5 things to consider before trading forex
Forex trading is an exciting and potentially lucrative endeavour, and it has remained one of the most popular forms of trading for many years. These days, the forex market is the largest financial market in the world and the most liquid, with over trillions of dollars in trading volume processed daily.
If you are considering tapping into the market and giving forex trading a go, you may be relieved to learn that it is less complicated than you think. Nevertheless, there are several important factors you should consider before trading forex. Below, we take a look at 5 main ones:
The first thing to consider before trading any instrument is your budget. In other words, this is how much you can afford to lose. Even though many of us do not like to think of trading as leading to a loss of money, the truth is, many traders do lose money. Therefore, it is necessary to plan for the worst.
Some people determine their budget based on rules, including the 2% rule, which indicates you should never trade more than 2% of the money you have. Some traders also follow other routines, such as devoting a small percentage of their paycheck towards trading each month, to build up their account funds over time.
Nothing is set in stone when it comes to budget. However, it is advisable to start small, because you can always top up your funds later.
Risk management is how you handle the volatility and uncertainty that come with trading. There are different ways people manage risk, but it boils down to ensuring you maximise your profits while limiting your losses.
Traders may use risk management tools such as stop-loss orders or automated trading, which allows them to exit and enter trades depending on market performance. Traders may also learn about trading psychology to ensure they do not fall in the trap of over-trading.
A trading strategy is different from a trading method. A trading strategy includes the indicators and analysis tools you will be using to make trading decisions, rather than how you will approach your trading overall.
Popular trading strategies include:
- Trend-following strategies: these strategies follow a market trend, and traders enter trades in the direction (or deliberately against) the trend. Traders mark trends using indicators such as moving averages.
- Range-bound strategies: these strategies focus on trading within a certain price range. Traders mark ranges using indicators such as support and resistance levels.
- News-based strategies: these strategies focus on trading based on economic news releases. Traders use an economic calendar to mark important events that can influence currency pair prices, and they trade based on their predictions and general trader sentiment.
You should also have your trading goals defined before you place your first trade. This can a tangible goal, such as a percentage of fixed number related to profits – how much money you want to make by the end of the year, for example. It can also be less tangible goals, such as improving your trading technique and learning more about a certain currency pair.
Knowing your trading goals is important, but it is even more important to stick to them closely when you are trading. It is easy to feel over-confident in rising markets and it is easy to make impulsive decisions in volatile markets. Know what you are working towards and update your goals at the end of a set time period when you feel ready to do so.
You should also ensure that you have sufficient market knowledge before you trade. This is in relation to the forex market (broadly) and the specific instrument you want to trade. Know when the forex market opens and closes, and know when the most active trading hours for your currency pair is. This can help you make more informed trading decisions.
You should also make sure you know what drives the price fluctuations of your chosen currency pair. For example, if you are trading the US dollar against the UAE dirham, you should know what factors cause it to appreciate or depreciate. If need be, you should understand how inflation rates, GDPs, and interest rates affect the currency pair.
Get started trading forex
Once you decide to trade forex, you can follow the 5 steps outlined below:
1. Choose a suitable broker
A small part of your success depends on the broker you choose to trade with. To ensure you make the most of your trading experience, you must choose a broker that is licensed in your region to lower the risk of fraud and scams. A good example is Saxo Broker Dubai. You must also ensure the broker offers the instrument you would like to trade. In the case of forex, this is the currency pair you would like to buy or sell, with the leverage you would like to use.
Finally, aside from a broker that is reputable, you must ensure that it is one suitable for you. Check their fee structures, such as the commissions they charge and any additional trading fees you may incur. It is important to select a broker with transparent fees, because having high transaction fees can surely eat into your profits.
2. Open a live forex account
Once you have chosen your broker, you can open a live account. This allows you to start trading with real money. Some brokers offer accounts of different tiers, ranging from classic to premium to VIP, depending on the amount you are trading or your trading frequency. Many also offer corporate and business accounts for finance professionals looking to get into currency trading.
Additionally, many brokers offer demo accounts, in which you can trade with simulated funds. This allows traders to practise and employ new strategies, and it also enables them to see if forex trading is right for them.
Once you have created your account, you will need to verify your identity. This is often an automated process where you upload a photo ID, and your account should be approved shortly if the information you give is correct.
3. Fund our account
When you have created your account, you can start funding it to begin trading. You can usually do this through a bank transfer or by using a credit or debit card. Some brokers also allow you to fund your account through other ways, such as PayPal or Stripe. However, this depends, and you should check your specific requirements beforehand.
Depending on your account tier, you may also be subject to deposit minimum requirements.
4. Familiarise yourself with the trading platform
When you have funded your account, you can familiarise yourself with the trading platform in terms of how to execute trades, including entering and exiting new positions. You can also check whether you can operate third-party tools and plugins, such as automated trading algorithms and strategies.
Becoming familiar with the platform can give you a great advantage when trading, and it can help you set up your risk management tools properly and effectively.
6. Place your first trade
When you are ready, you can place your first trade. Be sure to have an exit strategy before you open a new position, and you should continually monitor the markets closely.
The bottom line
Forex trading is certainly popular with traders, and the market is incredibly liquid, making it easy for many traders to enter and exit trades as they wish. If you are looking to start trading, you should consider your budget, strategy and goals, market knowledge, and the risk management tools at your disposal. You should also remember that traders are never guaranteed profits, and you should therefore never trade more than you can afford to lose.https://businessegy.com/