The forex market generates in excess of $5 trillion every single day, as it continues to diversify in terms of investor profiles and the ways in which individuals can profit.
While the lucrative and accessible nature of the forex market may be alluring to aspiring investors or those with an entrepreneurial mindset, however, the foreign exchange remains extremely volatile and capable of triggering significant losses within a short period of time.
In this article, we’ll explore this idea further while considering the main mistakes that you need to avoid as a start-up forex trader.
1. Don’t Go At It Alone
Novice investors are often keen to get started in the forex market and achieve a viable profit, meaning that they may try to launch their careers without the necessary support network.
This is where online trading platforms such as Oanda come into play, as they offer a broad range of analytical and news-based tools that enable investors to inform their trades in real-time.
Not only this, but they provide a range of tools that enable traders to manage their risk and boost potential returns, with universal economic calendars making it possible to identify the data releases that will impact on specific currency pairing.
2. Avoid Being Over-leveraged
One of the key benefits associated with forex trading is the leverage that it provides to traders, but this can also prove detrimental in some instances.
So while using leverage is perfectly routine in forex trading, it’s important to know when to stop and recognize the dangers that this can pose to your capital.
Being over-leveraged can undermine everything from single to correlated trades, particularly in instances when a currency moves against their position.
3. Failing to Understand the Relationship between Currencies and Economies
While currencies represent standalone and derivative asset classes, there remains an intrinsic link between pairings and the economies that underpin them.
Even if you’re a technical trader, it’s imperative that you understand the fundamentals of the forex market and the way in which the macroeconomic climate impacts on currency valuations.
At the very least, you should try to understand what factors influence the supply and demand for the currencies that they trade, and how these entities impact on price trends.
4. Failing to use a Demo Account
If you’ve ever traded through an online platform, you’ll know that these entities offer users access to a demo account.
A demo account can be operated for between three to six months, while it essentially simulates a real-time trading environment in which investors can apply their strategies and experiment with new ideas.
This means that they can increase their knowledge and build practical experience without risking their hard-earned cash, laying the foundations for a truly effective trading strategy.
5. Risking too Much Capital on One Trade or Session
We spoke earlier about the dangers of over-leveraging, and the same principle applies when distributing your capital and executing orders.
More specifically, risking too much capital on a single trade or session can be extremely damaging, particularly when dealing with margin-based derivatives such as currency.
After all, this can cause you to lose a significant amount of capital in a short space of time, and potentially more than you can afford over time.
As a general rule, traders should risk less than 1% of capital on any trade or during a session, no matter how tempting it may be to increase their spend.