El Forex market, the one in which exchange currencies, generates a multitude of trading opportunities, since it is one of the most liquid markets in the world and one of the largest in terms of volume, with transactions that exceed five trillion dollars a day. It is also one of the most accessible, it is decentralized and remains open 24 hours a day from Monday to Friday.
Although it has many advantages, Forex trading is not without risk and it is important to know in detail how it works, how you can operate and also learn to do good risk management, being advisable to practice before with a trading simulator. One of the things that should be known before starting to operate in the foreign exchange market is that it is a very volatile market, prices fluctuate constantly, and this provides us with great opportunities but can also be a source of risk.
Errors to avoid
One of the main mistakes that Forex traders make, especially beginners, is risking more than they can afford. It is also a mistake to invest large sums of money because the Forex is an unpredictable market that is significantly affected by political and even social events.
Manage risk
Among the most effective tools to manage risk in Forex is the development of a trading plan. Of course, in order to write such a plan we must be clear about all the keys to risk management in Forex. These are some of them:
- Set a stop loss. In a market like Forex, marked by volatility, it is essential to set a stop loss on our positions to avoid losses exceeding our capital. It is a tool with which we can establish the maximum loss that we are willing to admit. When we set the stop loss we must answer several questions, in addition to what is the maximum loss that we are willing to take: What are the levels of volatility in the asset with which I am trading? What type of stop loss best suits my strategy? What is my trading strategy?
- To diversify. In the same way that when we trade stocks we try to include securities from different sectors or companies in our portfolio, in Forex it is also more than advisable to diversify the investment with several currency pairs and not put 'all your eggs in the same basket'.
- Training. The Forex market is constantly evolving so it is important that the trader is in the process of constant training and is recycled with the free courses that most brokers usually offer their clients. Continuous learning is one of the keys to success in trading.
- Leverage. It is a tool that allows us to multiply our profits if the market goes in our favor, but we must be clear that it will also increase losses if it goes against us, since it is calculated on the total value of the position and not on the margin. That is why you have to learn to use it responsibly and sensibly. The right leverage will always depend on our trading strategy on the basis that the longer it is, the lower the leverage.
Stay up to date with the Forex calendar. The trader must be aware of the economic forecasts that can affect the currency market. For example, if an intervention by the President of the ECB is planned, his words may affect the price of the euro. In the case of the Fed, it will foreseeably affect the dollar.