It’s easy to see the widespread appeal of the forex (FX) market. From the low entry barrier, its high liquidity, and use of leverage, traders are presented with the opportunity to make some very lucrative investments.
When trading on the FX market, you are trading a currency pair. These forex transactions are facilitated mainly through different forms of trading such as contract for difference (CFD) trading. Researching the best practices is a sure-fire way of minimizing losses and getting a firm understanding of how the markets act in general, as well as how they react to global events or stimulus. Read on to see our top three tips on how to avoid losing money on the FX market, therefore ensuring that you retain as much of your capital as possible.
Focus On Trade Pairings
In the early stages of being a FX trader, we would recommend focussing on only one or two currency pairings when investing. By doing this, you will not only gain valuable experience but also lower the risk of making losses by spreading your investments around too much. It is also imperative to take into consideration both currencies in a pairing.
Whilst your initial selection may be informed by the performance of a specific currency, the success or failure of a trade requires you to take into consideration the second asset that makes up the pair, and how well that it’s performing.
Understanding the historical relationship that exists between some pairings will go a long way in helping you make smart speculative investments, and also lead to you having a greater understanding of the market.
Practise makes perfect in most cases. Even the best-laid out strategies can fall victim to the conditions of the market, so a crucial tactic to employ is the use of demo accounts. Simply put, demo accounts work by providing a true to life simulation of the market and allow you to trade using virtual capital instead of your own funds.
These give you the opportunity to accurately test your strategies and provide a practical learning experience that actively prevents you from losing your own money over time. Without your own capital at risk, demo accounts are a perfect training ground for newbie investors and traders. Taking your time to learn the platform you have chosen to use, and the volatility of the markets, is essential when trying to avoid losing money on the FX market.
Use Stop Losses
Most modern-day brokers offer access to automated trading and risk management tools, which can automatically limit losses in real-time. Stop losses can be imposed on trades by establishing a predetermined selling price for open trades, which acts as a way of limiting financial losses.
This amazing risk management tool is perfect when traders are looking to balance a number of open trades in real-time. By automatically closing positions when they have already incurred a specified level of loss, this can really help safeguard your capital over time.
It is important to be wary of using tight stop losses on brokerage sites, as these may close a promising position before it has had time to develop, and also don’t allow for the natural volatility of the market.
There are more factors to research and consider, but in conclusion, these are our top three tips to help you avoid losing your own capital on the FX market. The more comfortable you are with employing these suggestions, the more secure your investments will become. Although the market will always have a level of uncertainty, you will be able to make more informed trades by using these techniques and tools.
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