Forex trading is the act of exchanging currencies in an attempt to make a profit; nothing more, nothing less. But knowing that doesn’t mean you’re ready to start trading – not just yet. Before you venture out and choose a broker, you have to understand a few things.
The next few points altogether compose the essence and pulp of forex trading. They’re like an “essential” album by a great band. So, without further ado, here you go.
It’s Not as Complicated as You’ve Been Told
Forex trading is nothing more than exchanging a currency for another. Sure, there are a lot of strategies and rules, but the main principles are simple. It’s all about demand and supply. High demand for currency and low supply will cause the prices to rise and the abundance of a currency will decrease prices. All that you need to do is to try and predict these patterns of rises and falls in demand and supply, and even that, isn’t hard.
If you do your homework right, if you research properly before trading, and take the time to familiarize yourself with the global economy, you’ll be just fine. Yet, while it’s not hard, it’s time-consuming. So, you need to be determined, motivated, and most of all, willing to look for trusted sources of information and also go through the financial documents they provide.
Trading is not Gambling, but It’s Not That Different
Here is how they’re similar. There are a lot of uncertainties in both activities, a risk factor, and probability plays a huge part, as well. See, with any trade you make, there’s a chance that the value of the currency you buy decreases. So, for example, if you buy 10 USD for 9 EUR one day, there’s no guarantee that you won’t wake up the next morning finding that US Dollars are now worth 8.8 EUR. And, the same thing with gambling. You could go all-in on a hand you think is a winner only to lose to a higher hand. But, don’t let that idea repel you from forex trading because there is one main factor that sets it apart from gambling.
Uncertainties, risks, probability, sudden fluctuations, all these are factors you can easily control, to an extent, obviously, but the fact remains that skills beat luck in the trading game. If you know a country’s economy well enough, if you’ve tracked their currency’s value for the past year or so, and if you wait long enough for the good, smart, and sensible high-probability trade deals rather than aim to double your money, you won’t be gambling, you’ll be investing. But, remember that there’s a fine line between both terms, gambling and investing, because, with experience, you’ll find that a lot of traders are just gamblers.
Emotions Play a Huge Role – We’re not robots or computers. We are simply driven by emotions, at least most of us are. You could be having a great day until someone says, “wow, you put on a couple of pounds, huh?” Next thing you know, all your insecurities come flooding in, and you find yourself looking up ways to lose a muffin top. Just one simple phrase could do that. Now, imagine what would happen if you lose a sum of your money on a trade, even worse, a series of unsuccessful trades. In the trading world, it’s easy to get frustrated by constant failures.
It’s easy to panic and most of all, it’s easy to get stuck in, what we call, the vortex.
The vortex is what happens when, say, for example, you go into the trading game with high expectations and loads of confidence that you will never fail. Needless to say, one of the basic tips of trading is to be realistic. You can’t double your money overnight, so save yourself the trouble. Back to our story, with this confidence, you start trading. It goes well the first couple of times, but then you take one tiny hit which you refuse to accept as a defeat. In an attempt to reverse your mistake, you trade more, with higher amounts of money and higher risks, then you end up losing all your money. See, the vortex is just a trading binge fueled by fear, panic, and the inability to accept defeat and cut losses. Once you’re able to control your turbulent emotions, you’ll start trading better.
Trading Small is Good
We can sum up this entire point in one Chinese saying that goes, “equipped with knives all over, yet none is sharp.” There are a lot of currencies out there in the forex market, and you can trade
in all of them, but what about the quality of your trades? However, if you focus on one currency pair, and hone your knowledge of its countries’ economies, you’ll eventually be able to call yourself an expert. You’ll start slowly, yet surely winning trade after trade, and what’s better than a 95% success rate, right?
To expand more on the concept of trading small, we’ve got to go back to the notion of “doubling money”. Trading is often glamorized in movies, ads, and all societies, as a matter of fact. The majority think that, once you’re in, you can make a fortune overnight, buy a private island and a Maserati. But, that’s not really an ideal way of thinking. Trades with promises of fortune do exist, but they come at high risk, a very high risk. Actual fortunes, according to experts, are built on 5-10% risk-trades and small, yet regular, earnings. Again, quality Vs. quantity.
In these four points, as we said before, lies the essence of forex trading. It’s just like any other trading job where you buy an item for cheap, and sell it for profit. Nevertheless, because of a lot of false impressions, people make the mistake of thinking they’ll be getting rich quick with no effort.
So, actually, if there’s anything you need to know, it’s that if you want to make it out there, you’re going to need to work, prepare, study, and practice self-discipline.