Although people with no previous financial experience can, and do, become successful Forex traders, they are in a small minority, statistically speaking. True, many beginners suffer early losses and later rally and go on to become successful, but for many the losses are too heavy and they give up, believing that forex trading is not for them.
So here are 8 tips for helping the novice trader keep his or her losses to a minimum.
- Don’t rush in without first learning how
It’s tempting to set up a trading account and dive straight in, working by the seat of your pants. But don’t. You’ll likely as not get burnt. First, set up a demo account. Apply a limited set of strategies and chart your progress, note how and when you made gains and losses.
These demo accounts offer the same experience as a live trading application. This way you get to see how the market reacts to economic forces including the news, without actually risking any real losses. That’s not to say you should treat these losses with insouciance –because if you don’t learn from them now, once you go live they are going to hurt and confuse you.
- Keep your expectations real
Don’t imagine forex trading is another ‘get-rich-quick’ scheme. Even successful traders didn’t get there overnight. It can take years to gain the experience and insight to turn forex trading into a substantial earner. So keep the day job sweet until you can at least see trading as replacing what you need to live on.
- Draw up a Sound Trading Plan
This entails not only an overall objective for your trading activities, but also a plan for each trade. So what’s your preferred currency pairing – GBP/USD? GBP/EURO and so on – what’s the leverage you will use, and how long will spend on your trading activities – an hour a day, 4 hours a day and so on. Also what’s the rate of return you expect to achieve, realistically speaking? You’ll also need an exit strategy for each trade you make, setting the upper and lower limits for the trade.
- Exercise discipline on a consistent basis
This is true of any other activity in life and is no different for a forex trader. Stick to the plan until you have enough evidence to persuade you to deviate from it. Admittedly, sometimes the market can be so volatile that you would be foolish to revise your plan, although it may be more prudent to quit trading for a while until things settle down and you can make more sense of new trends.
- Add Stop-Loss and Take Profit Instructions
If you enter a trade at the market price without specifying when you want to close or exit the trade, you are risking the whole value of your account. To avoid that eventuality you should add stop-loss instructions to all open positions.
One reason you do this is because trading is a 24-hour activity and there may be spikes in currency values that you are unaware of because you’re in bed! So you want to put a limit on your losses.
You can apply the same kind of control to your profit with a Take-profit order. Why limit your profit? Because, once again, you might think your gains are going to go up only to discover they dropped and all your profits have been wiped out. If you check a take profit order you can safely lock in your gains without needing to do anything more than collect.
- Avoid margin trading until you are well ahead
Most platforms support margin trading, which means you can enter into positions larger than your account balance. This means you can strongly leverage the funds in your account and potentially generate large profits relative to the amount invested. The downside, however, is that you can potentially incur significant losses in your margin capital very quickly.
So, clearly, don’t use it until you have begun making successful trades on a consistent basis AND can afford the larger losses on a margin trading.
- Watch out for rate spread fluctuations
You need to be aware that exchange rate spreads – the difference between the bid and the ask price – can fluctuate a lot during the day and serve you a loss. Be aware that forex spreads widen when the market closes and in response to announcements about interest and employment rates.
- You’re not in a Hollywood movie!
The stereotypical picture of a trader on a roll is a man clutching his phone, hands in the air screaming obscenities like he just scored a hat-trick in the World Cup. If you succumbed to this kind of euphoria every time your trades did well, you would soon make a huge blunder. Your character here should be all about staying cool and not chasing wins, not risking losses when you know if they go further you’ll get burnt.