Within the next lines, you will discover the three things you need to know when you are starting to trade currencies on Forex.
1. Gradually learn to increase your gains.
Trading Forex will not allow you to transform your account from $10,000 to a million. The return is more related to the risks you take rather than the quality of a strategy.
The famous saying “it takes money to make money” is also correct for trading in the currency market. Many traders started with a modest amount on their account, and now they are making living trading on Forex. The point is that they have gradually learned to increase their capital, making it possible today to generate viable income.
If you have a strategy that builds on the advantage of trade, the expected benefits will be positive, but without leverage, the amount will remain relatively small, even minimal. And in case of bad luck, a series of losing trades are still possible. Some traders are often aiming for disproportionate gains, and that is why they incur considerable losses. Leverage is useful up to a point, but it can turn the winning strategy into a rout. Also, make sure to grasp the technical analysis at some point if you want to avoid a bull trap.
2. The Leverage Effect Can Transform a Winning Into a Loss
Be always sure that too much leverage can jeopardize a profitable strategy. Let’s say we are playing a coin toss. If the coin falls on the head, you win $2, and if the coin falls on tails, you will pay $1. Would you play this game? Probably you would, and even multiple times. When you have a 50% chance of winning $2 or losing $1, it is clear that you will accept.
Now let’s say that if it’s heads, you win three times your bet, but if it’s tails, you lose everything you have in your wallet. Would you play in that case? Probably not, because a lousy coin toss would change everything. Even if you have the same probability of winning, no one will risk losing all of what they have. That is the way many Forex traders manage their trading accounts. They bet all of their capital on one or two trades and finish by losing their entire account, meaning that leverage can transform a usually winning strategy into a losing one.
3. Take advantage of the market sentiment.
Use the market sentiment indicator from the particular broker. It is the best tool to use, and it should be part of your trading strategy. Sentiment is a free tool that tells us how many traders are buying and how many are selling on each major currency pair. It should be used as a contrarian indicator, meaning that we are doing the opposite of the crowd. Using it as a directional filter for trades has completely changed today’s trading.
Expecting too high returns of investments and taking oversized risks will probably result in losing a trading account. Try to judge the Forex market like you would any other market and expect “normal” returns using conservative estimates without leverage.