Different countries use different currencies — it’s a simple truth, but it’s one that many of us take for granted. You see, those different currencies each carry a different (and ever-changing) exchange rate based on the current value of one unit of a given country’s currency. The United States has the dollar, the United Kingdom has the pound, Europe has the euro, but none of them has the same value — for example, one dollar is currently worth more than one euro, but one euro is currently worth more than one pound.
If you play your cards right, you can end up exchanging and exchanging and exchanging until you end up profiting from your exchange. Forex trading, or foreign exchange trading, is one of the most accessible day trading markets out there because of the simplicity of this concept. All it takes is a computer, a couple of hundred dollars, and an internet connection to buy, sell and trade foreign currencies in an effort to walk away with more than you put in. However, this is not a guarantee of a quick income. Many forex traders end up losing money instead of making it. There are ways to avoid this, though.
Losing Money? Stop Trading
First and foremost, the obvious needs to be said: If you can’t seem to stop losing money, then stop spending it. There are two ratios that are key to forex trading, and they’ll be your guide as to whether or not you need to give it a rest for the day: your win-rate, which is a percentage of how many trades you win, and your risk-reward, which is a ratio of how much you win relative to how much you lose. An ideal win-rate is 50% or above, while an ideal risk-reward ratio is 1 or above.
A win-rate of 50% and a risk-reward of 1 means that you lose as much as you win, effectively cancelling everything out. If you’re successful, you’ll see a win-rate well above 50 and a risk-reward that surpasses 1.
Don’t Let Your Eyes Grow Bigger Than Your Wallet
Forex trading is so popular because it has such a low entry barrier — really, anyone with more than a few bucks could stand to win (even if they wouldn’t be winning very much at all with such a low investment). However, this also means that there’s a greater potential for your eyes to become bigger than your wallet. To be truly successful at forex trading, you must first establish a risk management strategy that defines just how much of your money you’re willing to risk. The standard belief is that an investor should never risk more than a few percentages of their capital on any given trade. Likewise, an investor should set aside a given percentage of their wealth that they can afford to lose.
Of course, there will be times where you get the urge to completely ignore these percentages and risk much more than you’d normally be comfortable with. Referred to as “going all-in,” this incredibly risky practice has the potential to completely upend your risk management strategy and result in you losing far more than you’d ever be comfortable with otherwise. It’s best to resist the urge and stick to your percentages, no matter if you’re having a good day or a bad one.
Don’t Try to Get Ahead of the News
Typically, when one part of the market moves, another is sure to follow suit. It’s like Newton’s Third Law of Motion: for every action, you are guaranteed a reaction. In forex trading, these actions are usually based around scheduled economic news. As a result, many traders will try and get ahead of the news and buy or trade accordingly in an attempt to either soften the blow or maximize the profit. Don’t do it.
The price is almost definitely going to move sharply up or sharply down in the wake of a big news release. It’s best to avoid getting caught up in the extremes and stick to a strategy that gets you involved in trading after the release.
Choose the Right Broker
Getting a broker involved could be the greatest choice or the worst mistake you make in forex trading. The right one could help your profits soar to new heights, while the wrong one could see your money completely disappear. Plus, if you end up getting scammed by a fraudulent broker, the outcome could be even worse.
You need to take the time and devote attention to choosing the right broker. Consider these factors to help make your choice easier: What do I want to accomplish? What is this broker offer? Are they using reliable sources for their referrals? Once you decide, you can take additional precautions by testing the broker with small trades at first. Of course, you should also avoid brokers that offer bonuses to you.
Don’t Trade Aimlessly
Lastly, and perhaps most importantly of all, you need to make sure you are trading with purpose. Trading aimlessly and without any sort of risk management strategy is probably the worst mistake a forex trader could possibly make. Create a written document that clearly outlines your strategies, spells out your risk management plan, and details your ideal win-rate and risk-reward ratios.
Jumping headfirst into forex trading without a plan or clear outline will only result in immense loss and abject failure. Understand the risk involved, develop heaps of patience and plenty of self-discipline, and — above all else — the skills necessary to succeed. If you keep losing money or can’t seem to find your footing in the forex trading market, then perhaps it’s a sign that it’s not the right investment for you. There’s no shortage of other opportunities out there, so don’t take it personally. Just make sure to always take precautionary measures.