Being a successful player in the financial sector requires having a lot of ambition, self-confidence,and a bulletproof plan. But when it comes to deciding which strategy will work best, you will find that accounting for all the possible variables in the game is difficult. To give you a helping hand, here’s what’s actually predictable and unpredictable about forex trading.
The Predictable
Risks are something that can be predicted in FX. Although it is true that the market changes in the blink of an eye, keeping a clear head and knowing when you’ve hit your stop is essential. A smooth, successful exit from a trade is the best way to come out on the winning side of the equation.
To achieve this, you need to, first of all, set a profit target. If the situation doesn’t pan out in the way you’d expect and there is no chance of reaching it, you need to retreat while your numbers are still looking up. Avoid letting your emotions ruin a perfectly good approach.
Testing out your plan beforehand is another sure way to minimize your losses as much as possible. Thus, signing up for a forex demo account is a good way to dip your feet in the water for a bit and see which of your strategies work best.
Furthermore, being aware of all the possible setbacks of this type of stock is an excellent way to reduce hazards. These usually relate to liquidity, currency and transaction costs. Here are the three main risksinvolved in foreign exchanges and the best ways to steer clear of them.
- Liquidity risks.This means that you don’t have the ability to sell your stock fast enough once you’re in the middle of a trade. This is the hardest one to protect yourself from, but determining potentially illiquid trades is an option.
- Currency risks. Currency is volatile, and that is a known fact. When you engage in forex of any nature, you will need to sell your country’s national one to buy that used in the geographical area where you wish to place your investment.This might lead to losses, but you can avoid them by hedging your currency exposure.
- Transaction costs.These vary tremendously from country to country because brokerage commissions are higher in international trading than in its domestic counterpart. Other charges such as exchange fees, taxes, levies,and stamp duties may also apply. Buying throughAmerican Depository Receipts, known as ADRs for short, is the most effective way to reduce them.
The Unpredictable
Uncertainty usually comes in when and where you’d least expect it. According to Investopedia, rewards are the most unpredictable factor in foreign exchange. Calculating your risk to reward ratio can only help you so much when there’s no certainty that your expected profit will be made.
Having knowledge of trends and other market motions and fluctuations is essential, but you need to accept that it does not guarantee anything. Currencies are always moving, and such fluctuations can be either big or small. It sounds commonsensical enough, but this is something many of those engaged in the field tend to forget.
What you can to do maximize your profits is try trading multiple lots. By acquiring gains on the first one, you will be able to move your breakeven stop for the second and ride the entire move out from there. This is done using multiple mini-accounts and it’s a rather safe way to play the game. Still, you shouldn’t limit yourself to only this.
After all, predicting movement in thetrade market is feasible to an extent. You need to keep an eye on the following factors: geopolitics, economic growth, notable mergers, interest rates and capital flows. This seems like a lot, but it’s easily achievable by regularly checking on reliable international news outlets.
However, you also need to be savvy in telling apart genuine information for fake news, which has unfortunately flooded even the most dependable publications. For example, Bloomberg News recently reported that China will halt its purchases of U.S. debt. The official currency regulator of the country, namely the State Administration of Foreign Exchange (SAFE), quickly denied this claim.
Asia’s largest economy is actually planning to diversify its FX reserves. But if one had taken the initial report into account, poor financial decisions might have been taken. When it comes to trading, the truth at hand is that you can never be too careful. On top of that, nothing is ever one hundred percent certain, and you need to always remember that.
Conclusion
There is an important reason why most forex transactions result in losses, and that is that the market is as fickle and full of surprises as a stormy ocean. Thus, your best bet as a trader looking to make some gains is to consider every crucial aspect objectively when making any decision. After that, you just have to hope for the best.
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