3 Things You Must Know Before Starting to Trade Forex

When we learn about the world of forex and online trading, the first thing in our mind it to go live as soon as possible and make it big. God knows, I have made my fair share of mistakes when I first entered this business many years ago. I lost the first account as many new traders do. Losing your first account, usually doesn't come as a result of just one mistake. It includes several mistakes which we fail to address because we don't know them since we are inexperienced. It would be that much easier if we already know what to do and not to do when we start, so here are a few tips for new forex traders.

Not All Platforms and Charts Are the Same

When new traders decide to go live, they go around looking for a good and safe broker to open a live account with and start executing trades as soon as possible. They see the feedback that the broker has in certain feedback websites where traders give their opinion on brokers. They look if the broker is regulated by a safe legislator, see that the forex live rates are pretty similar to major names in the market so everything should be OK, right?

Well, not exactly, there's something new traders miss. It is the charts. I didn't notice this myself either back then. I thought that since the prices move the same in the markets, then all brokers must have the same charts. But, brokers are located in different time zones and have different opening closing of the charts. While it might not make a big difference on larger timeframes such as on the weekly and monthly charts, the daily, the H4, the H2, the H1 and smaller timeframe charts get heavily affected by such time distortion. I love to use candlesticks as a trading strategy, but imagine if you are using a H4 chart on a broker who closes the candlestick 2 hours before the majority of other brokers. The H4 candlestick will be totally different from the ones that the majority of traders out there see.

There are many different platforms and different brokers out there

So, if your H4 candlestick looks like a doji which signals a reversal, the other traders see a big bullish candlestick which point to a continuation of the bullish trend. The same goes for the daily candlesticks. Dynamic indicators such as moving averages also get heavily affected by such differences in time zones. Very recently, I was looking at the same chart of GBP/USD in two different platforms of different brokers. While I was getting ready to open a trade based on a moving average, I saw that on the other platform, the same moving average was standing some 50 pips higher on the daily chart. Obviously, I didn't take the trade since many traders were seeing something different on their charts from what I was seeing. The price did climb another 50-60 pips higher before reversing down, so that was a good decision. The best type of platform is the one that closes when the US session closes at 5 pm Eastern US time. That means that the daily chart closes when the markets close, which is when the US session ends.

Know Yourself Before Committing

As with all other professions in life, we must know if we can do the job. But to do the job, we need to know our own character in order to approach trading from the best angle for us. Many analysts separate forex traders in several categories according to their personality. But for me it is simpler than that; according to me there are only two types of traders, the impulsive traders who jumps in and out of trades pretty often and the conservative type of trader who trades rarely but hold on to trades mush longer.

The impulsive trader cannot stand the pressure of holding on to trades until they unfold their full winning potential. So, he/she closes trades before their due time and cuts the profits short when the market goes in his direction. When these types of traders are on the opposite side of the market, the losing side, they tend to cut the losses short as well. But that is another mistake they make, because they should stick to the original plan and let the stop loss where it is until the price reaches it. Sometimes is good to cut losses short, but more often than not, it is a mistake.

The conservative traders sit and watch the markets, making analysis on the larger time-frame charts and opening a trade once in a while which might be a few times a day or a few times a week/month, depending on the opportunities. They usually rip off good profits from their trades, but they also tend to miss a lot of good opportunities due to overthinking trades and holding back for too long.

Some traders get too nervous when trading, which is off course wrong

I am the second type of trader. I used to fear opening a trade in the beginning and consequently, I was missing many good opportunities. But I got used as I became more experienced. If you are a conservative trader, you should push and encourage yourself. it will be painful the first few weeks but you will get used to it. Alternatively, if you are an impulsive trader and want to trade all the time, then you must refrain yourself and work on your personality. You will also might have to find a forex broker that has tight spreads and fast execution. Bottom line, you have to know your personality before starting to trade live, in order to find a broker and a strategy that works for you.

Leverage Is A Killer

Leverage is great to make more money than you would with your own funds, but you can't use to much leverage otherwise, you would turn trading forex into a gamble. Imagine if you had a coin and you had to flip it. You would win $100 if it landed on heads and lose $100 if it landed on tail. That's pretty risky but let's suppose it is like that.

Now imagine if you leveraged 100 times, you would win $10,000 and lose $10,000. I don't think there are many new traders who would invest more than $10,000 on their first live forex account. You could win the first time and the second and the third, but if you continue using that sort of leverage, win all lose all, then you will surely lose once at some point. Your account will turn to zero on just one trade. It is similar when your whole account depends on say, 10 trades. The market can go against you in 10 consecutive trades pretty easily, never be too confident in this game. Overconfidence kills as well as over-leverage. So, keep your leverage at a level where you feel confident trading safely. Same as when you drive, you only go as fast as you are confident that you can control the car properly, otherwise, you will have an accident. I would say that 5-10 times leverage is a safe leverage.

I would add other things such as knowing if your broker guarantees your stop loss or the protection of the minimum margin required so you don't end up with a big negative balance in your forex account when things go totally wrong and trust me they do go wrong sometimes even if you are the most experienced trader. But, the EU where the majority of the brokers are based is implementing new regulations which guarantees such things.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.