Forex trading offers one of the best growth opportunities for people who are are looking for a way to grow their investment portfolios. This is so especially because it doesn’t take much for beginners to start reaping the rewards of trading in the forex market. One doesn’t need a huge capital outlay, advanced computer systems, or any kind of skilled expertise. All you need is a small investment, access to the internet, and a laptop. This makes it one of the most beginner-friendly trading marketplaces in the world.
However, while forex trading offers a lot of promise in terms of earning potential, it is not risk-free. Mistakes made by beginners tend to amplify the risks of trading in an online forex trading platform, and as such, increase the likelihood of failure. The good news is that there are ways to avoid mistakes that most beginners are susceptible to. Here is what you should do to increase your chances of becoming a successful forex trader.
Use stop-loss orders
Trading without a safety net could lead to you losing all of your capital. As a result, it will deny you the opportunity to recoup your losses with subsequent trades.
While making losses on trades is not unusual, you have to put measures in place that will help to prevent losses that can wipe you out. Stop-loss orders are designed to provide you with the safety net necessary to keep you from suffering catastrophic losses. They allow you to minimize your risk exposure on any given trade by getting you out in case you suffer a certain amount of loss. By setting stop orders for all your trades, you will ensure that you don’t end up incurring losses that are too big to handle.
Set a percentage limit of daily losses
Once you incur a loss, it is tempting to want to double down on your investment in the hope of recouping your investment once the market changes. Losses can also cause you to want to commit your money on a winning trade. However, this only increases your risk exposure. In case of unexpected changes, you may end up losing all your money.
Before you start trading, you should set a limit as to what you are willing to lose on any given day. Setting this limit as a percentage of your capital is a good risk management strategy as it will keep you from succumbing to the allure or emotional trading. It will allow you to set reasonable stop-loss orders, and it will, therefore, enable you to keep your risk profile at a healthy level, something that will definitely increase your chances of success.
Watch out for correlated trades
Generally, taking multiple trades is a good way of diversifying risk. Essentially, it ensures that if you incur losses from one trade, profits from the other trades can absorb the loss and thus allowing you to trade profitably.
Unfortunately, when it comes to forex trading, making multiple trades doesn’t always equate to spreading your risk. In fact, in some cases, it increases it. This is the case when it comes to correlated pairs. Understanding the effect that correlated pairs have on your risk profile will help you to avoid multiplying your losses in case things don’t go your way.
Use a forex practice account
You can avoid most of the mistakes that beginners make by simply signing up for a forex practice account. With this account, you will be able to test out trading strategies without risking your hard-earned investments. It will give you the opportunity to familiarize yourself with the intricacies of forex trading and as a result, it will prepare you for the challenges that you will eventually face when trading.
Furthermore, you can use the account to test any new risk management strategies. Doing so with a practice account will give you a better chance of refining your strategies since the process is devoid of the emotions that accompany the process of trading with your own money.