Forex market is the largest financial market in the world with over $6.6 Trillion USD daily volume in 2019.
As a beginner forex trader there are some important things that you need to consider before investing in the forex market, which includes market risks, trader safety, risk management etc.
Here are the crucial tips to help you get started with forex trading:
1) Only Trade with Top Tier Regulated Forex Brokers
Trading with a regulated forex & CFD broker would ensure the security of your funds and protect you from cyber threats and can also provide you with insurance on your funds in case something goes wrong.
Financial regulators ensure that brokers offer fair trading environment to its clients and protect traders from scams and frauds by brokers. Regulated brokers have to maintain transparency of their activity with the regulators, which makes fraudulent activities less likely than in case of an unregulated broker.
Rahul from South African broker comparison website Forex Brokers SA explains that: “To get regulated by a Top-Tier Regulator, a broker has to pass multiple credibility tests, technical assessments and have to surpass the minimum criteria for security of traders. Moreover, the regulators constantly keep an oversight on the activities of the licensed brokers through their reporting mechanism, and reprimands the broker in case of any wrong doing or bad practice.”
There are many different financial regulators across the world with different requirements and security levels for brokers and traders.
These regulators are often divided based on the region they cater like European Regulators which include FCA of UK, CYSEC of Cyprus or by level of their trust as Tier 1 or Tier 2 regulators or Tier 3 regulators. European, US, Australia, Canadian regulators are the most trusted and called Tier 1 regulators. While CySEC is ranked as Tier 2 regulator.
Traders should check the broker’s regulation based on their region or by their Trust Tier Level.
For example Traders in UK should only trade with FCA regulated brokers. Most of the EU countries have their local regulators in different countries, like BaFin is in Germany, CySEC is in Cyprus. European Traders are advised to trade with brokers licensed under EU jurisdiction which is CySEC or BaFin.
Asian traders should trade with ASIC or FCA or CySEC or MAS (Singapore) regulated brokers, if there is no local regulator in your country.
Similarly there are 2 major regulators in Africa i.e.: FSCA in South Africa & CMA for traders in Kenya. For traders in SA or Kenya, trading with brokers under these regulators will give them immediate access to legal & financial jurisdiction, in case of any disputes.
If there is a local capital markets regulator in your country then it is best to trade with brokers that are regulated locally. Moreover, it is a good practice ensure that the broker that you are choosing is licensed by multiple tier-1 and tier-2 regulators like FCA, ASIC, FSCA or CySEC.
2) Educate yourself before Trading
Forex trading is very risky, especially when done without prior experience or proper knowledge.
Educating yourself about trading is a must to understand the technical & fundamentals of currency & CFD trading. You must also learn to control your emotions while trading. This includes investing a small amount only if you are a new investor, and use that capital to learn trading in the Live market conditions.
Learn about the forex market and its patterns. Seek professional help if needed. You can also go through trading blogs, eBooks and financial market news to gather more information, and learn about trading.
Remember, 60-70% forex traders lose money. Education & experience can help you avoid common mistakes and increase your chances of making an informed trade.
3) Know the Risks of Forex Trading & CFD Instruments
It is a known industry stat that only around 10-20% of Professional traders make a profit in the long run and around 50-70% traders lose their money, some brokers have higher losing traders than others.
This is because Forex trading is very risky, more so if you don’t know well what you’re doing. And the only way to mitigate that risk is to refrain from entering a bad trade, or losing big on a few trades.
In particular, there are two factors that contribute even more to the risks involved in forex trading:
Risk of High Leverage:
Using leverage is the same as borrowing money from your broker to enter a trade.
Example: Let’s say that you use 1:10 leverage, this means that with $1000 of your capital, you can place a trade 10X bigger i.e. worth $10,000. This would mean that you are trading 1 Mini lot.
If you place a 1 Mini Lot buy order on EURUSD at 1.1000, and the market goes up by 100 pips in your direction to 1.1100, then you would gain $100 from that trade or 10% of your actual capital. But if the trade goes down to 1.0900 i.e. against you by 100 pips, then you would also lose $100 i.e. 10% of your invested capital.
This means that if all goes well, you earn a significant sum by investing just a fraction of the initial capital requirement. But, if the trade doesn’t go as planned, you’ll very likely lose more than you had planned.
So, always use proper risk management with favorable Risk to Reward ratio, and enter a trade based on the potential losses, instead of the probable gains. This can significantly reduce the risk profile of your investments.
Also, avoid entering a trade where potential losses exceed 3% of your capital, at least until you become experienced.
High Volatility & Unpredictable market movements:
The slightest of political, social, economic or natural disturbances within a country can change the value of its currency.
The value of a currency also depends on trader’s sentiments. If too many traders re-invest from a particular currency to another, the value of the former will fall.
The only way to avoid volatility risks is by staying updated on the latest trading & economic news, so you can act quickly based on any developments.
However, in spite of staying updated, unforeseen events may cause changes in the forex market like in case of end of Swiss Franc capping by Swiss National Bank, or Covid-19 pandemic that has effected almost every economy, some more than the others. In such cases, try to withdraw your investments as soon as possible to avoid more losses.
4) Practice on Demo Account
Almost all brokers offer demo accounts for free.
Most CFD & forex brokers offer MetaTrader platform with desktop, webtrader & mobile apps, so you can download demo platform of the broker that you want to trade with, and practice trading before opening a Live account.
By creating a demo account, traders will get a virtual account with virtual money that you can use to place demo orders at real-market like prices & conditions.
New traders should always practice on demo for at least 6 months or till the time you are consistently profitable on demo over a period of few months.
Remember, that you should never trade with real money until you are confident & understand the market.
Demo accounts will familiarize you with the trading platform and tools/features offered by the broker. Additionally, demo accounts are perfect for testing your trading strategy.
5) Always Use a Stop Loss
If you are trading without a Stop loss then there is always a risk that you can lose more than you had intended, or even more than your actual invested capital if the market goes against you. This risk would be magnified if you are in a highly leveraged position.
So, it is really important to always use a Stop Loss order in your trade, and stick to it. Set the Stop-loss such that the loss does not exceed 3% of your capital.
Also, check if your broker offers guaranteed stop loss, as this will ensure that you are able to exit your trading position at the fixed price that you have set, even if there is a sudden market movement that goes against your direction.
Some brokers offer guaranteed Stop Loss execution, as a Risk management feature, without any extra fees, so you should ask your broker if they have this feature.