As you are preparing to enter the forex market, the first thing you need to know is that the less prior knowledge you have, the more likely you will be to lose money due to poor trading decisions and rookie mistakes. However, that is just par for the course – everybody has to start somewhere.
Forex trading can be a very rewarding and fulfilling experience, but in order to reach that point, you will first need to set realistic expectations (more on that later) and have a willingness to learn and accept failure as part of the process. Here is how to get enough experience to trade in the forex market.
Set Realistic Expectations
Think fast: what is the first thing you think about when you see a news story about someone winning the lottery or winning a ridiculous amount of money at the casino? If the first thought that crosses your mind is ‘’Boy, I know I can do that too!’’ and you feel an impulse to put all your savings at stake, do not beat yourself over it, that is only human. Deep down, we are all searching for the perfect ‘’get rich quick’’ scheme, and it is very easy to fall victim to our ambitions.
But what most people do not know (or tend to ignore) is what goes behind the scenes. That guy who won $100,000 at poker put a lot of strategy and thought into his play. Maybe that woman who struck gold during one lazy Sunday afternoon at Forex has been on a losing streak for five consecutive months.
This is why, as a beginner, it is wise to not set your expectations after success stories. First and foremost, you are trading because you like the mechanics behind this process, and you want to try something new. What comes after long stretches of trading (money) will be the fruit of your efforts.
Start With Small Deposits
One of the biggest mistakes that most Forex rookies make is to put to put forward too much money from the beginning, without having any prior experience in terms of how investments and risk management work. The situation can become even worse when a newbie’s first trade is successful, which encourages said individual to take larger risks without putting any thought in it. This phenomenon is called the overconfidence effect, a mental bias in which a person’s subjective confidence does not reflect their real skill.
It can happen to anyone in a wide variety of contexts. Say, you start learning a new skill (programming, woodwork, what have you) and after grasping the basics, you feel like an expert. And then you hit the first bump, knocking you off course and making you realize where you really stand. The difference here is that ‘’bump’’ can represent a lot money, money that maybe you could not afford to lose. So, to minimize the risk of this happening, start with small deposits and work your way from there.
A real-life example of what the overconfidence effect can do is Bill Lipschutz. After inheriting $12000 after the passing of his grandmother, he turned them into 250,000. Feeling a surge of overconfidence, he lost all of his capital after a poor commercial decision, and an unexpected fluctuation in the market. This event taught him a valuable lesson about patience and risk management, which he then applied with great success.
Use the Right Tools
Just like a serious golfer has his trusty cross, a forex trader needs their tools to gain an edge over both the market and other participants. Forex software serves a vital role in the trading process:
- It can be a valuable learning tool
- Increases productivity
- Improves performance
As for the tools itself, here is what we recommend for beginners:
- Forex trading simulation software. This type of software does exactly what the name suggests– it creates a live simulation of the forex market using a series of algorithms. It basically creates the impression of a live trading session, along with market conditions. You can use the data gathered from these simulations to hone your trading strategy.
- The Forex Calendar help you be up to date with the latest events and announcements that have a direct effect on the forex market, such as economic news, new values, currency pairs and so on and so forth. In the Forex Market, information is power, and you will need all the info that you can get to exploit trends.
- Another useful tool that will help you identify emerging patterns is a pattern recognition It helps you spot raising wedges, current and future financial trends and currency fluctuations, things you can use to create short-term and long term strategies.
Learn to Trade the Right Currencies
Because the Forex market works on a 24-hour cycle, your best chance at obtaining an edge over other experienced participants is trading during peak volume hours to ensure liquidity. Put simply, liquidity represents the ability of a trader to sell a position (whether short or long), when the situation asks for it.
For rookie traders, the best currency pairs to trade are the following:
With patience and perseverance, you can turn forex trading from a hobby to a full-time occupation. But in order to reach that point, you have to set realistic expectations, use the right tools and learn how to manage risk and how to invest smartly.