4 Important Things to Remember When Trading on Forex

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Popularly known as the Forex Market, the Foreign Exchange Market is a tremendous earning platform. Usually, the average turnover of the Forex Market is over three trillion dollars annually, making it the top liquid market in the world, with more stock traders deciding to trade on Forex every day.

forex trading app

This liquidity has made it the most popular market among new and seasoned investors alike. Most people decide to trade in the Forex Market with the intention of making some extra money on the side, while a few also wish to make it their full-time career. The easiest way to trade Forex is by opening an account with a Forex broker who offers a user-friendly platform such as MetaTrader or cTrader.

In order to be successful at Forex trading, there are at the very least five important rules to take with you while you learn how to trade on the Forex market.

1. Forex Is Very Different Than Stock Market Trading

The Forex market is very similar to the stock market in that prices are constantly fluctuating based on the supply-and-demand rule, there is an ever-changing bid and ask value, and in the types of order mechanisms used by traders. But the similarities pretty much end there. One of the significant differences between Forex and stocks is the number of trading alternatives available to traders.

Compared to the thousands of equities on the stock market, Forex has only a few currency pairs to choose from. Most Forex traders focus on around seven currency pairs: GBP/USD, EUR/USD, USD/JPY, USD/CHF which are the four “major” currency pairs, and USD/CAD, NZD/USD, AUD/USD which are the three commodity pairs.

When learning how to trade on Forex, it is best to stick with these seven and shy away from the more “exotic” currency pairs.

2. Create a Trading Strategy and Stick to It

Creating a trading strategy is one of the golden keys to Forex trading. And this holds true with any activity you do. People who make plans are more likely to have success in what they do than those without.

  • Outline your trading plan
  • Set your stop-loss and take-profit points
  • Explain your entry and exit points

Sticking to your plan is the primary element of your trading success. But keep in mind that your strategy can always be modified because change is the driving force behind your trading improvements. Nevertheless, adjusting your strategy should only occur when you find no other positions open. Furthermore, never modify your plan to keep losing positions open longer.

3. Pick a Derivative Strategy Best Suited for You

Trading in Forex means investors are spread betting. These kinds of derivative strategies. For those who don’t know what a derivative is, it’s an asset that you don’t own. Instead, you’re speculating on whether or not the value of the asset will rise or fall within a predefined period. That time frame you bet on is called the spread.

Short selling. Selling securities that the seller doesn’t own or has borrowed. Short selling is the assumption that the price of the security will drop, allowing for the seller to by it back at the lower rate to get a profit.

Copy trading. When you copy the trading habits of successful, more experienced traders.

Mirror trading. This is when you copy specific trading strategies instead of the traders.

4. Set Stop-Losses to Minimize Loss

Even though this has been mentioned above, it cannot be stressed enough. It is vital for your financial survival to set stop-losses. Every game has wins and losses, but if you don’t have what it takes to keep on playing, then you will not be in the game at all. The reason why many novice Forex traders are not able to move forward with their dreams of making extra income from trading on the Forex market is that they end up losing all of their capital.

Ryan Yarbrough is a small business consultant, speaker, and the manager at Davis Financial Services, a small business consulting firm.

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