Important Rules of Investment in Forex
Forex is a trendy word. Across South Africa, residents are exploring the largest financial market. Given the economic toll of the pandemic, this opportunity may be a lifesaver. Thanks to modern technology, foreign exchange is now at our fingertips.
Succeeding, however, is easier said than done. All too often, newbies neglect the most basic rules and pay dearly. Follow our tips to make your profits consistent.
1. Choose Instruments You Know
If you know nothing about the economy of Turkey, how reasonable is trading USD/TRY? Work with currencies whose dynamics are familiar. The South African rand is also part of an exotic pairing (USD/ZAR). Why not capitalize on your understanding of the local economy? To trade any instrument successfully, you need to monitor the two economies it represents.
The same logic applies to any other market. To profit from CFDs on Brent, you need to understand what the oil price depends on. Spot metals are majors paired with silver or gold. Market indices are linked to stocks of the largest corporations. Whatever the asset, learn about the factors behind its movements.
2. Calibrate Risk
A common rule of thumb is to risk no more than 1-2% of your capital per trade. This means if there is $10,000 on your balance, you can afford to use just $100 per trade. Small volumes may look demotivating, but a string of modest profits may amount to a lot. Risk is what any trusted broker like Forextime will mention.
Sceptics like to say that the majority of traders lose, and this is true. Only a third succeed on average, and their strategy or lack thereof is often to blame. Those who take unjustified risks end up losing. Beginners concerned about the soundness of their approach may delegate forex investments to strategy managers.
Another axiom of forex trading is setting Stop Loss for every trade. This feature is found on any popular platform. It limits the amount you can possibly lose. Without it, your balance may vanish in no time.
3. Be Aware of Your Emotions
We are irrational beings. Greed is a dangerous trait: it causes you to continue when it is high time you took a break. Brokers advise against trading if you feel depressed or overjoyed. Strong emotions cloud human judgment. A common consequence is opening new trades prematurely.
If you are overly optimistic, you think you can maximize profits immediately. If you have lost, you may want to compensate for the failure. Either way, you would be wrong. Analyze your decisions: are they based on solid market analysis or emotional urges?
4. Accept Your Mistakes
Do not expect trading to be smooth sailing: failures are inevitable. The market is beyond your control: you can only foresee its trends. Even stellar traders face a loss at least occasionally. The key is not to prevent failure altogether (this is impossible), but to limit the impact through careful risk management.
Every loss is an opportunity to improve your strategy. There is no universal recipe for huge profit: every trader has their own roadmap. Make sure the strategy fits your personal style and stay the course. For instance, if you perform badly under pressure, hurried strategies like scalping will be too stressful for you.
Mistakes are often caused by emotional behavior. Nobody likes to err, but a loss is not the end of the world. No trader is protected against occasional missteps.
5. Demo Is Not Just for Newbies
Demo trading is a mandatory element of Forex education. Do not even think of skipping this phase. It is a free opportunity to explore your software and build useful trading habits. However, demos do not lose relevance as you gain experience. Before applying a new strategy or entering a new market, apply theory to practice in the simulator.
6. Keep a Journal
Do you think keeping a diary is a relic of the past? You will be surprised by how helpful a journal will be. Note down all essential details of every trade: instrument, entry, and exit, volatility, your motivation for it, etc. With such records, it is much easier to review progress. This should be done at least weekly.
Learn from the Best
Forex is a popular topic plenty of bloggers exploit. Not every speaker may be trusted, though. Relying on tips from your broker is reasonable, but be careful with external sources. First, not all ‘gurus’ have a proven track record of profitable trading. Secondly, their advice may not apply to your style. Whatever information you receive, evaluate it critically. These days, amateurs can easily pose as experts on the internet.