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The Basics of Forex: 3 Things to Know Before You Start Trading

    

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There are many reasons as to why someone would turn to the forex market as an avenue for investing. Profit, hobby, experience, and entertainment are all factors we’ve seen discussed over the years. No matter the reason for trading forex, every investor starts out in the same spot, as a novice who isn’t quite sure how to get the best out of the market.

Understanding that every potential forex success story has to start somewhere, the following looks at the basics of forex, addressing the things that you should know before you start trading.

1. Forex Trading is Not a Get-Rich-Quick Scheme

In spite of what you may have read elsewhere—usually on less-than-reliable forex “help” sites—forex trading is not going to allow you to turn a small amount of capital into a seven-figure balance overnight. The amount you earn while forex trading is going to be determined by the amount of money you are able to invest, along with your attitude to risk. While this is the core of the matter—remember the phrase “it takes money to make money”—strategy also plays a part. Anyone who wants to truly have success in the world of forex trading needs to understand that it’s often a case of patience and growth.

We often hear about traders targeting 50 percent, 75 percent, 100 percent, or more profit each and every month, but the sheer level of risk required to possibly make that a reality is staggering. What this opens the door to is a potentially devastating level of loss. No trader is able to get it right with every trade made, so adopting an approach such as this is foolish, even if you have a level of capital that would allow for a few missteps. Remember—forex trading isn’t a get-rich-quick scheme, and it never will be.

2. Leverage Can be a Double-Edged Sword

Leverage and the forex market tend to go hand in hand, but before you start using leverage (or forex trading in general for that matter), you need to understand that it has the power to both help and hammer your portfolio. Offered up rather freely these days, leverage is pretty easy to understand, but for those new to forex, here’s a quick example. Say you have £1 to your name; under the terms of a 2:1 leverage agreement, you can double that amount for the sake of trade. This gives you the possible chance to make £2 or lose £1, but this is a low-end leverage example, to say the very least. The reality is that those choosing to use leverage as a trading tool are doing so with much bigger numbers in mind, with many heading into the 500:1 range.

We can’t deny that leverage certainly holds a place within the world of forex, with its importance arguably being crucial. But it is anything but an “easy” way to get your hands on more capital for the sake of forex trading. Risk will always be a factor within the leverage equation and is something that you can’t afford to take lightly.

3. Practice Often Makes Perfect

For all the money that flows through the forex market, many forget that, at the end of the day, it is a skill- and craft-based way of investing. Yes, chance, circumstance, and even a touch of luck play a role at times, but there is still no getting around the fact that you are going to have to learn how to forex trade. Demo accounts are routinely provided by forex brokers for a reason; they are there for every upstart trader to take advantage of.

Before you even begin to invest any real money, it is highly recommended that you try your hand at investing virtual funds. By doing this, you are taking the pressure off, as you learn at your own pace without facing any negative financial implications. What this will also allow you to do is try out various forex trading strategies as well, in order to find one that suits your appetite for risk and level of investment capital. It may sound obvious, but practice can often make perfect when it comes to forex trading.

Conclusion

The forex market is rife with profit or loss potential, as the 24/5 activity means that it does have the means to offer up a secondary income if approached in the right way. What the above has detailed is three crucial factors that you need to be aware of before you start trading. So, if you are looking to start forex trading, remember all that you’ve read here today, as odds are that you will be a better trader for it!

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Disclaimer:

The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

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