Before trading in the forex market for the first time, here are 10 items to consider before you get started. Even if you just started trading forex, take these to heart and I think you will improve your chances of success considerably, even if only two or three of these ring a bell with you.
- Currencies trade in pairs, unlike stocks or commodities. In stocks you either buy Google (NASDAQ:GOOG) or IBM, and in commodities you will buy oil or gold, etc., but you are dealing with one financial instrument. In currencies, you are always dealing with two currency pairs at once. Ex. EUR/USD, USD/JPY, etc. Therefore, know the outlook for both countries at hand.
- Trading in currencies is cheaper than any other financial market because there are no commissions. All you pay is the market maker’s spread (which all financial markets have too). The cheaper your costs, the quicker you can get into the profits!
- Open a demo account and learn to trade it first before “going live” with real money. You will usually learn how to avoid some mistakes and also get familiar with the broker’s trading platform before you have hard earned money at risk. You can open a demo account here.
- Get educated. I can’t tell you how many people that I see that “dive into trading” this market and they don’t know how little they know. Be willing to spend that little amount because it may save you thousands in the end.
- Know where to find the data that comes out on each country and be aware of when it’s coming out.There are several sites out there that are good about having all of this data in one handy place. Here is one that I’d suggest looking into.
- Start out with a “mini account”. Many traders seem to want to start off with a “standard account”. However, this is the quickest way for the new trader to lose money that I know of. The “trading size” is so large (in number of currency units controlled) that if you are wrong, you are bad wrong! In fact, a standard account would cause 10 times the losses that a mini account would cause on the same exact trade. You can open a live account here.
- Start off trading small. By that, I mean to trade one mini lot per order at first. Start off with only one order in the market at any one time. Once you get profitable with that, then you can increase your lot size. However, if you can’t make money with a one mini lot trade, you wouldn’t have made money with 5 mini lots at risk. In fact, your loss would be five times bigger.
- Start off with a “well capitalized” account. Many traders start off saying “How much do I have to start an account with?” when they should ask their broker “How much is practical to start out with?” You will find that most mini accounts should be started with at least $3,000 to $5,000 dollars yet in the industry they will let you start with $200 to $300 dollars. Too little of capital = too high of percentage of the account risked on each trade. That’s the logic behind this point.
- Risk ONLY 1-5% of your account balance maximum. If you have to risk more of your account than that on a trade, then you don’t have enough money in your account or your stops are excessively wide. Most people err on the former rather than the latter.
- Start off trading the most liquid pairs out there. These will be the ones with the smallest spreads between the buy and sell quotes. This will be pairs like EUR/USD, USD/JPY, GBP/USD, USD/CHF, EUR/CHF, etc.
If you keep these 10 things in mind as you get started trading, you will be doing yourself (and your account) a favor. I’ve never seen anyone “live by these” and regret it.