Like countless online Forex brokers like to advertise, the foreign exchange market features unique and outstanding earning potentials for its investors. However, many novice traders tend to forget that the chances of incurring substantial losses are at least as high.
Forex Trading Features
Online currency trading features unique characteristics that attract thousands of new traders to the market every day, among which:
- Convenient trading hours: the market is open five days a week, 24 hours a day;
- Low starting capital: you can start trading with as low as $250;
- One-click trading: order execution is utterly simple and in many cases instantaneous, which enables investors to enter a trade as soon as they realize its profit potential;
- High leverage: since daily fluctuations in the foreign exchange market rarely go beyond one percentage point, brokers enable traders to “loan” a bigger amount of money to invest, up to 400x the initial capital;
- No trading commissions: the vast majority of online forex brokers earn from the “spread”, the difference between the bid and the ask price, so there are no fixed amounts to pay per trade and investors can trade very little sums;
- Charting tools: many online Forex brokers provide their users with sophisticated analysis tools that help them decide where to enter and exit a trade.
Common Newbie Mistakes in Forex Trading
Unfortunately, while all these unique advantages certainly hold true, novice Forex traders tend to overlook the fact that the risk of loss is at least as substantial as the possibility of becoming profitable. In order to trade successfully in the foreign exchange market, new traders need to be highly disciplined and to constantly keep the following points in consideration:
- Very high leverages can work against for you as well as for you: since you are trading loaned money, this means that, without the use of margin calls or the so-called ‘stop orders’, you can theoretically end up losing 50, 100 or even 400 times the amount you initially invested;
- The mere fact that you are able to start trading forex with as low as $250, sometimes even less, doesn’t mean you also should do so: as a matter of fact, many novice Forex investors fail due to a combination of undercapitalization and not understanding leverage mechanisms;
- Before risking any meaningful amount of money, you should have spent at least six months on the so-called demo accounts, which many online brokers use to let users familiarize with their investing interface, and be consistently profitable on them for several months in a row;
- Set your profit objectives and loss boundaries and stick to them without exceptions whatsoever. Trading on demo accounts is easier in many ways because you are only trading ‘pretend money’ — and a large sum of it, which protects you against bad investments: but when you’ll start trading your own money, you will feel emotionally attached to it and taking a definite decision on when to enter or exit a trade will be significantly harder.
