Is the FX Market a viable Investment? Here is a simplified guide for starters

The foreign exchange market (FX market) is a global decentralized or over the counter (OTC) market for trading currencies with the major participants being the large international banks like Absa. Many questions have been asked around the market’s profitability. The answer to this may be viewed as either objective or subjective depending on one’s perception of the market.

Many people come into this Industry with too much optimism and hope, probably from being misguided or having wrong mentors. Trading newbies have a misguided belief of overnight riches venture and living a flashy life within a year but they end up blowing their accounts and losing their money. With the market’s dynamics getting even complex over time, one is likely to record recurring losses over time forcing them out of the trade.

Traders retreat to a corner, buy new material, become experts, in theory, some even fall prey to the self-made gurus with tricks to offer and in time traders show up once again in the Fx market and try to reap big. But losses become a vicious cycle.

A mentality of some hidden secret by some people who are making it big in the market starts to form and over time, new traders conclude that forex might be, after all, a scam. So how are some people living on trading in the foreign exchange market? It’s all about your mindset and attitude going into the business. How do you perceive losses in the market? How do you consequently respond to changing dynamics of the market? How much are you willing to risk and how much can you afford to lose? Is your mentality set for all these realities and not on the fake quick get out of poverty free card? Below are some perspectives worth looking at when planning to venture in fx trading;

Photo credits: qnbforex.com

1. STRATEGY _10%

This is a specific set of entry and exit rules based on a methodology that gives you a statistical edge and confidence in the market. You need to have tested your strategy with a demo account with 100 sample trades. In every venture that has an aspect of risk, a trial is an important thing before entry with actual finances.

2.POSITION SIZING _ 30%

This is knowing the number of lots to trade, your risk percentage, and keeping it consistent and low. This is what guides a trader or tells you how many contracts to buy/sell per trade. With this for a beginner in this industry start with a 1% risk of your net liquidation or capital risk per trade. But with experience and consistency in making the profit, you can increase it slowly but keep it constant per trade.

3. PSYCHOLOGY

This is the elephant in the room and once you master your mind and have that psychological preparedness, you’ll have a good deal of confidence for success in the market. A few wrong trades shouldn’t mess up your ideology of foreign currency trade. It takes time to become a successful trader even in the commodity market, let this not be an exception.

Put simply in 100 sample trades you win 50 and lose 50 trades in the sample size with a risk to return ratio of 1:1.5 or 1:2. Let the % risk be represented by R and when you lose you lose R and when you win you win 1.5R or 2R.using the least which is 1:1.5, the trick is when you lose you lose less and when you win you win more.

50 * 1R = 50% _ loose

50 * 1.5R = 75%(win)

You can, therefore, have a 25% increment to your net liquidation per month/week/ or whatever period depending on the frequency of trading. The higher the risk the higher the return.

FX trading can, therefore, earn you money but it needs tact, patience, resilience, and a positive attitude to maintain the right mindset.

Author: Festus Thuo