Trading forex while managing risk

Forex is often considered a less-than-salubrious trading environment, where regulations are few and scammers run riot. However, that doesn’t stop the sector growing larger each year. Back in 2016, the Bank for International Settlements reported $5.4 trillion of daily market turnover, and recent estimations put it as high as $7 trillion.

Catapulting the growth of the sector is electronic platforms, which have lowered the technology costs, and extreme leverage – sometimes as high as 500 to one – that lures people with ideas of easy riches.

Igor Afa, a financial analyst at JustForex and an expert on the forex market, argues that the reports about it being unregulated, while not untrue, have been blown out of proportion.

“Forex trading is known to be risky and is poorly regulated, but these risks can be managed,” he says.

To begin with, there is the market itself and the forces acting on it. Forex is highly volatile and unstable, which is both a profit opportunity and a source of risk. “If you don’t know the rules or if your strategy is less than stellar – you will lose,” he says.

Then there are the brokers. In the same way the odds are rigged in favour of a casino, some brokers rig the odds in their favour. “You need them to trade on the market, but not all of them are good or reputable,” says Afa. “I would suggest you understand the commission structure and ensure that their systems are fast and are able to execute in real time.” There are many tips online on how to choose a good broker, he adds.

However true scammers are less of an issue, he says. While investors may fear a repeat of 2009 and a repeat of the Crown forex debacle, this is firmly in the past. “Both the EU and the US are watching brokers carefully now. There are still some who haven’t learned their lesson, but they have been pushed to places like Cyprus or Madagascar.”

Despite the fact that the risks are documented, many people fancy themselves as global currency traders. The reason it’s so popular, says Afa, is that you don’t need much money to start trading. It’s possible to begin with as little as $100. You also don’t have to conform to the trading schedule – the market is online 24 hours a day, even on weekdays. This means you can keep your schedule flexible, which is not something that applies to other markets.

So, how do you start trading forex?

Starting up is as simple as finding a broker you trust, opening a trading account and depositing your starting capital – about $50 will suffice.

As for the trading itself, there are many viable strategies. Price Action is an option if you have an eye for patterns and a lot of patience. Afa recommends the ‘lazy river’ scalping strategy. While it’s less profitable, he says, it’s simple to understand and very easy to use.

He also suggests picking a currency pair with liquidity. A lot of traders from developing countries opt for local currency, but this is not recommended. The more conventional EUR/USD, GBP/USD and USD/CAD are much better than any exotic pair.

What is a demo account?

A demo account is a vital tool for any wannabe trader. Essentially, they are practice accounts, complete with virtual currency. These are ideal platforms to test out new strategies before investing cold hard cash – this is where you learn the terminology, the methods of analysis and some fundamental skills.

Ideally one should spend at least a week exclusively on the demo platform. “Only once you end the day completely in the green, should you attempt real-money trading.”

What about leverage?

This is entirely up to individual traders and their ability to manage risk. Experienced traders prefer 1:100 or, in the sure-fire cases, 1:300, says Afa. Most platforms, JustForex included, will offer richer stakes, such as 1:1000, but personally, this is too risky.

What emotional characteristics are required to be a successful trader?

• If you panic after a bad deal, you will make other mistakes and eventually lose.
• You need patience. As the best forex traders note, it is worth waiting for one profitable transaction rather than opening many positions ‘just in case’.
• Enthusiasm is a must. There will be a lot of research and nerd-talk before you get to the actual profits. If you don’t care about the process of trading, you should quit right now.

Ultimately, says Afa, you need to keep your emotions in check and persevere. If you can’t, it’s not for you. “There’s nothing shameful about it – around 60% of newcomers do not come back to the market. But those that remain eventually win.”

What profits can one expect to make?

This is the question all traders ask. There is no universal metric, it all depends on the deposit and the state of the market. “I generally expect to increase my deposit by 20-30% in a month. Maybe 60%, if I feel like doing a lot of scalping, but this is exhausting. I did double my capital once, but I don’t expect to do that again.”

The bottom line, he says, is that trading forex is no more complicated than trading equities or CFDs (‘contract for difference’; a form of derivative trading). However, the market is very fast-moving, so you will always have to follow the news and do your own analysis.

Brought to you by JustForex.