Avoid losing money when trading Forex! A lot of the people who start trading Forex dream about getting rich with ease. We can’t deny that Forex doesn’t offer the opportunity to earn money to everyone at any time, but the opposite is also true. You can lose money quite fast as well.
We have prepared the following guide to help you avoid losing money trading Forex if you’re a beginner in the business.
#1: Practice with a demo account
When you finish your Forex trading education (check out our article on Forex market insights for more info) and decide which broker to go with, you should start practicing.
Before you can become a professional Forex trader, it’s recommended to open a demo account where you can test your knowledge and skills without the pressure of losing real money. This helps you to adapt to the Forex market and to find & develop your own strategies.
But beware: demo accounts have a downside: they’re not as time-sensitive as real trading accounts. As soon as you move to the real deal, you might experience a reality-check if you were lazy with the education process. You should be aware of this “small” inconvenience because practicing with a demo account will prevent you from losing too much when trading the real markets.
Remember: practice really makes perfect in almost all situations and scenarios!
In the real world, costs and slippage can turn what looks like a good system into a bad one. Think you are a gun news trader on demo? In a live account, you will seldom be able to get in at the same price you have been in practice. Source: Pepperstone.com
#2: Start small
After you get comfortable with the demo account and decide you’re ready for the real money thing, feel free to venture inside, but heed our advice first: start small. With small money, you can still get real trading experience, but you reduce the chances to lose your trading account. Take your time to test what works and what doesn’t work for you, but do it smartly.
Two more things to pay attention to here: don’t overtrade and don’t go over the roof with leverage. The desire to earn a few extra dollars a day by going for the tiniest of profits is more often than not a losing strategy. Same issue with high leverage: don’t fall in the mirage of big profits, because this can be your doom. The brokers might want you to go for more and more because they feed on the bigger spreads they get from your high leverage trades, but you shouldn’t fall for their trap.
As we just discussed above; because it can be difficult to realize you are over-trading when you are “in the moment” of trading, it is best to simply go on the offensive against over-trading by planning your trading strategy and trading plan in advance. Source: Learntotradethemarket.com
#3: Always keep track of your trading activity
The Forex journal is an extremely useful tool to help you avoid losing money trading Forex. It has 2 main functions:
- a. it reflects your ability to remain disciplined and loyal to your trading plan and
- b. it’s the best evidence that reflects your capacity to become a successful trader.
A trading journal is mandatory to have right from the get-go. There you can write down the history of your winning and losing trades. As you earn more experience, you can include extra details, such as instruments used with the highest success ratio, the most rewarding strategies you tried and more in-depth dates and profits info.
Updating your trading journal periodically is imperative, because it allows you to see and analyze your capacity of staying true to your plan and trading philosophy. Additionally, a trading journal provides you with all the data you need in case you feel it’s time to try different strategies and tricks.
Most traders (and especially beginners) do not understand the importance of a trading journal and you shouldn’t fall into that category.
Having a journal that gathers your statistics sets up a trading plan by defining parameters of action needed, provides a rear view mirror so that you can measure how well you executed each trade, and most importantly provides you with the feedback to develop and evolve your trading skills, is an extremely valuable tool for becoming successful. You will find a good trading journal to be a best friend and mentor as you make progress. Source: Investopedia.com
#4: Don’t over-complicate things
Another thing you must do to avoid losing money when trading Forex is to keep your trading as simple as possible. You can achieve that if you master your Forex trading strategy. Yes, you should have just one, directly correlated to your plan. Most traders have no clue what they’re looking for in the markets. It’s a mistake you don’t want to make.
The first step you need to take is to master one aspect at a time before moving to another (such as price action setups). This way, you can get a deeper understanding of each and every part of your strategy and soon enough you will become a specialist. The more you mix things up just to rush your trading for the big and juicy profits, the fewer chances you have to become a successfully pro trader.
Some more insights: Focus on the trade at hand (use a reasonable stop loss for it), avoid the hard trades at all costs and don’t over-rely on risk-reward.
Do you remember how babies learn to walk? If you don’t, why not go watch them again? Because trading the financial market is a little like learning how to walk. Source: Tradeyouredge.com
Check out this video: The Problems with Overtrading with Forex Coach Andrew Mitchem
#5: Don’t be afraid to take occasional losses
You should always see Forex trading as a business, not as something personal. With this in mind, one of the best ways to avoid losing money at trading is accepting the occasional losses. It can be particularly hard, as it requires you to be emotionally stable in the hardest of situations, but it’s an absolute must criteria to succeed in this business.
A bad call isn’t the end of the world. It’s part of the game. If you follow the things we talked about up to this point, everything’s going to be all right. At the end of the day, you’ll be on the plus side. Just don’t forget to close the losing trades without hoping that things will turn around, because this can lead to huge losses.
The idea that simply setting your stop loss smaller than your take profits will achieve a certain risk reward is complete nonsense.
Using risk/reward to set your trade entry and exits does not make any sense unless you know the probability of outcomes in a given trade. Source: Forexop.com
Conclusion – avoid losing money when trading Forex
Forex is a great and surprisingly reliable means of earning money. If your approach is right, you have the minimum basic knowledge of the markets and you put your skills into practice, you have a good chance to make some nice income from it.
Before you start though, it’s best to take the cautionary measures to avoid losing significant amounts of money when trading Forex. Consider our suggestions as good starting points on which you can build up your strategies. Hopefully these steps to avoid losing money when trading Forex have been helpful for you. Forex and profits is all about making you to a more profitable trader. Let us know if you have other steps we should add. How were your experiences as a new Forex trader?