FX trading is one of the most popular forms of trading. Instagram is littered with young ‘influencers’ who boast the wealth they’ve acquired through forex trading. But this image is somewhat of a fabrication. Yes, you can make a lot of money from FX trading, but most people end up losing money – especially if you’re new to trading forex. So, here are five forex trading tips to follow to help you become profitable.
- Specialise in an FX market
- Take the downswings with the ups
- Manage risk
- Plan ahead
- Utilise stops and limits
1. Specialise in an FX market
Trading is exciting. With over 5,000 markets available on our platform, there no shortage of opportunities. But that temptation of opening multiple positions across a range of different markets is what often gets traders into trouble. Don’t be a jack of all trades before you’ve mastered one.
Focus on one or two FX pairs at first. Research them, get to know their history, why they have been volatile, what is likely to affect their prices etc. Then begin trading. The more you trade, the more experience you will gain. If you get to know specific markets inside out, you have more chance of being profitable.
2. Take the downswings with the ups
Another fatal mistake some traders make is closing positions too early if they start to loss money. Volatility, specifically this year with a trade war between the world’s two largest economies, the Brexit saga continuing and a slowdown of the German and Chinese economies, is very common. Therefore, most trades you open are bound to be down and losing money at some point – especially when taking spread into account.
The important thing though is to not just simply panic and close the trade at a loss but analyse why it’s in the red and act accordingly. That’s not to say that you should never close an unprofitable trade, but equally if you close a trade as soon as it starts losing you money you’re going to almost always miss out if/when that market becomes profitable. As long as never risk more than you can afford, it should not always be a problem if a trade falls into the red.
3. Manage risk
Talking about risk, we all know trading consists of very high risk. But to combat that and mitigate potential losses, brokers offer you options to help you manage risk. It’s certainly worth utilising these to help combat the unpredictable FX markets.
At ETX Capital, we offer free Guaranteed Stops, meaning your stop will be executed and your position closed when the market hits the price you set even when there’s slippage or gapping. We also offer a number of hedge markets, so you can have two contradicting positions open simultaneously. Managing risk isn’t all about implementable tools. Our award-winning education can teach you about theories and concepts of risk management. Join us for the host of free webinars we offer, watch our platform guides and or explore our range of eBooks to further your trading knowledge.
4. Plan ahead
Any news surrounding a country can impact that country’s currency. With the UK, the pound is being heavily influenced by Brexit developments (or lack of), the race to be the next PM and the strength of the FTSE, to name a few. Any changes to these three points and the pound will likely fluctuate.
However, that is literally only half of the issue at hand. Regardless of how the pound is reacting, when trading FX pairs there’s always going to be another currency to factor in. When trading GBP/USD, not only will the UK’s dealings affect it, but also the US-Sino trade war, or on-going relations with North Korea etc.
Good FX traders will anticipate when the volatility may hit. They do this buy researching ahead and looking for scheduled meetings, votes or something that may have an impact on the strength of the currency they’re trading. Of course, there’s always going to be some unforeseeable surprises along the way, but by anticipating periods of volatility, traders can manage risk accordingly.
5. Utilise stops and limits
Stops and limits are the bead and butter of risk management tools in trading. Most traders will use them and given that they’re almost always free, it makes sense to do so. It’s good practice to have in your head levels at which you will close a trade in terms of high and a low price, so why not just set the stops and limits to those levels and ensure you limit losses and secure profits?
Stops and limits can always be changed, so if some unanticipated news comes out that will affect an FX pair, you can alter them accordingly. But by using stops in particular, you don’t have to be glued to the screen watching the markets’ every move. If something does suddenly happen that causes your FX pair trade to crash, the stop will ensure you only lose a proportion of your investment.
If there’s one point to take away from these tips, it’s to expect forex markets to continue to be volatile this year – 2019 has been full of it so far. Although you can’t determine how volatility will affect your open positions, you can prepare for it the best you can and ensure your positions are properly protected.
To give yourself the best chance of riding out the volatility that the FX markets may feel, education is the answer. Learn and observe why the FX markets are moving the way they are, manage the risk effectively and research up on what is coming up that may cause the forex markets to change.