The global market does more than $5 trillion in average daily volume, making it the largest financial market in the world. Forex’s popularity entices foreign-exchange traders of all levels, from greenhorns just learning about the financial markets to well-seasoned professionals. Because it is so easy to trade – with round-the-clock sessions, access to significant leverage and relatively low costs – it is also very easy to lose money . Here are 10 ways that traders can avoid losing money in the competitive market.
1. Do Your Homework – Learn Before You Burn
Just because is easy to get into, it doesn’t mean that due diligence can be avoided. Learning about is integral to a trader’s success in the markets. While the majority of learning comes from live and experience, a trader should learn everything possible about the markets, including the geopolitical and economic factors that affect a trader’s preferred currencies. Homework is an ongoing effort as traders need to be prepared to adapt to changing market conditions, regulations and world events. Part of this research process involves developing a plan – a systematic method for screening and evaluating investments, determining the amount of risk that is or should be taken and formulating short- and long-term investment objectives.
2. Take the Time to Find a Reputable
The industry has much less oversight than other markets, so it is possible to end up doing business with a less-than-reputable . Due to concerns about the safety of deposits and the overall integrity of a , traders should only open an account with a firm that is a member of the National Futures Association (NFA) and that is registered with the U.S. Commodity Futures Commission (CFTC) as a futures commission merchant. Each country outside of the United States has its own regulatory body with which legitimate brokers should be registered.
Traders should also research each broker’s account offerings, including leverage amounts, commissions and spreads, initial deposits, and account funding and withdrawal policies. A helpful customer service representative should have all this information and be able to answer any questions regarding the firm’s services and policies.
3. Use a Practice Account
Nearly all platforms come with a practice account, sometimes called a simulated account or demo account. These accounts allow traders to place hypothetical trades without a funded account. Perhaps the most important benefit of a practice account is that it allows a trader to become adept at order-entry techniques.
Few things are as damaging to a account (and a trader’s confidence) as pushing the wrong button when opening or exiting a position. It is not uncommon, for example, for a new trader to accidentally add to a losing position instead of closing the trade. Multiple errors in order entry can lead to large, unprotected losing trades. Aside from the devastating financial implications, this situation is incredibly stressful. Practice makes perfect: Experiment with order entries before placing real money on the line.
4. Keep Charts Clean
Once a trader has opened an account, it may be tempting to take advantage of all the technical analysis tools offered by the platform. While many of these indicators are well-suited to the markets, it is important to remember to keep analysis techniques to a minimum in order for them to be effective. Using multiples of the same types of indicators – such as two volatility indicators or two oscillators, for example – can become redundant and can even give opposing signals. This should be avoided.
Any analysis technique that is not regularly used to enhance performance should be removed from the chart. In addition to the tools that are applied to the chart, pay attention to the overall look of the workspace. The chosen colors, fonts and types of price bars (line, candle bar, range bar, etc.) should create an easy-to-read-and-interpret chart, allowing the trader to more effectively respond to changing market conditions.
5. Protect Your Account
While there is much focus on making money in , it is important to learn how to avoid losing money. Proper money management techniques are an integral part of successful . Many veteran traders would agree that one can enter a position at any price and still make money – it’s how one gets out of the trade that matters.
Part of this is knowing when to accept your losses and move on. Always using a protective stop loss (a strategy designed to protect existing gains or thwart further losses by means of a stop-loss order or limit order) is an effective way to make sure that losses remain reasonable. Traders can also consider using a maximum daily loss amount beyond which all positions would be closed and no new trades initiated until the next session. While traders should have plans to limit losses, it is equally essential to protect profits. Money management techniques, such as utilizing trailing stops (a stop order that can be set at a defined percentage away from a security’s current market price) can help preserve winnings while still giving a trade room to grow.
6. Start Small When Going Live
Once a trader has done his or her homework, spent time with a practice account and has a plan in place, it may be time to go live – that is, start with real money at stake. No amount of practice can exactly simulate real . As such, it is vital to start small when going live.
Factors like emotions and slippage (the difference between the expected price of a trade and the price at which the trade is actually executed) cannot be fully understood and accounted for until live. Additionally, a plan that performed like a champ in backtesting results or practice could, in reality, fail miserably when applied to a live market. By starting small, a trader can evaluate his or her plan and emotions, and gain more practice in executing precise order entries – without risking the entire account in the process.
7. Use Reasonable Leverage
is unique in the amount of leverage that is afforded to its participants. One of the reasons is so attractive is that traders have the opportunity to make potentially large profits with a very small investment – sometimes as little as $50. Properly used, leverage does provide potential for growth; however, leverage can just as easily amplify losses. A trader can control the amount of leverage used by basing position size on the account balance. For example, if a trader has $10,000 in a account, a $100,000 position (one standard lot) would utilize 10:1 leverage. While the trader could open a much larger position if he or she were to maximize leverage, a smaller position will limit risk.
8. Keep Good Records
A journal is an effective way to learn from both losses and successes in . Keeping a record of activity containing dates, instruments, profits, losses, and, perhaps most important, the trader’s own performance and emotions can be incredibly beneficial to growing as a successful trader. When periodically reviewed, a journal provides important feedback that makes learning possible. Einstein once said that “insanity is doing the same thing over and over and expecting different results.” Without a journal and good record keeping, traders are likely to continue making the same mistakes, minimizing their chances of become profitable and successful traders.
9. Understand Tax Implications and Treatment
It is important to understand the tax implications and treatment of activity in order to be prepared at tax time. Consulting with a qualified accountant or tax specialist can help avoid any surprises and can help individuals take advantage of various tax laws, such as marked-to-market accounting (recording the value of an asset to reflect its current market levels). Since tax laws change regularly, it is prudent to develop a relationship with a trusted and reliable professional who can guide and manage all tax-related matters.
10. Treat As a Business
It is essential to treat as a business and to remember that individual wins and losses don’t matter in the short run; it is how the business performs over time that is important. As such, traders should try to avoid becoming overly emotional about either wins or losses, and treat each as just another day at the office. As with any business, incurs expenses, losses, taxes, risk and uncertainty. Also, just as small businesses rarely become successful overnight, neither do most traders. Planning, setting realistic goals, staying organized and learning from both successes and failures will help ensure a long, successful career as a trader.
The Bottom Line
The worldwide market is attractive to many traders because of its low account requirements, round-the-clock and access to high amounts of leverage. When approached as a business, can be profitable and rewarding. In summary, traders can avoid losing money in by:
- Being well-prepared
- Having the patience and discipline to study and research
- Applying sound money management techniques
- Approaching activity as a business