Foreign Exchange, or Forex, is the trading of currency pairs on an international market used to buy and sell currencies. Forex trading is similar to that of stock trading as the trader does not need to physically own the asset in order to trade it.
Traders use Forex trading to profit through the changing values of these currencies through the exchange rates. The value of floating exchange rates are set by the Forex Market.
Before Malawian traders can start trading Forex, there are a few things they must know to ensure that they understand what Forex itself is, and what Forex trading entails along with what they can expect when trading in the Forex Market.
1. It is not a quick way to get rich
When starting out with Forex trading, a lot of traders have unrealistic expectations that trading is a quick way to get rich and Malawian traders should avoid this to avoid substantial losses that may exceed their initial deposit.
There are too many factors out of the trader’s control that will determine how much profit they will make. Forex requires patience, time, discipline, and dedication towards developing a trading strategy that works for the trader.
2. Start from the beginning
Malawians who have some experience in trading will know that there is a process that needs to be followed before they can actually start trading. This process is as follows:
- Developing a trading plan according to the needs and objectives of the trader.
- Choosing a broker and trading platform that suits the needs and objectives of the trader.
- Familiarize yourself with the act of trading Forex, learn key terms and definitions, open a demo account to practise trading.
- Develop and implement a trading strategy.
- Keep an eye on the market and learn how it works, then monitor it for conditions.
- Keep a journal of trading activity as a point of reference to identify patterns and take note of mistakes so as to learn from them.
There is a great variety of currencies that Malawian traders can choose to trade, around 180 in total globally, but of these, only a few currencies are traded in large volumes on the Forex Market.
The US Dollar is the world’s reserve currency and it accounts for around 89% of all Forex transactions. Apart from USD, there is the Euro (EUR), Japanese Yen (JPY), Great British Pound (GBP), Swiss Franc (CHF), Australian Dollar (AUD) and Canadian Dollar (CAD).
Malawian traders need to understand the driving forces behind the exchange rates and why they change so that the trader can more accurately predict the direction in which a currency pair will more.
Malawian Forex Traders need to keep a close eye specifically on macroeconomic and political developments such as the following:
- Central Bank Announcements
- Economic data such as GBP, Trade tariffs, inflation figures, unemployment rates and so on.
- Keep an eye on political instability in the quoted currency as this may lead to inflations in Forex prices
Luckily, there is the perfect tool for Forex Traders namely an Economic Calendar which they can use to stay up to date.
4. The Forex market is liquid and volatile
Due to the Forex Market seeing a value of about $5 trillion in currencies traded a day, the market is highly liquid, which means that due to the high volumes being traded, transaction costs are often much lower than with other markets.
Volatility arises from the liquidity and the volatility can be measured by how drastically a market’s price change. High volatility is not suited for all traders and Malawian traders need to test their strategies in a risk-free environment before entering this market.
5. Keep Strategies Simple
At first glance, strategies may be extremely intimidating, but Malawian traders need to know that the complexity of the trading strategy is not a guarantee of success.
When starting to trade, it is advisable to start using a simple strategy, to research strategies and test them on demo accounts to see which one works for the trader according to their trading needs and their trading plan plus risk management.
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6. Leverage can be advantageous, but also detrimental
Leverage is an especially useful tool to use when trading Forex, especially if Malawian traders do not have a lot of capital to start out with. Leverage allows the trader to open large positions despite their initial deposit.
But leverage should be used with caution as it can multiply profits but at the same time, it can also lead to substantial losses that may exceed the trader’s initial deposit.
When choosing a broker, Malawian traders need to look at brokers that offer negative balance protection to avoid their trading account going into a negative. It is also imperative to use Stop Loss and Take Profit when trading.
Due to the risks involved with trading leveraged financial instruments, such as Forex, regulating bodies such as the FCA prohibits brokers it regulates from offering leverage over the 1:30 ratio.
There are brokers, especially offshore brokers, who offer higher levels of leverage of up to 1:2000 and despite the risks involved with using offshore brokers, the risks with such high leverage levels is multiplied.
7. Assess the Risk/Reward ratio
In the trading plan, the Malawian trader will have to outline their risk exposure along with how much they can afford to lose when faced with losses. In addition to this, traders need to determine volatility when they have chosen a currency pair to trade.
This can be done quite simply by using the ‘Average True Range’ indicator for a period of time that spans 20 trading periods. The percentage value from this can be used by applying it to the lot that the trader wants to trade.
The amount calculated is the potential loss the trader can incur when trading. The recommended amount should not exceed 3% of the trader’s capital with the reward target double this amount.
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8. Keep emotions out of trading
Trading decisions need to be made in an objective manner and should not be based on emotions at all. By allowing emotions to drive decisions, the Malawian trader can be faced with overtrading, or closing positions prematurely.
Greed and revenge are two of the most volatile and detrimental emotions that will only lead to disaster and substantial loss. Success in trading depends on both sound market analysis and a defined strategy along with adherence to such.
9. Make use of risk management tools
As soon as the Malawian trader has determined their risk/reward ratio, any trade position is to be assumed only after the trader has entered a Stop-Loss order. Should the trader expect a certain profit target to be reached, they can use a Trailing Stop-Loss.
10. Keep practicing, keep trading
Making a success and gaining profits the first time around is not guaranteed, in actual fact, success comes after practicing trading, making use of tools and indicators, testing and back-testing strategies and applying them, and more.
There is a lot of trial and error involved and traders need to compensate for losses by making use of risk management tools in addition to keeping a trading journal to keep track of their trading and any mistakes, so that they can learn from them.
After failing, or incurring loss, it is important for the Malawian trader to keep trading, not to get discouraged and stop; practice makes perfect.
Trading Forex can be very intimidating, but by using educational tools, guidelines and research tools provided by their broker, the Malawian trader will be well on their way to becoming a more profitable trader.