The foreign exchange market, also known as the forex trading system, does not always guarantee a return on your investment. This is the case with most investments. But that does not mean you need to avoid the space entirely.
By following a few best practices, you'll know the best ways to reduce the risk of loss and increase your chance of success. Learn a select few, below.
Easy Does It
Easing, rather than rushing into the forex is probably the single most important thing you can do to better your odds.
The forex is a highly leveraged market, with typical leverage ratios of 50:1 and 100:1. In some circumstances, a 200:1 leverage is available. This means that with as little as a $25 investment you can—in theory at least—make a profit of almost $500. It also means that if you use the maximum available leverage, you can be wiped out in a matter of seconds when the market moves against you.
Another aspect of the forex market that differs from stock trading is that after filling out a short questionnaire about trading goals, anyone who can present a debit card and some means of identification is qualified to trade—and on margin ratios unavailable in the stock market—without depositing a cent in their forex account.
These forex trading characteristics can attract dreamers hoping for a quick cure for financial ills. In this sense, it has an attraction similar to state lotteries. In reality, the odds of winning the jackpot in a multi-state lottery are slim to none.
So far as the forex is concerned, the hazards are particularly abundant for new traders because the reality is that unlike the lottery, because the trading on the forex not a game of chance: it's a game of skill, too often a skill that new traders don't bother to acquire before placing their first trades.
The best practice when you're beginning trading is: take it easy. Set limits on losses beforehand and then stick to them. One practice that's almost always disastrous is to follow a big losing trade with another one in hopes of recovering what you've lost. That's not trading; it's compulsive gambling.
American songwriter and humorist Tom Lehrer's song, "Be Prepared," advises: "Be prepared as through life you march along..." Lehrer was kidding, but for traders the point should be taken very seriously. In fact, the phrase can even become your motto. Unless you're well prepared before (not after) you begin trading, your results will probably be about average. Average in the forex is:
- About two-thirds of forex traders lose money, many losing what they never had to begin with and ending up with whopping high interest credit card debt.
There are two great ways to prepare for a successful entry into forex trading. One is is simply to read the forex trading literature. There's a lot of it and it's all widely available on Amazon and elsewhere. Reading Amazon's customer ratings will give you a very good idea which books are useful and which are not.
The other great way to prepare is to open a practice trading account. Almost all major US forex brokerages offer them without charge. Be serious about practice trading and keep track of your results. in all cases, the practice software will do the record-keeping for you, but it won't help you unless you look at it and try to understand why some trades worked and why others failed. Your early practice trades will probably be unsuccessful. Don't let that discourage you: it's normal. Keep practice trading until over some extended period—for at least a month of daily trading—your trading results are positive. At that point, you're ready to ease in.
Being disciplined has a few essential components. First, there's the matter of deciding how much loss you can tolerate before you begin trading. Once you've decided, don't change it in response to a bad trade. That happens. Second is using your successful practice trading methods (and only those methods!) when you begin actual trading. Always stick with your plan. Without it, you're just another clueless novice, forced out of the forex after a few expensive, largely miserable weeks.
This best practice is easy. Be wary of anyone proposing to sell you some method or system that will "guarantee" results or produce some fixed percentage of profits over some period of time. Only trade through well-known and well-established U.S. traders. Investigating your potential broker is easy: go online to the National Futures Association, the U.S. self-regulatory body for forex that's similar to FINRA for stock brokerages. Once there, use BASIC, their broker-checking service. If your potential broker isn't listed or has a record of complaints, drop it like a hot rock.