How to Trade on the FX Without Going Broke?
You would be surprised how many traders enter the Forex market without even the minimum preparation.
For many, the FX seems like a short-cut to massive gains without much effort. However, once you enter the foreign exchange, you’d see that things stand differently.
You need to learn the terms, to know how the market operates, and how to remain in it for as long as possible.
To help you avoid sinking your account, we present you with a list of tips and guidelines we found valuable when we were in your position.
Let’s take a look, shall we?
Get Familiar with the Market Before Trading
We have emphasized this in other pieces, too just because it is so important. Knowing what you’re getting in to is crucial, especially in Forex.
Some time ago, when we weren’t entirely sure how the FX worked, we sat down, first individually and then together, and dug every fundamental piece we could find about the exchanges. The lots, the pips, the orders, the strategies, the big picture calculations.
However, understanding something “in theory” isn’t enough. We had to go through some harsh ups and downs before balancing our trading methodology.
Which brings us to our next remark.
Follow a Solid Trading Methodology
Apart from a trading strategy, your trading methodology compiles a few other concepts as well.
Think of it as your personality in front of the trading screen. Your desired trading hours, your initial deposit, your mindset towards different strategies, and reactions to overall performance.
A trading methodology is your attitude towards the Forex market. You embody that attitude, be it by manual or automated trading.
So, for us, knowing yourself as a trader before committing to a certain trade style is essential.
Define Your Goals Clearly
Once you have defined your trading personality, it’s time to set goals and follow them strictly.
Different traders benefit from various trading styles. For some, keeping a position for days, weeks, or even months is ideal. Such traders would go for position trading at any time of the year.
However, if you wish to see results daily, maybe day trading would seem more appealing.
There are also the rush seekers, striving to snatch the tiniest bits of profit over and over again. For them, scalping would be ideal. It can be exhausting but it is rewarding for those who can keep up with it.
The bottom line here – make sure you understand your trading preferences. Find out which strategy suits you best, and only then carry on to the markets.
Choose a Trustworthy Broker
Every trader needs a Forex broker to trade on the FX.
Brokerages act as the middleman between you and the exchange. They execute your trades and charge you with the “spread” on said trades. Forex brokers can also give you “leverage” to trade on higher stakes.
Leverage is something we’d focus on in individual articles as well, but for now – try to stay away from massive leverage. It can boost your winning amazingly but it can also destroy your account in a bad outcome.
That in mind, some brokerages would offer you promises of glory without particularly delivering on them. It’s true that traders decide how to operate on their own, yes. However, it doesn’t hurt to have a respectable broker on your side.
At the very least, an established forex broker would give you proper advice and not rush you into any harmful trades.
Know What Profits to Expect
Let’s say you’ve already picked a trading strategy, matching for your trading style. Now, it’s time to calculate how much to expect from this strategy in the long run.
You can use a simple equation to reach your expected profits:
E = [1 + (W/L)] x P – 1
With “E” being your Expectancy. “W” is your average winnings in a trade, where “L” is your average losings in a trade. “P” is your win ratio percentage.
Here’s a quick example:
- You’ve conducted 8 trades.
- 6 of them are winning trades, 2 are losing ones.
- Your total winnings over 8 trades are $1,800; your losses total $400.
Let’s put that into the formula now:
E = [1 + ($300/$200)] x 0.75 – 1 = 0.875
Such an outcome suggests you’ll have 87.5 cents return per every dollar invested.
Knowing what return to expect even before starting is imperative. This helps you define your goals even more clearly. It also boosts your trading strategy improvement.
To know your end goal lets you shape your career with a clear vision.
Implement Sensible Risk Management
Most beginner traders dream to “hit it big” with every single trade. However, every experienced trader would smile warmly upon such a mindset.
To earn more on each individual trade, you need to risk more. And unless you are an FX whisperer, riskier trades can do more harm than profit to your account.
Depending on your trading strategy, you’d choose a corresponding risk-per-trade percentage. It represents how much of your whole account volume you risk on every trade. Pretty straightforward, yes.
Sticking to a risk percentage in the range of 0.5%-2% per trade can be optimal.
No matter your strategy, we’d recommend such an approach to any trader. Once you get more familiar with leveraged trading, you’ll see risk percentages there are quite different.
However, leveraged trading should be reserved only for the most experienced traders. Hopefully, when you arrive at using leverage, you’d be sensible enough to use it properly.
Use Weekend Analysis
The Forex market doesn’t operate on weekends. No exchange is open then, so you can use the time to analyze your trades from the past week. Additionally, you can analyze your designated currency pairs and form predictions for the upcoming week.
Once you learn to plan your trading routes, it becomes easier to implement a stellar trading strategy. Being prepared only knocks out possible speedbumps ahead of time.
The Alliance Conclusion
Nobody can “beat” the Forex market, but we can sure as hell try staying in it.
At first, it may seem difficult, but you’ll get used to it with time. Keep a clear head before starting trading, follow your trading methodology and don’t risk too much on a single trade. Afterward, analyze every action you’ve taken, and improve your strategy.
It’s easier said than done, but it’s not impossible.
We hope these guidelines give you a good chance against the FX!