Forex trading is widely portrayed as a get-rich-quick scheme. On the flip side, critics are quick to dismiss the concept as mere gambling where the house almost always wins.
The stark reality is that forex trading isn’t for the faint-hearted. It’s certainly not a hassle-free way to strike gold.
Beyond the flashy cars, private jets, and glamorous parties are years of grueling hard work.
If we go by estimates, over 90% of all new traders lose their initial capital. Extreme caution is critical before venturing into forex trading.
As many seasoned traders would admit, success doesn’t consist primarily in the ability to earn profits. Rather, the skill is to protect your capital.
Small losses are inevitable. However, getting your entire account liquidated is often a consequence of untamed greed.
We’ve prepared a definitive guide to the safest forex trading tips for novice traders. By keeping in mind the following do’s and don’ts, you can minimize losses and maximize your earnings with each trade you take.
1. Educate Yourself
Many people venture into forex trading without the slightest idea about how the industry functions. A recipe for failure right there!
To excel where over 90% of traders fail, there’s much to unlearn and relearn.
Start from the basics by familiarizing yourself with forex trading. Understand the frequently traded currencies and what drives market sentiment.
Then, delve deeper into fundamentals and technical analysis. Remember to also research tips for choosing forex brokers.
Even before setting up a demo account, be sure to explore multiple forex trading blogs, YouTube videos, and user comments on online community forums.
2. Create a Trading Plan
A forex trading plan may not be the ultimate winning formula. But it helps drive your action, minimizing costly impulsive decisions.
First, determine your trading approach. Are you a scalper, day trader, swing trader, or position trader?
Next, select between trading fundamentals or technical indicators. For technical analysis, you may pick from trendlines, order blocks, support/resistance, etc.
Complete your plan by defining your trading goals and entry/exit rules. Now, back-test the trading strategy. If the plan works fine, stick to it.
You may improve your trading strategy iteratively. Just desist from experimenting with different plans every few days.
3. Go Demo Before Going Live
Taking your maiden forex trade on a live account might well be the easiest way to get liquidated. Fortunately, most forex brokers have demo versions.
A demo account lets you evaluate your trading strategy to determine its win rate. You win or lose in a risk-free environment, minimizing emotional stress.
A demo account also familiarizes you with the trading platform.
Besides, you can leverage the opportunity to test your patience and loss tolerance.
4. Always Use a Stop-loss Order
A stop loss is the minimum amount you lose if a trade goes against you. Despite mixed opinions, this is often the only thing preventing a bad trade from wiping out your capital.
Set a stop-loss order about 20 – 30 pips above or below the most recent liquidity zone.
However, beware of inducements or false breakouts. Wait for clear market signals before setting your stop-loss order.
Always target a region above/below an already mitigated demand/supply zone.
5. Set a Realistic Risk-Reward Ratio
Any forex trader would want to risk little but gain much. Fair enough!
But what should the ratio look like?
According to seasoned traders, 1:2 or 1:3 is a realistic risk-reward ratio.
For a better perspective, a 1:3 risk-reward ratio when trading $100 means you lose $100 when the trade goes against you, but win $300 if it goes in your favor.
Now, let’s assume that you only win half of all the trades you take.
That means for every three trades, you win $300 and lose $200. This would bring your net profits to $100, allowing you to remain liquid despite the 1/3 win rate.
6. Never Overleverage
Overleveraging is perhaps the most brazen display of greed in forex trading.
While you win big when you overleverage, losing a single trade could get your account wiped out.
Experts recommend a 1:10 or 1:20 leverage.
Note that some forex brokers offer leverage up to 1:10,000. Even so, stick to lower leverages unless you’re a professional with huge-margin accounts.
7. Diversify Your Portfolio, Not Currencies
Even the most experienced forex traders don’t bag paychecks every day. The market can get occasionally choppy, making it difficult to correctly analyze your currency pair. During such downtimes, you can reap big if you diversify into other instruments like cryptocurrencies and commodities.
Note that diversification strictly applies to non-forex assets. When it comes to forex trading, stick to one or a maximum of two currency pairs.
Fewer currency pairs are easy to analyze and track. More importantly, choose the most traded currencies.
Any major (currency pair comprising the USD and another top-tier currency like the EUR, GBP, and JPY.) would be desirable. You might also consider a minor (currency pair including a major that’s not USD).
If you’re new to forex, avoid;
- Crosses – A pair without the USD
- Exotics – A major + an emerging currency
- Any gold combination, due to the element’s volatility
Wrap Up
There’s no denying that forex trading can earn you millions overnight. However, that’s only true if you approach forex as a naïve gambler and your reckless maneuvers miraculously pay off.
In reality, success as a forex trader consists of compounding.
Target small, assured wins and protect your capital. Or, get overambitious and blow it all.
Happy trading!