How Foreign Exchange Trading Works
It used to be that foreign exchange trading was something you did when you travel to foreign countries. Back then, you exchanged some of the currency from your home country for currency that belongs to the country you are visiting – paying a currency exchange rate
Nowadays, foreign exchange trading refers to a particular type of investment trading that has dominated the market. Instead of exchanging one currency for another, exchange trading allows investors to speculate on the fluctuation of one country’s currency against that of another country.
Speculating on price fluctuations appears to be easy. That is why most people assume that’s they can jump right in and get started making profits. This “It cannot happen to me” attitude is what energizes their enthusiasm only to disappoint them when they walk away empty-handed. In fact, 96% of new traders quit trading before they make a profit, leaving them clueless as to why they were not successful and perhaps feeling as if they have been scams.
There is no scam involved with Forex trading. The problem faced by begetter traders is that the industry is structured those who understand it from the inside. So as a beginner, your task is not to make profits but learn the inner workings of the various foreign-exchange currencies.
The biggest illusion that traps most new traders is the opportunity to invest with Forex trading leverage. This leverage allows traders to multiply their initial deposits so that they can participate in more investments.
If a trader deposits $1000 with a 2:1 leverage margin, they would in fact have control $2000 in market currency. While that might sound impressive, there are several Forex brokers that offer as high as 50:1 leverage. This would give that same trader $50,000 in market currency, which presents the opportunity to make a lot of profits.
What most new traders do not consider prior to taking advantage of this opportunity is the consequences that come when the investment is lost on bad trades. What traders hear when they are told they can invest that $50,000 in the market is that they have more opportunities to make more money. What they are not hearing is that they have more opportunities to lose more money, as the risks are increased with this leverage.
If the trader invests $1000 to leverage $50,000 in the market their average loss amounts to approximately $350 with each pip worth five dollars and the average daily fluctuation ranging between 70 to 100 pips. The entire investment could be depleted in three days if the trade is really bad. That would not only wipe out the investors thousand dollars contribution, but put them in debt for the remaining $49,000.
Even though traders are optimistic, the reality is achieving immediate profits is extremely difficult to do. Most traders start off with confidence in winning, but they soon discover that there is more to it and they begin making trading mistakes.
Avoid Making Mistakes
Even if you avoid the leverage trap, your emotions can be the source of many mistakes when Forex trading. The most important thing to gain control over is your emotions because temptation, excitement, anticipation and defeat are all feelings that you will experience – and sometimes simultaneously. Beginner traders quickly find that with each fluctuation in price their emotions are running along the same roller coaster, reaching one extreme to another in a matter of seconds.
in order to avoid being wiped out, traders have to create a trading plan- and stick to it. Even more, you should review all of your trades, or keep a journal, in order to track your progress.
Another mistake new traders should avoid making is accepting what other people say about Forex trading as true. Looking through forms and online reviews, it is easy to find disgruntled ex-traders who speak positively about it as if they are winning a lot of money. But beware their pride will not allow them to admits their losses so they are going to pretend as if things are opposite from what they are. So when you read these poles, do not become discouraged from thinking that everyone else is doing better than you. The truth is, they are struggling just like you are. They just will not admit it.
Becoming successful at Forex trading is absolutely achievable – as long as you become an insider and control your emotions. It is best to practice your trading skills with a demo account. Also, start small when you are ready to invest real money and allow yourself to make mistakes. Traders fail every day at trading. Not because they lack skills, but because they are unable to be honest with yourselves. If you can manage to overcome that hurdle, you will have solved half of the problems working against you as a beginner.