Once a forex trader has opened an account, it may be tempting to take advantage of all the technical analysis tools offered by the trading platform.
While many of these indicators are well-suited to the forex markets, it is important to remember to keep analysis techniques to a minimum in order for them to be effective. Using the same types of indicators — such as two volatility indicators or two oscillators , for example — can become redundant and can even give opposing signals. This should be avoided.Understanding How Forex Signals Work, the Easy Way
Any analysis technique that is not regularly used to enhance trading performance should be removed from the chart. In addition to the tools that are applied to the chart, the overall look of the workspace should be considered.
The chosen colors, fonts and types of price bars line, candle bar, range bar, etc should create an easy-to-read and interpret chart, allowing the trader to more effectively respond to changing market conditions.
Protect Your Trading Account While there is much focus on making money in forex trading, it is important to learn how to avoid losing money. Proper money management techniques are an integral part of successful trading. Many veteran traders would agree that one can enter a position at any price and still make money — it's how one gets out of the trade that matters.
Part of this is knowing when to accept your losses and move on. Always using a protective stop loss is an effective way to make sure that losses remain reasonable.
Traders can also consider using a maximum daily loss amount beyond which all positions would be closed and no new trades initiated until the next trading session.
While traders should have plans to limit losses, it is equally essential to protect profits. Money management techniques, such as utilizing trailing stops , can help preserve winnings while still giving a trade room to grow.
Start Small When Going Live Once a trader has done his or her homework, spent time with a practice account and has a trading plan in place, it may be time to go live — that is, start trading with real money at stake. No amount of practice trading can exactly simulate real trading, and as such it is vital to start small when going live.
10 Ways To Avoid Losing Money In Forex
Factors like emotions and slippage cannot be fully understood and accounted for until trading live. Additionally, a trading plan that performed like champ in backtesting results or practice trading could, in reality, fail miserably when applied to a live market. By starting small, a trader can evaluate his or her trading plan and emotions, and gain more practice in executing precise order entries — without risking the entire trading account in the process.
Use Reasonable Leverage Forex trading is unique in the amount of leverage that is afforded to its participants. Properly used, leverage does provide potential for growth; however, leverage can just as easily amplify losses. A trader can control the amount of leverage used by basing position size on the account balance. While the trader could open a much larger position if he or she were to maximize leverage, a smaller position will limit risk.
An Alternative to ForEx Trading?
For additional reading, see Adding Leverage To Your Forex Trading. Keep Good Records A trading journal is an effective way to learn from both losses and successes in forex trading. Keeping a record of trading activity containing dates, instruments, profits, losses, and, perhaps most importantly, the trader's own performance and emotions can be incredibly beneficial to growing as a successful trader. When periodically reviewed, a trading journal provides important feedback that makes learning possible.
Einstein once said that "insanity is doing the same thing over and over and expecting different results. Understand Tax Implications and Treatment It is important to understand the tax implications and treatment of forex trading activity in order to be prepared at tax time. Consulting with a qualified accountant or tax specialist can help avoid any surprises at tax time, and can help individuals take advantage of various tax laws, such as the marked-to-market accounting.
Since tax laws change regularly, it is prudent to develop a relationship with a trusted and reliable professional that can guide and manage all tax-related matters. Treat Trading As a Business It is essential to treat forex trading as a business, and to remember that individual wins and losses don't matter in the short run ; it is how the trading business performs over time that is important.
As such, traders should try to avoid becoming overly emotional with either wins or losses, and treat each as just another day at the office.
As with any business, forex trading incurs expenses, losses, taxes, risk and uncertainty. Also, just as small businesses rarely become successful overnight, neither do most forex traders. Planning, setting realistic goals, staying organized and learning from both successes and failures will help ensure a long, successful career as a forex trader. The Bottom Line The worldwide forex market is attractive to many traders because of its low account requirements, round-the-clock trading and access to high amounts of leverage.
When approached as a business, forex trading can be profitable and rewarding. In summary, traders can avoid losing money in forex by:. Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund. Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin? This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam.
Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. Trader's Guide To Forex 1. In summary, traders can avoid losing money in forex by: Trading foreign currencies can be lucrative, but there are many risks.
Investopedia explores the pros and cons of forex trading as a career choice.
The forex markets can be both exciting and lucrative. Find out what jobs exist in this space and how to get them. Forex trading may be profitable for hedge funds or unusually skilled currency traders, but for average retail traders, forex trading can lead to huge losses. Deciding which markets to trade can be complicated, and many factors need to be considered in order to make the best choice. Before entering this market, you should define what you need from your broker and from your strategy.
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Online Trading & FX for Business | OANDA
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