4 Tips for New Forex Traders
Getting into forex trading can be exciting. It’s a market that is at once similar to and wholly different from other kinds of trading, and accordingly it presents interesting challenges and opportunities. Ultimately though — as with any other new type of investment you might decide to explore — it requires a thought-out, strategic approach.
To help you with that approach if you’re considering getting started in forex, we’ve drawn up a few tips that should be useful in the early going.
1. Take Advantage of Flexibility
When we discussed why someone would start forex trading in a previous post, we mentioned the notion of enjoying more flexible trading. This idea comes from the fact that forex operates at all hours, as well as that the high liquidity and sheer size of the market allow for most any approach you might favor. You can day trade with small amounts; you can invest more heavily over the long term; and you can figure out any hours that may work best for you, or for the currency pairs you’re trading. These are really some of the main perks of the forex market. From the beginning, you should look for ways to take advantage of the flexibility.
2. Know Your Protections
Experienced forex traders will often take advantage of a variety of protections that exist specifically to guard against losses or solidify earnings. Primarily, this means placing stop limit and stop loss orders. Though there are differences between these two types of orders, they are meant to save a trader from suffering a significant loss. Basically, you can put in an order such that that if an asset dips to a certain price (or below that price), your holdings will automatically be sold. You’ll take a loss, but automatically avoid a worse loss. These are actually fairly simple features of both forex and other markets. But it’s a good idea to fully educate yourself about protections like these before you get started, so that whether or not you use them, you trade as strategically as possible.
3. Learn About CFDs
A typical forex trade involves buying or selling a currency pair. For instance, you might “buy” a quantity of the Euro against the U.S. dollar, denoted EUR/USD. Then, if the Euro goes up against the dollar, your investment gains value and you can sell for a profit. However, there’s another way of trading forex altogether, in the form of contracts for differences. Trading CFDs on forex pairs means instead that you are securing a contract that indicates whether or not you think the Euro will rise against the dollar. From there, it’s simple: If you’re right, you profit, and if you’re wrong, you take a loss. All in all, it’s an interesting alternative method that you should at least learn about if you’re starting out in forex.
4. Know Your Leverage Options
Leverage is a popular concept in forex trading, though it comes with both pros and cons. Defined as borrowed money, leverage is essentially what a broker will allow you to trade based on your investment. If you like, you can generally make forex trades with significantly more money than you actually invest. The benefit of this is that if you trade well, your gains will be that much higher. Naturally though, losses can be more significant as well. As with protections and CFDs, leverage is something you should explore and learn about before starting with forex, even if you don’t end up using it.
Once you’re getting started, you’ll need to learn various strategies as well. You’ll need to gain an understanding for different currency pairs, how the market moves, and so on. But the tips above will help you to quickly grasp the options that are available to you in this bizarre, exciting market.