Trading currencies on the foreign exchange market is one of the most attractive investment vehicles due to its inherent volatility. High volatility offers the opportunity for large gains, but it can also amplify losses. That’s why new traders need to adopt sound strategies and adhere to tried and trusted philosophies early on their “journey” to lay the groundwork for long-term success.
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There are different aspects of forex trading that you should focus on when starting out. Three of the main priorities are a positive mindset, bankroll management and trading strategies. Each of these can affect the other so following a few forex trading tips will help you to keep on track.
Put the fundamentals in place
Before you start buying and selling currency pairs, you should first familiarize yourself with the main concepts in forex markets. You should understand how a broker acts as an intermediary and gives you access to leverage, be aware of how stop-losses and other tools can be used to drive profits and minimize losses, and generally know key terminology like going “long” or “short”.
After educating yourself, it’s time to start practicing on a demo account and thinking about bankroll management. Most investors follow a 1%-3% rule for forex investment. That means you would only invest around $50 if you had access to $5,000 in your account. This is important early on as a string of losses could put your account in jeopardy. Effective bankroll management will enable you to learn “on the job” as a beginner.
Manage your emotions
Softer skills are also crucial in forex, even if you excel in crunching numbers and analyzing charts and patterns. Not every person is cut out to trade forex daily. It can be a pressure cooker environment where a prolonged downside could put you on “tilt” and negatively affect your decision making. When you first start trading, be aware of how forex trading is affecting your emotions. Try to be positive and be ready to take a step away to regroup if you need a short break.
Start using simple strategies.
There is no need to complicate things when you first start out. Simply following breakouts and looking at support and resistance levels can be enough to identify great opportunities to make gains on major currency pairs such as GBP/USD.
A breakout occurs when an asset moves beyond a support or resistance area. This is a sign that a new trend may have started, which gives you the opportunity to benefit if you act quickly. A viable breakout strategy would see you buy a currency when it breaks above either, for example, a 20-day high or low. This is sustainable in the long term if you watch the markets closely.
There is a downside that the breakout signal might not always lead to a new trend. This is known as a false signal, which can be a problem if you don’t exit the market quickly enough. Making use of stop-losses can help here. Setting one up to close based on time parameters can limit your losses.
Moving average crossover
Another beginner-friendly strategy centers around the simple moving average (SMA), another tool that can identify trends. Forex traders use two SMAs, a faster and slower one, and they generally look to enter the market after identifying a bullish trend. This occurs when the shorter SMA crosses above the longer SMA. A sell signal would see the opposite occur.
Traders use both breakouts, SMAs, and a range of other indicators and charts to gauge whether it is a good time to buy or sell a currency. That’s why getting to grips with charts and tools is vital for new traders.
Stick to day trading
Forex trading strategies are also dictated by the amount of time a particular position is left open. “Scalpers” try to capitalize on smaller price movements to make lots of small profits. Forex is ideal for scalping due to its volatility and liquidity. However, beginners should opt for simpler day trading strategies to begin with.
Day trading is the process of opening and closing positions during a single session. While scalpers enter and exit the market within several minutes, day traders usually open and close based around 30-minute and 60-minute intervals. Day traders don’t keep positions open overnight as doing so can increase the risk of a trade.
To conclude, forex trading can appear overwhelming at first but by starting small with simple strategies and adopting a positive, focused mindset and a well-managed bankroll, you can ensure this journey will be long lasting and potentially profitable in the long term.