The plunge of the European common currency has been the market theme for much of 2010. With the euro value declining to the lowest level against the dollar since 2006, foreign exchange trading has given way to extraordinary profit taking.
Feeding on turbulence, the forex market offers unparalleled opportunities in both upturn and downturn markets compared to the more traditional stock and property markets. In addition, the alluring tool of leverage, the ease of market entrance and exit and the possibility of small capital investment has opened the doors to a much wider range of participants. Forex trading can yield enormous profits in a relatively short period of time, but can also result in losses. To avoid trading pitfalls, Tadawul FX, an online trading broker, shares several key trading tips for successful trading.
Do broker due diligence
Ensure that the broker you choose is licensed and regulated, and do due diligence on a regular basis to ensure the firm is in good standing with its regulatory authorities.
Choose a reputable broker that is well capitalised, has strong relationships with highly regarded banks and financial institutions and can clearly demonstrate how it manages its clients’ funds. Much of this information can normally be found on a broker’s website and online forex forums.
The forex market is a 24 hour market, so it is essential to also choose a broker that offers 24 hour support. Identify the mediums the broker offers for client support (eg. e-mail, Live Chat, telephone) and test them.
Whilst trading, you may run into technical problems, therefore not only should you seek 24 hour support, but also quality support. You want to ensure that when your money is on the line, there is knowledgeable, professional and efficient help that can quickly deal with the matter.
Understand what you are working with
Choose a broker that offers competitive conditions on the instruments you wish to trade. Determine whether the broker offers fixed spreads or floating spreads. Large or floating spreads can cut into profits so be sure to identify what works best with your trading methods, techniques and the time periods during which you trade. Find out how much leverage the broker offers, identify the minimum and maximum lot size you can trade, stop/loss and take/profit levels, increment size of the positions and whether or not you can hedge.
Forex companies offer different trading platforms with a range of tools, including integrated charting and news, technical analysis, automated trading systems, etc. The applied principle is always the same: choose a platform that is easy to use and that demonstrates speed and reliability. To get a feel for the platform and trading conditions, open a free demo account and test.
Use leverage wisely
The biggest pitfall of traders, and particularly aspiring traders, is getting their balance wiped out because of incorrect usage of leverage and undercapitalisation. Although higher leverage can yield higher profits, it also amplifies the level of risk. Your chances of becoming a successful trader are greatly increased by using leverage correctly and capitalising your account sufficiently. Furthermore, traders should also understand their broker’s margin call policy and identify whether the company follows the FIFO (first in first out) or LIFO (last in first out) methods.
Know your trading costs
One of the perks of online forex trading is that there are no exchange fees, regulatory fees, and generally no commissions. Nonetheless, forex trading carries other costs such as spreads (fixed or variable) and rollover charges for holding positions over night. Have a clear understanding of what these are and how they differ amongst your shortlisted brokers, as these can significantly impact your bottom line.
Plan your trade, trade your plan
In order to eliminate emotional trading, plan in advance. A strong trading strategy will allow consistent performance and put odds in your favour. The more methodical you become in entering and exiting trades, the more profitable and consistent you will be in the long run. Watch the financial markets avidly to avoid making rushed decisions. Placing a stop loss after initiating a trade will also minimise losses against unforeseen market circumstances caused by unexpected events, such as terrorist attacks or natural disasters. A lack of discipline, constant tweaking of a trading method and an unclear trade management system will almost always result in losses.
Trade in the direction of the trend
In the forex market we see great trends in currency pairs that have a long lifespan (cycles). It therefore pays to identify the dominant trend of currency pairs and stick with it. Going against the trend will likely cause you to lose a great deal of money in a short space of time, thus destabilising you emotionally and leading you to make irrational, hurried decisions.
Know your risk
Before initiating any trade, know your risk and accept it. Prior to thinking about profit, it is essential to understand and manage your risk. Becoming methodical in trading eliminates fear and greed and can protect you from overtrading or trading on impulse. Generally you should aim to keep risk to one to three percent of the account balance and evaluate each trade independently.
Know the characteristics of the currency pairs
By examining past behaviour of the currency pairs, you can determine key characteristics of their behaviour including how well the pair trends, the economic events that influence it, the daily ranges of the pair and the ideal times to trade the pair. By understanding the behaviour of the currency pairs, you become better equipped at managing and trading the pairs successfully under different market conditions.
Find your trading personality
Psychology is a huge part of trading. When money is on the line, fear, greed and many other emotions can overwhelm, making trading extremely difficult. Patience, a clear mind and of course, common sense are fundamental factors in successful trading. One trading method does not fit all, so understand yourself and what works for you, and choose a trading strategy system accordingly. Losing is part of the business, so you must have confidence in your systems and accept that some losses are inevitable.
Trade to profit
Trade to profit and not just to trade. The forex market presents us with a constant stream of opportunities, therefore you should initiate trades only when the odds are stacked in your favour. Should you experience more than two to three consecutive losses, stop a trade, evaluate your performance, identify your mistakes and rectify them. Keeping a trading diary of all your trades, successful or not, will prepare you methodically and psychologically to re-enter the market and allow you to analyse your mistakes.
About Tadawul FX
Tadawul FX is a Swiss founded online forex and commodities trading company that is licensed and regulated by the Cyprus Securities and Exchange Commission (license No. CIF 103/09), the regulatory authority for the financial services industry in Cyprus. Under CySEC, Tadawul FX abides by and complies with all regulations set by the Markets in Financial Instruments Directive (MiFID), in the European Union and its transposition in Cyprus with the Investment Services and Activities and Regulated markets law.
Tadawul FX offers a variety of trading instruments including currency trading, gold, silver, oil, gas and CFDs via its MetaTrader4 platform. It was one of the first firms to offer Islamic Trading Accounts, and now caters to a global client base, from small novice traders to institutional clients. Tadawul FX offers fixed spreads on all forex instruments, has customizable accounts, flexible leverage of up to 1:500 and welcomes all strategies including hedging.
The company prides itself on quality, honesty and transparency. It places great emphasis on client satisfaction, offers 24 hour client support and has high customer retention. Tadawul FX has strong relationships with top tier banks and financial institutions and traders can be assured of safety and security of working with an established and reputable firm. Depositing and withdrawing funds is easy, fast and secure. All retail clients’ funds are held in segregated accounts and are additionally secured through an Investor Compensation Fund.