For individual investors, there are many reasons to consider diversifying one's portfolio by entering foreign exchange trading markets. To be successful, it is important to have a thorough understanding of the basics of forex trading, as well as to adhere to a well-planned strategy. In this article we explore some ways that retail traders can make the most of their forex trading experience.
Education Before Investment
The first step to being successful as a forex trader is to become proficient in the ins and outs of foreign exchange markets. Beginners should look into educational materials, such as ValueChampion's free guide to forex trading. Additionally, online brokerages tend to offer free materials to registered clients. This content typically includes topics on the fundamentals of currency trading as well as tips for leveraging a brokerage's analytical tools. Some platforms even offer a feature that allows investors to simulate real FX trades with artificial funds. This is a great way for newcomers to test their theories before investing their own hard-earned money.
Minimise Your Trading Costs
As investors begin to familiarise themselves with the basics of forex markets and are ready to start trading, it is imperative that they find a brokerage that charges reasonable fees and offers access to their preferred currencies. When comparing brokerages, we suggest that retail investors consider brokers' average FX spreads and any FX trading fees. For example, we've found that a few brokerages charge significantly less than the market average, which provides investors with additional value compared to more expensive alternatives. Additionally, online brokerages offer different numbers of currency pairs, which can be an important factor in choosing a broker. This is especially important for the most serious individual forex traders, who prefer having access to a wide range of options.
Keep an Eye on the News
For slightly more sophisticated forex investors, it is essential to carefully review major international news. The recent trade tension between the United States and China is a prime example. Understanding the relationship between a potential trade deal and associated movements in currency values is helpful for planning your next trade. Furthermore, given that currency markets are typically accessible 24 hours a day 5 days a week, keeping up with the news is even more important for FX traders.
Consider Straying From the Pack
Sometimes it pays to be a contrarian investor. When it comes to forex trading, it can be worth researching strategies that may be different from current trading trends. For example, certain currencies may trend in different directions compared to others that they are typically associated with. As Kay Van-Petersen, Macro Strategist at Saxo Bank points out, "whilst most emerging market high-yield currencies are having an incredible year versus the USD (RUB, TRY & MXN are up +16.60%, +10.77% & +10.33% YTD in total returns) we have seen a distinct lag in the Brazilian Real (BRL) which is actually down -2.27% versus the USD in total returns. This is despite a higher rate, key structural reforms being implemented, and a central bank that has been aggressively cutting interest rates– which should lead to inflows into the country."
Evaluate Your Own Performance
Once you've started trading, you'll want to keep an eye on your performance, even if you are only tracking your returns on a brokerage's forex market simulator. One helpful measure for forex trading performance evaluation is called expectancy. Expectancy weighs your average wins (profit) with you average losses and factors in the proportion of your trades that are winners. You can calculate your expectancy using the following equation:
Expectancy = [1+( Average Win / Average Loss )] * [Win Ratio - 1]
As an example, imagine that you've made the 10 trades below with your own funds or using a simulation. In this example, you average win was S$135, you average loss was S$62 and your win ratio was 50% (5 out of 10). Using the formula from above, your expectancy is 59%. This expectancy can be interpreted to mean that your forex trading has an average return of 59 cents per dollar. Of course, it is impossible to say that past results will predict your future returns, but it gives you an idea of how successful your trades have been.
Stop-Loss Order: Helpful Feature for Retail Investors
For individuals that do not have time to watch currency news and price fluctuations throughout the day, it is crucial to make use of stop-loss orders. A stop-loss order is a function that instructs your broker to buy or sell when currency pair (or other security) reaches a specified price. This way, if there is a major rise or fall in a currency of particular interest, you won't be caught flat footed and your brokerage will make orders for you. In effect, stop-loss orders can help forex traders to protect their profits from major fluctuations in the market, making them a handy tool especially for those that aren't constantly at their computer.
Approach Leveraged Trading Cautiously
When it comes to forex trading, leveraged trades are very popular. Leveraged trading allows traders to amplify their returns by borrowing money from their broker. Individuals are often tempted by leverage trading as it allows them to take more significant positions and benefit greatly from smaller currency movements. While this technique can work wonders for those that utilise it successfully, it can also result in drastic losses. In general, it is best to consider how much you would be willing to lose before begin trading with (or without) leverage. For example, if you were to invest S$2,000 of your own funds and borrow S$4,000 from your broker to trade with 2x leverage, your returns (positive or negative) will be amplified by 100%. This clearly makes a big difference and is worth considering before you get started.
Research & Experience: Keys to Forex Trading Success
Like any other significant financial undertaking, it is important to approach forex trading with a well-designed strategy. As mentioned above, simulation markets are a great way to test your strategies without risking your own hard-earned funds. Depending on your level of expertise and appetite for risk, you may find certain strategies more suitable than others. Regardless of what you choose, we strongly recommend that you conduct thorough research in order to get the most out of currency markets.