Traders trading in the FX market are people with a lot of passion. Forex is an extremely volatile market. There are no rules to play by but there are ways to enter the market, prepared.
Being prepared before going into the market is about doing a lot of research about the market. The essence of volatility must be understood so that a new trader entering the market does not get too overwhelmed. For new Forex traders here are a few things that they must be aware of about the FX market :
- A trader needs a broker to enter the FX market
- There are 4 major FX exchanges: New York, London, Singapore and Japan
- FX market works 24*7 for 5 days
- In the FX market, brokers help traders with investments by lending money termed leverage
Here are 5 things that a new trader must know before opening up a Forex account :
1) Forex is a volatile market:
FX trading is not for the faint-hearted. A good day or week in the market, does not mean that a trader’s strategy will continue to work in his favor for unprecedented days to come. When the market swings against a trader’s speculation, the prices can fall steeply. This is when a trader must take a call to quit the market for that day, for safeguarding his profits. A trader must understand this fact about the FX market before he enters to trade.
2) Trading small in the Forex market in the beginning:
In the words of FX expert, Kishore M, “Trading is an enticing play. Wheplatn speculations start hitting the correct pricing and the trade swings favorably, a trader may often be tempted to play a bigger position. This would be a fatal mistake in FX trading”. As a new trader, one must invest smaller amounts. This gives a trader the guts to play the field while testing his strategy. Even if he loses his investments and makes a loss, he is still learning without really hurting his account.
3) In Forex trading risk management is a must:
A new trader must understand that trading is a speculative market, where profits are huge as are the losses. Risk management here is many faceted. When a trader enters the market, one of the first things that he needs to take care of is his own money. As a trader, one would know how much loss can he bear. That limit would be the calling point for his stop loss order. A stop-loss order would automatically close a trader’s position, thereby avoiding any more loss.
It is also a must to diversify trades. Playing just one trade would mean that a trader risks everything in one trade. This is not a good move at all. One should choose different trades to keep the opportunity of winning profits open. It is also vital to understand that the FX market is unpredictable. If the market swings completely opposite to the predicted trend, then a trader suffers loss at every trade he invested in. The question to ask here is if he is comfortable losing all the money in the worst possible situation. If the answer is yes, then one may go on.
4) In FX market a trader has costs to bear:
A broker in the FX market will trade on behalf of a trader for a commission. This is also referred to as the spread, which is a difference between the bid and the asking price for a trade. A good guess can earn the trader a good profit after paying the spread. However, a bad guess can wipe out everything.
5) Be cautious of over-leverage:
One of the most interesting features in the FX trading market is the offer of leverage. This is an investment that the broker makes for a trader. Leverage offered can be in-between the range of 1:50 to 1: 500. This would mean that for an investment of a $1000, a trader may trade up to $50,000 if he chooses a leverage of 1:50. Kishore M, Dubai based FX expert say,” Thought a broker can offer a leverage up to 1:500, a loss will mean, that the trader will owe that much money back to the broker. Hence to be on the safer side, we advise that a trader do not “over leverage”. 1:100 would be the ideal leverage size when a trader enters the market with an X amount of money for investment. As a new trader, one must understand the implication of taking leverage. A good guess will mean a nice profit. However, a bad guess will mean a huge loss, inclusive of a broker’s own investment and the leverage, which now the trader will owe back to the broker.
5 things that a broker must know before opening a FX account
Forex is a volatile market
Trading small in the Forex market in the beginning
Risk management is a must
In FX market a trader has costs to bear
Be cautious of over leverage
Forex is a decentralized global market. Unlike the stock market which is centralized, in the FX market, the buying and selling of the currencies occur over the counter. There is, therefore, no policy to safeguard the profits and the losses made in this market.