One of the most popular types of investment in Africa, particularly among young people, is forex trading. It is reasonably priced, accessible 24 hours a day, and can be viewed from both mobile and computer devices. Anyone with a cell phone and $10 to spare can participate.
However, Forex trading is a high-risk investment, and depending on the Forex broker, 60-90 per cent of traders will lose money. The majority of traders lose money because they haven’t developed (or aren’t following) a risk-management plan that minimizes losses.
It takes time, education, and patience to develop a successful risk-management strategy, but there are a few basic techniques to reduce your risk.
Make Use Of A Regulated Broker
This may seem self-evident, but the number of new traders that fall victim to Forex trading scams and/or deal with unregulated brokers is staggering. Be wary of brokers or “Forex gurus” that contact you through social media and offer guaranteed returns. All well-regulated brokers will publish their licenses at the bottom of their websites, and it takes merely a few clicks to confirm their regulatory status with the appropriate authorities. Negative balance protection is also available from well-regulated brokers, ensuring that you never lose more money than you have in your trading account.
Test Your Plan With A Demo Account
All brokers will provide a demo account, which works in the same way as a live trading account but with virtual funds. The majority of reputable brokers will provide a demo account that never expires. With an unlimited demo account, you may test your techniques and put what you’ve learned into practice without incurring any risks.
Maintain A Minimal Level Of Leverage
It’s critical to be aware of the leverage you’re utilizing once you start trading with a real account. While multiplying your trading capital by 1000 or 2000 may seem like a fantastic idea, the multiplying effect of leverage also applies to any losses you incur. Start with a maximum leverage of 1:100 until you are comfortable with the impact of leverage on your trade.
The most traded currency pairs in the world are EUR/USD, USD/JPY, GBP/USD, and USD/CHF, and they all involve the US Dollar. These are the most stable couples as well. Most brokers also provide “minor” and “exotic” currency pairs, such as EUR/TRY (Euro/Turkish Lira) and AUD/MXN (Australian Dollar/Mexican Peso). These exotic pairs are more volatile than majors, so your trading fees will be higher.
Cryptocurrency Should Be Avoided
Cryptocurrency CFDs, such as BTC/USD (Bitcoin/US Dollar), will be available from many Forex firms. Because cryptocurrencies are notoriously volatile, leverage will likely be quite minimal. However, price fluctuations with cryptocurrency pairs may be massive and unpredictable, and the risk of “wiping out” your trading account is considerably larger than with traditional currency pairs.
Make Use Of A Reliable Copy-Trading Service
Many newcomers do not have the leisure to spend all day watching the marketplace. Many brokers, thankfully, offer copy-trading services. Beginners can imitate the trades of more experienced traders with copy-trading brokers, who then receive a tiny commission from the profit. Most copy-trading brokers will lay down each experienced broker’s success percentage, risk profile, and maximum single loss (known as a “drawdown”), allowing newbies to replicate a trader who meets their needs.
Always Utilize A Stop-Loss Order When Trading
The final piece of advice for avoiding significant losses in Forex trading is to set a stop-loss order on every deal you enter. Once the price reaches a pre-determined level, a stop-loss will immediately close your trade. The natural tendency is to hang on to a losing deal in the hopes that it will turn lucrative. Regrettably, this is not always the case. A stop-loss is one of the most effective tools in a trader’s armoury, as it may prevent a lost transaction from wiping you out or lock in a small profit.
As said at the outset, developing a risk-management plan requires time, education, and experimentation (on a demo account, of course! ), but these eight pointers will help you get started and avoid losing your shirt in your first ventures into the Forex markets.
Culled from The Guardian Nigeria