Forex trading intrigues many, with its promise of quick turnover and high gains, yet few understand how forex trading works, and even fewer are informed enough to engage in it in a profitable manner. If you’re an investor who emphasizes growth over value and are the type who prefers to have a hand in each investment-related decision, as opposed to handing your affairs over to a money manager or to trading in managed funds, then you’ve probably got what it takes to be successful at trading forex. Here’s what you need to know.
Unlike stock brokerage firms, forex trading firms are not regulated. Because of this, it becomes easier for a trader to be duped by a firm or broker if they haven’t done their homework. While most forex firms operate honestly and fairly, the field is wide-open for less-than-honest claims, promises and practices. As with investing of any kind, the more you educate yourself, the less likely you are to fall prey to such bottom-feeders. Be particularly careful in your choice of brokerage firm, because the funds you deposit into your trading account are not insured. If the brokerage goes under or if your broker is unscrupulous, you have no recourse. Be sure that you choose a reputable broker. If you choose to use a so-called “expert advisor”—nothing more than a euphemism for an automated forex trading robot (of which many are available), be certain that it too is reputable. The common thread you’re looking for is legitimacy.
Another key distinction between trading forex and trading stocks is that the forex markets lack the transparency of the stock markets. In contrast to stocks, which display a quoted price, a retail forex trader will never have 100% price discovery: in other words, you never can be sure that the price points at which your trades are executed are not skewed. Your trades are placed through a broker, who in turn must place your trades through a bank, which quotes him a price; you have no way of determining whether the broker has manipulated the price points in order to maximize his earnings off of your trading activities. This practice is called “leaning” and is rampant among disreputable brokers.
With the above potential pitfalls in mind, there’s plenty of good reason to invest in forex. If you do your research and prepare yourself by studying the market, and you practice trading in a demo account, you should be able to quickly develop some skill in understanding and predicting movements in your chosen currency pair. You don’t have to be a rocket scientist to develop a sense of where the forex trading opportunities are, and if you start small by trading in a micro account, you’ll soon get the hang of things. As is always the golden rule of investing, don’t trade with more than you can afford to lose, and when you begin to earn profits, leave them in your account for further trading instead of depositing additional capital into your trading account. Let your profits accumulate and withdraw funds only when you’ve reached a pre-set profit goal. Be aware that most forex brokers offer traders a high leverage ratio, but resist the temptation to take advantage of any leverage offered: it’s too easy to forget that the increased leverage will only mean proportionally increased loss if your trades don’t work out.
Indeed,you should put careful consideration into your stop-loss and take profit points, and should stick by these pre-set markers, remaining unemotional.If you’re organized enough to perform proper research, thoughtful enough to craft a solid trading strategy in keeping with your risk profile, diligent enough to implement your strategy without reacting emotionally, and dedicated enough to stay on top of forex market movements, there’s nothing barring you from turning your forex trading into a highly profitable exercise.