I often see traders fail as they enter into trading without any understanding of what it is about. They jump into trading with nothing but a hope and an impression that they will figure it out on the way. This should act as a guide to getting into the psychology of trading, and also the real-world steps that you need to take in order to get going with your trading.
Trading is not an emotional exercise where we hope for the best outcome. Leave hope at the door because it is only going to distract you. Instead, focus on recognizing trends as they start, do the math and technical analysis to give you a more controlled outcome, and read all the economic news you can.
Plan your goals
Realistic goals are important for new traders. These should not be financial goals for a trading session, but rather a goal to adhere to a process or a strategy you want to apply. It is easy to get distracted and start employing emotional strategy if you do not set goals for yourself. When you trade you need to know what you want to do, set your limits and stops so that you don’t try to overreach, and finally, don’t run before you can walk. Simplicity, Stops, and Strategy – the 3Ss for new traders.
Money and Risk Management
You have to manage your risk and your capital if you are going to reach your financial goals. If you don’t manage risk or the amount of money you are going to lose, then your trading strategy will not bring a positive change to your trading wallet.
A good rule of thumb is not to expose more than 2% of your capital in a single trade. If you don’t break this rule, you will never have to face a large loss. With a potential loss of only 2%, you will need a lot of consecutive bad trades to lose significant amounts of your capital base.
Select a leverage ratio that suits you
Just because your broker offers you high leverage does not mean that you should take them up on their offer. For new traders, I would recommend that you use a leverage of 1:1 up to 3:1 so to keep the trades small, and potential losses would become more manageable.
Start with trading one pair
As you start trading more pairs, the more complicated your portfolio will become. One of the 3S’ I mentioned when discussing goal planning was simplicity. By only trading a currency pair, you will keep your trading simple – it is a great way to start. I usually recommend to new traders in Forex that they start with the “Majors”. These are a set of currency pairs associated with currencies of the top economies of the world and are thus the most traded pairs. Pro Tip: Because they are the most commonly traded, you should find a lot of signals and analysis for free.
Trading is a learning experience and you are going to learn a lot of lessons as you trade. I often say that I have a great memory, it is only short. If you have no way to recall what strategies worked for you, and the details of the scenario were that led to the outcome, it will be hard to work that into a strategy and execute that same move over and over again for profit.