Forex trading can be a lot to digest. Fibonacci retracement, central bank interest rates, moving averages, import and export figures, and the list goes on. Although it’s a bold move to try and dip your feet into the murky waters and learn from firsthand experience, it can save you from monetary losses and headaches if you try and learn some of the terminologies and fundamental concepts beforehand.
Currency Trading is Not the Lottery
Most people go into trading currencies thinking that they’ll be able to turn it into a money-making machine in a matter of weeks or months. What they soon realize that forex trading can guzzle more money than it generates, especially when spearheaded with the wrong understanding of the business. By acknowledging this one simple fact, you end up making higher-probability trade decisions over time, rather than hastily opening and closing positions.
High Leverage Does Not Equate to High Potential Gains
Foreign exchange brokers are well-known for their high leverage account offerings. This is not to be taken as a token of generosity. High leverage trades do not always end well. As much as it can amplify potential gains, it can amplify potential losses. Forex accounts are usually leveraged higher, with brokers offering as much as 200:1, meaning you can control $200 in asset value for $1 of your own cash invested.
There are three types of currency pairs that are available in a standard forex account – majors, cross-currency, and exotics. Major pairs include EUR/USD, USD/JPY, and GBP/USD and are more stable since they are backed by more established economies. Cross-currency pairs like EUR/NZD and CAD/JPY are those that do not have the US dollar mixed into the pair. It was created to make possible the conversion of two currency rates without the need to convert it into US dollar first. Exotics like USD/MXN and USD/SEK tend to be traded in less frequency hence the cost to trade them are usually relatively higher.
Pip is the standard unit of measurement in currency trading. The tricky part is that one pip varies in value depending on the currency pair and position size being traded. For example, 1 pip movement in a $10,000 NZD/USD position will generate either a profit or loss of $1. On the other hand, 1 pip movement in the same sized USD/CAD position will only gain or lose $0.80. Getting used to this unit of measurement is vital to make quick conversions on the spot and to adjust positions in accordance with predefined risk management rules.
Winning Should Not Be Your Main Focus
As enjoyable as it is to think and focus on winning trades, it can do your account harm if such thinking continues. Risk management should be your main focus if you wish to succeed as a trader for the long haul. Prepare yourself mentally for losses and avoid thinking that any one strategy will protect you from even the smallest loss.
There you have it – five tips to learn and master before entering the currency market. Understanding each of them in-depth will make you less susceptible to the common pitfalls that currency traders encounter and oftentimes succumb to while simultaneously increase your probability of making consistent financial gains.