When you read up on standard investing advice, forex trading isn’t always mentioned. The main focus tends to be on stock trading. That’s all well and good, but forex still represents the biggest financial trading market in the world and is thus clearly still attracting a lot of people. For that simple reason, we want to go over a few things you should know in advance if you –– like so many –– are considering entering the currency trade.
This is advice that works in nearly every aspect of life, but it’s especially important when it comes to finances. Make sure your goals are more specific than, “I want to earn some extra money.” Think of SMART goals –– objectives that are “specific, measurable, achievable, relevant, and time-bound.”
Once you have your goals set, you can look into what type of trading would be best to achieve those goals. If the conditions and possibilities in the forex market match your SMART approach, it may be time to give it a shot –– though you may also want to dabble in multiple types of investment to see what works best for you.
Stop-loss orders are conditions that you can set so that your trading platform will automatically sell your currency or asset when it drops to a certain value. These exist to mitigate loss; if your stop-loss is set at a slightly lower value than what you paid, you won’t lose as much as if you didn’t have a limit in place and the value of the asset plummeted.
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Of course, it’s not pleasant to lose money on any investment, but experienced traders learn to cut their losses, and the stop-loss approach is common in forex simply because currency prices fluctuate so much (albeit within tight ranges).
It’s referred to at The Balance as the most important rule of investing: never invest money you can’t afford to lose. Set up a budget tracker, make sure you have every bill covered, and ideally an emergency fund as well.
Once you’ve done this, you can determine what portion of additional money at your disposal should be diverted toward investments –– whether in forex or any other market. Remember, there is always risk involved, so while you can gain wealth in forex, you should be prepared to lose what you put in without disaster ensuing.
There’s a variety of trading platforms to choose between in the investing world, and it’s important to find a reputable one that you feel comfortable using. These days, it’s easy to be convinced that a platform like Robinhood or Stash represents your main option for investing –– because a few newer, app-centric companies like these do an awful lot of advertising.
Beyond the trendy newcomers, however, FXCM notes that numerous large platforms have been around for some time and have “hundreds of downloadable apps” attached to help forex traders. Some such platforms include Trading Station, MetaTrader 4, and NinjaTrader.
When a trade goes well, you create a positive feedback loop. Your success turns into confidence as a result. Similarly, it can be very easy to fall into a negative feedback loop if and when your trades don’t go as well.
Both reactions are instinctive and understandable –– but it’s important particularly in forex to be mindful of not turning too negative. Currency prices fluctuate by tiny amounts all the time, and even the best traders lose money on plenty of trades, with the idea being to earn net gains.
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When you focus too much on the losses along the way, however, you can succumb to something called loss aversion –– which Psychology Today describes essentially as a form of anxiety about losing what’s ours. Of course, you should protect your investments as best you can, but when you get into forex it will be important to keep outsized reactions to loss in check.
Ultimately, it is also important to recognize that forex is trading –– not investing. And for some, that may be the difference. Jim Cramer implores young people to buy assets they can hold for a long time, for instance, so that wealth can grow with relatively little activity or effort. Trading requires regular attention and some expertise. This doesn’t mean you shouldn’t consider it, but it does mean the decision to get involved needs to be made with care.
We hope this list of considerations helps you toward making that decision.