12 Ways to Avoid Losing Money in Forex Trading
It is essential to have a rigorous system in place to minimize losing money. Below we list the most critical areas of consideration to help reduce the risk of losing money.
Do your research
Do not dive in and trade if you have no underlying knowledge of the forex markets. Here are the key areas to consider
- Understand how foreign exchange works, including quotes and what factors affect it.
- Will you use technical analysis or fundamental analysis?
- Will you use manual or automated software?
- Which domestic and foreign currencies or currency pairs will you trade?
- What hours and which session (European, Asian, US) will you operate?
Use a reliable broker
Only open an account with a broker that is registered with both the CFTC and the NFA. A central issue here is making sure your deposit and funds in an account will be safe.
Make use of a demo account.
Good brokers will have a demo account for you to use before going live. Make full use of this to practice getting familiarity with the broker platform, so order errors do not occur when you go live.
Begin with small trades and pre-plan
If you have had success with a practice account, it is a great start. When going live, critical risk is emotion. Real money is at stake. Trading in a small size will allow you to practice minimizing emotion, which is an unwanted part of trading. Emotional trading occurs when you do not pre-plan your trades.
Protect the downside
Always put a stop loss in place to protect your trading account. Foreign exchange is a fast-moving financial instrument. Unexpected news can move the forex market. If you have a leveraged position without a stop loss, this could wipe out your cash.
Exit trades properly
If you are in a winning position, do not come out too early. If you are in a losing position, do not compound the damage. Try and minimize stress and emotion in your decisions
Be aware of leverage
Leverage should be used with care when you are starting in forex. Brokers can offer up to 50 times of leverage. If you have $5,000 in your account, a $250,000 position results from using 50:1 of leverage.
Do not trade for the wrong reasons
If a currency pair is not moving, do not enter a trade just because you are bored. Have a trading strategy in place for your trade
Do not give up too easily
Getting trades wrong is normal. Even if you are having a bad trading day, try and keep to your daily trading limits and not quit because you are losing.
Maintain accurate account book-keeping
Keep an accurate record of every trade. Having instruments traded, why you entered into a position, and the profit and loss to hand can help you identify mistakes and avoid doing them in the future.
The impact of tax
What is the impact of tax on your FX trading? Ensure you do not have any unexpected tax bills to pay from your FX trading. A tax specialist can also advise if your trading can be tax efficient.
Trading is a business
You do not become a successful FX trader overnight. Stay organized, set realistic goals, and treat every day as just another day at the office, whether you have winning or losing trades.