Forex or foreign exchange or basically FX trading is the art of making money through exchange of foreign currencies. Forex is an old trade and many people have made lots of money through it. The likes of Warren Buffet and George Soros have made billions of money through forex.
Forex has evolved incredibly with times and technology. Initially, only the banks and the big boys were able to trade on forex. But with onset of internet, now small players can easily trade real time, online. This has made Forex one of the most sought after online business.
Forex trading is risk
Forex is known as the giant that swallows traders, chew them and spit them out dry. Initially when I started to do forex trading, it seemed easy. I had a demo account of $25000 and I would make trades and make about $5000 a day. This seemed quite promising. Not until when I tested water with $100. It lasted only 18 hours.
Forex is a zero sum game, for you to gain, someone has to lose. Unfortunately most of the losers are the new and inexperienced traders. The professional forex traders are like vultures in the dark waiting for the new traders to put their money on the table. They know the game. They know when to get in and when to exit. They always win. These winners are usually the global banks who run super computers and have geniuses on their payroll. The average trader does not have any chance in this competitive world of Forex. Unless he is well informed.
It’s good to remember that these professionals were once new traders. They have got where they are through massive losses and continuous experiences. Qualifying in forex is baptism by fire. You have to get burnt to really master the art of forex trading
Why is forex trading risky to new traders
Forex trading is risky to new traders because of only one thing; experience. New traders plug into the world of forex with a lot of hype. I always used to ask why many professionals have never got into the billionaire mark. I even had an excel sheet, I had computed, showing that I would hit a billion dollars in net-worth in about 20 years. Let me not overrule this ambitious goal; 20 years are not yet over. But what I can tell you is, if you rush into forex, you will easily rush out of it.
New traders versus professionals traders?
In forex market, most of the new traders are the losers and the winners are usually the experienced professional traders. The difference between the two is based on these ten key elements.
- Money management strategy. New traders do not have money management strategies. They will plug into the trade without any strategy. The key strategies that each trader should consider are:
- Entry strategy – You should know when to enter into the market. Winners will enter the market when it’s underbought or undersold while losers enter the market when it’s already over bought or oversold.
- Exit strategy – You should know when you should exit from the market. Either having made profits or losses. Winners will exit having make big profits and small losses while losers will exit market having made big loses and small profits.
- Trade small. Trade only 3-5% of your account. I lost my first investment in forex because I used to trade over 10% of my account. It took me a few hours to wipe out my account. Don’t be greedy.
- Make trading consistence. Forex trade is about doing the same thing over and over again. Most successful traders have targets and once they reach them, they close. Strategies create consistency.
- Never counter losses by trading bigger. This is like borrowing more to cover a debt. It just gets you deeper into the mess.
- Trade less often. Losers trade more often. Over trading is the reason why new and inexperienced traders lose money. A professional trader will wait until when the trade has set. He will check and counter-check to make sure that the signals are all right. Then he will get in and get out having made a kill. He might do this once in a week or a month or months but he will take no chances with his investment.
- Trading in stop loss. There is always a big debate on these issues. Some say you should put a stop loss while others argue that having a stop loss is like giving up. For me, I recommend trading in stop loss. This prevents your account from getting wiped out when a trade goes bad. There is a 1:2 ratio policy where you should take profit equal to half the stop loss. For instance if you want to gain 20 pips in a trade, then put a stop loss of 10 pips. With this, if you win 50% of all your trades, then you will have an overall gain of 100%. Professional traders will gain with pleasure and lose gracefully, earlier. Losers never admit losses and they wait till it’s late.
- Trading without a strategy. Professionals trade using a trading plan. The strategy tells them when to open a trade and when to exit a trade. They also always analyze before they make a trading decision. On the other hand, losers make the trading decisions on the fly. Their trading decisions are based on emotions or human subjectivity.
- Scalping. New traders scalp the markets and also try other short-term strategies that have low probability. They do this to get instant gratification. Successful trading is boring and long term! Do remember that!
- Losers trade with emotions. They will place trades based on the emotions and sentiments. Professional traders mostly base their trading decisions based on technical analysis and fundamentals.
- Trade with anxiety. Professional traders can easily predict what they can make from a trade and they are very sure of the success. New traders are not sure of the next market move and that is why they scalp. Every time they get a small gain, they close the trade.
You should treat trading as a business, not as a hobby. Do the opposite of what the losers do and try to imitate the winners. Make your trading solid, steady and boring. In every trade you make, ensure that you know everything that is going to happen.
Before you actively start live trading, make use of your demo account thoroughly. Only start live trading if you can trade effectively like a professional trader. Remember that professionals don’t lose. And if they feel that there is a chance they might lose, they never get into the trade. Remember what I said, they are out there watching and waiting. They will only place their trades once the losers have placed theirs. And they will always win.
Patience is key. Happy forex trading.