Forex is perhaps the largest financial market in the world, in terms of the trading volume. The decentralized system and the worldwide network of the currency market allow continuous transactions and trading to take place, which also makes it highly volatile.
As a result of the vast amount of transactions taking place constantly, the forex market is also considered the most liquid market and is probably the reason why most traders are attracted to it. The rapid ups-and-downs imply higher chances of both profits and losses as well.
To sustain your trades, it is crucial to be in a safe position in the market. Here are 5 keys to safe trading which could help to support your trades.
1. Start small
Before you take a step into forex trading, you need to have market experience. Opening a demo/practice account is always recommended before you put down your capital. A demo account helps you experience the market and figure out what works best for your money.
Once you are aware of the various market insights and factors that can put your money at risk, you would be able to make better decisions and attempt to minimise your losses. This further helps in locking in a safer position in the market, giving your portfolio an edge over others.
2. Keep a trading log
Monitoring the market alone by keeping an eye on profit/loss is not enough to sustain your position. You need to broaden your research by keeping track of all your trading activities. By doing this, you will not only understand the market better, you will also get a broad overview of your trading strategies as well.
You should take note of where your money performed well and where it missed the target, the geopolitical situations at that time, the trends that affected those trades, all these factors will help you frame a more sustainable strategy.
You are less likely to commit the same trading errors, and reduce the likelihood of losses when you keep an accurate record of all transactions.
3. Use your better judgement
The forex market is quite volatile. The rapid fluctuations in price levels might force you to change the direction of your trading plans. However, you must refrain from getting carried away by transient trends. One diversion can disrupt all your trading goals. Use appropriate timeframes and trade only what you can afford to lose.
4. Know your currency pairs
Know your currency pairs and the factors that can affect their value. Every country’s financial system works differently. Economics varies from country to country. One change in policy can lead to overnight price fluctuations.
You need to understand the different market sentiments of the countries whose currencies you plan to trade.
5. Choose the appropriate stop loss levels
This is probably the most frequently given advice in the currency market, as it helps you to protect your trading account from incurring heavy losses. More importantly, you need to choose the right level to place it.
Be rational and logical when placing your stop loss orders. There are several methods for deciding the correct spot. Get a keen understanding of all the different methods, and pick the one which works best for you.
The Foreign exchange market can be both enticing and risky to trade in. The price fluctuations make it a hub of trading opportunities, but only if you understand the market thoroughly.
Nevertheless, there are certain things you can only learn and experience when you enter the currency market. The more time you spend in the market, the better you will understand it. Keep in mind these safety rules and give a kick-start to your trading journey.
(The author is Chief Strategy & Trading Officer at Vantage- a global, multi-asset brokerage firm)
Disclaimer: The views and recommendations are those of the individual analyst and not of MintGenie.