Given that some investors come away with double-digit percentage gains year after year, there’s a good reason people are investing in currency. If you’re interested in becoming a currency trader, you need to get to know the field and what the rules are. If you aren’t able to assess your place in the market as a trader, you won’t be able to make important decisions.
Here are 4 questions you should be able to answer before you start the path to becoming an FX currency trader.
1. Is There Evidence For My Trade?
If you start to see the price bar move, that might be a sign it’s time to make a trade soon. However, if you don’t have supporting evidence beyond that, you could be viewing a fluke. Without multiple simultaneous factors, you could be looking at a red herring.
Step back if you don’t see significant evidence that currency changes are afoot. If you don’t feel that a trade makes sense based on the lack of changes of other evidence, sit still but keep watching.
While you might always have the chance to make a bad trade, if you act too hastily, you won’t be able to intelligently limit your losses.
2. Am I Prepared for the Risk?
Before you go into a trade, you should have a sense of the risk involved. Once you get an honest and sober assessment of what you could lose versus what you could gain, you need to be sure that you’re ready for the risk. If you’re not, you’ll be at the edge of your seat the whole time and might never be happy with the result.
While you might think you can handle a loss or two, depending on the size of your portfolio, several losing trades could wear away at your morale.
Your individual trades don’t matter as much as how they all work together. IF you’re thinking of your overall results, one trade shouldn’t make a difference. When it feels like it does, it’s time to tread cautiously.
3. Do I See Risk Reward?
If you don’t see realistic risk-reward, aka a profit of 2-to-1 or more, then maybe you should reconsider. Your profits need to be worth the time, effort and stress you’re taking on.
Set targets and stop loss figures for every trade. That way, once it hits either of your boundaries, you know it’s time to pull out.
4. How Will I Pull Out?
Whether you’ve hit your maximum or if the price has dipped below your acceptable minimum, you need a plan to exit. Will you do a break-even withdrawal and let the rest ride or will you take everything and put it somewhere else?
Have a plan before the trade goes live.
Every Currency Trader is Different
While no two traders will take the same exact approach to trading, each currency trader needs to be able to answer these basic questions. If you’re not able to, you might not be prepared to make a major investment in the currency market.
If you’re looking to perfect your currency trading approach, check out our guide for the top mistakes to avoid.