Forex trading involves changing one currency into another. As straightforward as this sounds, it’s more complex than you’d believe. Traders will exchange currencies for a number of reasons. Commerce, trading and tourism are often the main ones. One of the good things about forex trading is that the large sums of money which flow on the forex markets make it harder for unscrupulous traders to influence prices.
Naturally, the world of forex trading comes with its own terminology, which it’s important to understand if you’re going to venture into this pursuit. ‘Pip’, the smallest increment in the pricing of a currency pair; ‘spread’, the difference between the ask price and the bid price; ‘bid’, the price at which a market maker or broker is willing to buy currency; and ‘ask’, the price at which a market maker or broker is prepared to sell a currency pair; are all common terms you’ll encounter in forex trading.
Below is a look at how to make money in forex trading and at some of the pitfalls it’s important to be aware of before you embark on your forex trading journey.
Making money from forex trading
Trading currencies is an exciting endeavour, but it takes some skill. Here’s how to start making money out of forex trading:
Learn the fundamentals
Before you can start making money, you need to learn how the whole process works. If not, you could lose a lot of money, rather than make it. One way to learn about forex trading is to visit some online tutorials or even take a course in the basics. Build some solid foundations for succeeding by getting plenty of learning under your belt.
Set up a demo account
Another useful part of the learning process is to set up a demo account so you can practise in real-world scenarios without risking anything. A demo account allows you to make mistakes without any consequences and learn lessons from them. You’ll be able to learn how to react in stressful situations and to make quick decisions.
Just remember though that, sooner or later, you’re going to have to make that foray into the forex markets for real. Take your time in the demo account, but don’t stay in there for too long. It will also help to research into the best Forex for beginners accounts.
Devise a strategy
A strategy is important when making any kind of investment. Your strategy will help you determine which currencies to trade, when to buy them and when to sell them. Even more importantly, your strategy will enable you to remain disciplined. It’s easy to get caught up in the excitement of forex trading and start buying or selling more than you intend. The plan will help you to stay level headed and focused.
Keep your emotions under control
When investing, it’s essential to stay calm. Never make any trades when you’re feeling angry or stressed. If you do, you’re like to make a mess of them and regret your actions later. Greed and fear are two other major emotions that drive a lot of poor investment decisions so keep your emotions in check.
Set stop loss orders for all your trades
A stop loss order is a way to limit losses. The order will close the trade at a loss. Ultimately, it’s an order from the trader to the broker to execute a trade when the market is at a specific price which is less favourable than the trader’s entry price.
Be prepared to lose
Unfortunately, losing money is part of learning the waters of forex trading. Even the most experienced forex traders do it. It’s important to accept this and not dwell on a loss. Instead, learn from it so you can make the next trade a better one.
The risks of forex trading
You might be eager to get on a platform and start trading currencies, but forex trading is more complex than it seems, which means it’s fraught with risks. Here are some of the downsides of forex trading and some of the other things you need to know before you start:
- Small market movements can have a large impact: there’s a lot of leverage behind many forex trading products. Even though you pay only a small part of the value in advance, you should be aware that you’ll still have to pay for the whole amount of the trade.
- Exchange rates are volatile: Even in short periods of time, exchange rates can move a lot. This creates significant risk because movements in currency value may work against you, causing you to lose a lot of money.
- Limited protection risk from systems: stop loss orders are helpful, but they’ll only put a cap on your losses. You may also pay a premium price to guarantee the stop loss order.
- Trading delays can impact results: a lack of liquidity, execution risk or computer issues may stop you from making trades when you’d like to.
When forex trading, it’s absolutely crucial to decide what you want to achieve, so you can form your strategy. You should always keep your expectations realistic, which means making your goal achievable.
Forex trading is a riveting form of investing and it’s possible to make a lot of money quickly. You must, however, choose the right strategy and take the time to study forex trading thoroughly so that you can make the best investments.
The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.