Forex trading can make you serious money, but don’t ever make the mistake of assuming it is easy. There is a lot that can go wrong and many inexperienced traders jump in feet first without learning the ropes. Here are some tips to help you better understand the forex market and avoid any expensive mistakes.
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Have a Goal
It is always better to have a defined goal. For example, your goal could be to earn enough money to pay for a new car or vacation. This gives you a clear way to measure your success or failure. Write down your goal. Have a timeframe in mind, so you are not chasing rainbows indefinitely.
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Understand Your Tolerance to Risk
Forex trading is risky. The foreign exchange markets are notoriously volatile and currency pairs fluctuate in value from one minute to the next. Trading on the forex market is not for everyone and it can be quite unnerving if you have a low tolerance for risk. Bear this in mind before you start trading and make sure your risk tolerance is aligned with your goals.
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Select a Reputable Trading Platform
There are many trading platforms out there, so research some and find out what they offer. Look for a trading platform or broker with a good reputation for customer service. If it offers extras such as forex trading signals, analytical tools, and an app, even better.
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Try a Demo Account First
It is better to start with a demo account until you understand how forex trading works. Most major online trading platforms offer demo accounts. They are a very useful tool. Play around with your demo account risk-free and try out some different strategies. If you continue to lose money no matter what you do, reconsider whether forex trading is for you.
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Start Small
Start small by investing very small sums. Do not over leverage your transactions, as you could end up losing a lot more than you can afford to lose. Stick to small deposits and let your trading account grow organically. Remember: slow and steady wins the race whereas fast and frantic usually burns out before the finish line.
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Focus on One Currency Pair
The main currency pairs are EUR/USD, GBP/USD, USD/JPY, and USD/CHF. These pairs have higher liquidity, so are easier to trade for newbies. Some traders like to stick to their own currency. This isn’t a bad idea as you will be more familiar with the market forces that affect its value. Ultimately, though, it is a personal choice.
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Don’t Chase Losses
It is all too easy to get sucked into a downward spiral and begin chasing your losses. This is what happened to Nick Leeson – he kept chasing ‘one more trade’ in a bid to recoup his losses, but in the end, he brought down Barings Bank. If your trading position is in the red, leave it be. Do not keep adding to the position in the hope of making it a winning one. You may as well go and throw your money away on the roulette wheel instead.
Lastly, make a point of educating yourself about the world’s financial markets. Follow the financial news and keep a close eye on politics, as political events also affect world currencies.