FxZoo’s Top 10 FX Trading Basics that You Must Know.
Experienced or Novice Trader? Regardless of your knowledge, or experience, all traders should adhere to the following:
1. Choose a regulated broker
A real “no brainer” really. You should always be trading with a regulated broker. Ideally from an established regulator such as FCA, NFA, CySEC, ASIC although there are some newer regulators that some newer brokers are favoring. The onus falls on you to conduct your own due diligence. Do not rely on the claims your broker makes on their website. Check with the regulators website, online forums and chat rooms. After all, you are depositing your hard earned money with them so make sure they are trustworthy and reliable.
2. Your Needs & Expectations should match your Leverage Ratio
Continuing in the same vein as point 1: It is necessary that you choose the account that is most suited to our knowledge and expectations. Most Brokers offer multiple account types, trading platforms, execution methodology etc. which can be overwhelming. Regardless of the account type, platform, execution method the most important aspect is the ability to set your own leverage. Ideally the lower the leverage the better. As discussed in many articles leverage can magnify profits and, of course, magnify losses. In general, the lower your risk, the higher your chances/longevity, ideally make your choices in the most conservative way possible, especially at the beginning of your trading career.
3. Plan your trade and trade your plan
Plan your trading strategy and stick to it! Write down what your goals are and in what time frame you want to achieve them. What is your definition of success/failure? Do you have a set time to trade each day? What instruments are you most comfortable trading? Long term or short term trading? You need to have clear answers to these types of questions to have a consistent approach to trading. If you discover you can’t meet your goals, then take a step back and reevaluate. Keep a record of your “wins” and “losses” – study these trades, discuss them with colleagues, seek advice and, when needed, adjust your trading strategy accordingly based on the analysis of these winners and losers.
4. Control your emotions
Remove yourself from emotions such as panic, greed, excitement or fear. I know, easier said than done, as all traders are human beings, so it is obvious that we have to find a way of controlling such emotions and reducing their impact on trading. Novice traders are always advised to begin with smaller accounts. With reduced risk bad emotions are more controllable and you should be able to realize your trading goals. A more logical approach, and less emotional distractions will lead to a successful trading career.
5. Be a better Risk Manager
Risk management is all about maximizing profits and minimalizing loses. Sadly, many new traders (and some more experienced ones) fall into the habit of running bad positions i.e. running losses and cutting profits i.e. taking profits too soon. Ideally you should open every trade with a target you want to achieve – whether that be in pips or a $ value – and what you are prepared to lose – again in pips or a $ value. There is no hard and fast ratio but it makes common sense that you want to make more than you are prepared to lose! So if you are prepared to lose $50 you should be looking to make $100+. It is always recommended that you place take profit and stop loss orders on your open position. Again, this ensures you “stick” to your trading strategy and removes those bad “knee jerk” reactions.
6. Study, Study, Study
Market analysis is often very time consuming but is necessary to any good trading strategy/plan. Avoid trading “on impulse” purely on a “gut feeling”. Experience shows that faulty analysis is rarely the cause of a wiped-out account – a wipe out is often caused by an impulsive trade. Study technical analysis – finding the analysis that best suits your trading strategy – in addition study the fundamentals behind the instruments you are trading. Knowledge is power and breeds confidence. It should be noted that, sometimes, all the analysis in the world will not necessarily work – but analysis will, generally, help “back up” your trading plan and again helps remove the dreaded emotional trading rearing its ugly head.
7. No Martingales here!
Definition: a gambling system of continually doubling the stakes in the hope of an eventual win that must yield a net profit. Trading is not gambling. Never, ever, ever add to a losing position!!! It is pure common sense but, ignorance of the principle, or carelessness in its employment has caused disasters to novice and experienced traders alike. There is absolutely no point in adding to a losing position, unless you love gambling. A position in the red can be allowed to survive on its own in accordance with the initial plan, but adding to it can never be an advisable practice. So stick to your risk parameters and never allow yourself to “double up” when in a losing trade. The most likely outcome will be a better price average but in an amount that is much higher than your pre-defined “comfort level”.
8. Want to get rich quick?
Then rob a bank!! There are no genuine get rich quick guarantees in trading. Sure, you will find a multitude of EA’s (robots), trading programs, seminars and “money managers” online that claim to guarantee spectacular returns. But come on, let’s be sensible, if they were that good do you think they would be “for sale” for a few dollars online?
9. A “mistake” or “failure” is a “LEARN”.
Online trading is more and more accessible to everyone and you do not need to be an economics professor or quant to be a successful trader. You do however, need to be clear minded with clearly and carefully observed goals and trading disciplines. Don’t try to overanalyze (or over explain) your trading failures. A failure is a failure regardless of the conditions that led to it – just learn from that “failure” and avoid repeating it! It’s unlikely that you will become a trading guru overnight – providing the learning process is painless, and as long as the amounts that you risk are manageable, then the pains of the learning process will be harmless, and will result in you becoming a better trader.
10. Trade with a KISS
Keep it Simple Stupid! Trade those instruments you have the most comfort in trading. If you are comfortable trading EURUSD and spend all your time analyzing EUR and USD, both technically and fundamentally, and have a successful trading strategy then why, all of a sudden, start trading DAX? It is worthwhile having a certain degree of diversity in your positions/exposure – but avoid being over exposed or, even worse, over trading. Keep your trading strategy simple trading instruments you have the most knowledge/experience/comfort in.
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