The forex trading market is witnessing exciting times. TechNavio predicts that the foreign exchange market will increase by USD 582 billion between 2024 and 2029. The expected growth rate is over 10%. Many people have started exploring this opportunity to grow their wealth and have experienced satisfying rewards in the process.
However, like any other pursuit, forex trading demands balance and moderation to avoid risking your money and health. Not being cautious of your investment in this pursuit – monetary and emotional – can quickly wear you out.
We have six tips to help you adopt a balanced approach to forex trading to achieve progress without affecting your health or emptying the vaults.
1. Understand the Geopolitical Scenario
Geopolitical factors play a significant role in affecting forex trading. The critical subjects include inflation, central bank rates, and unemployment figures.
For example, the 2024 US Presidential election results posed turbulent circumstances for forex traders. Many felt the Euro and the Peso would be most sensitive to the outcomes. Reuters reported that tax cuts and tariffs that follow would affect the FX trading market considerably.
As a trader, you should keep updated with such events and adapt your decisions accordingly. Trusted sources like established media outlets are best, acknowledging that some may have politically biased views.
2. Only Invest Safe Amounts
As traders get more experience, they may feel confident investing higher amounts. However, the forex market is volatile, with several factors outside one’s control.
The safe strategy is to invest only amounts one can afford to lose. For example, it does not make sense to compromise your entire savings because you feel you have a hot hand. The resulting emotional damage can be significant.
It is best to avoid investing amounts linked to credit cards or home mortgages. You can’t be sure how things will pan out, regardless of your experience.
3. Addiction is Not Rewarding
Since forex trading can have many tangible rewards, it is not impossible to get addicted.
The first signs of addiction may not be apparent: a constant need to check data, double-guess your bets, and be unable to enjoy everyday pleasures. The situation is similar to the concerns raised by the video game addiction lawsuit, wherein intrinsic rewards make it challenging to disconnect from games.
The Gamer’s Rage phenomenon, which causes intense emotional outbursts, is not dissimilar to the stark disappointment caused by suboptimal trading decisions.
You can create a balance by cultivating other hobbies, especially those promoting relaxation and mindfulness. For example, an adult coloring book helps some people live in the moment and ward off preoccupations. You can try joining an exercise class to get your mind off the perpetual need to check. It will also benefit sore muscles – they need a break from sitting around for extended hours!
As a forex trader, it is crucial to acknowledge the associated risks of the activity. Maintaining records of financial transactions and the number of hours spent on an activity can help individuals monitor their behavior. For traders, too, taking pauses to check their attitude and dependence on the pursuit can avoid mental health challenges.
4. Set a Sustainable Risk Tolerance
Financial experts advise assessing your risk tolerance based on personal and monetary factors. Not everyone can stomach losses, even if they have deep pockets.
For beginners, a tolerance of 2% is usually safe. Some traders go up to 5% when they gather experience and expertise. Figures over these can be untenable and lead to considerable losses for your account.
You can set a risk-reward ratio to understand what works for you. For example, a trade may have a maximum potential loss of $800 and a maximum gain of $1600. In this example, the risk-reward ratio can be 1:2.
According to Investopedia, an appropriate risk-reward ratio is more than 1:3. Traders should also remember that the ratio can change with time. Learning how to monitor and adjust risk-reward in real time can keep your strategy robust.
Additionally, don’t forget that some trades with abnormally high rewards (compared to the risk) are suspicious. No free lunches, after all.
5. Be Wary of Fraudsters
Getting cheated out of your money in the forex trading market can be devastating. It is essential to steer clear of fraudulent offers that claim high returns with low risk.
Some scammers claim they can access the interbank market. Financial institutions use this global network to trade currencies among themselves. Recently, Bloomberg reported that Angola’s central bank ordered a 30% transfer of forex from oil and diamond sectors to the interbank. The order aims to improve liquidity.
However, traders should note that this market isn’t open to individual investors. Such claims are almost definitely fraudulent. Being vigilant is the only way to remain safe and enjoy the rewards forex trading can offer.
6. Set Safe Stops
Finally, traders can secure their trading position in the forex market by setting stops. They help you exit the trade when certain conditions arise.
For example, you can set a guaranteed stop to close things out at a fixed price. Alternatively, you can set trailing stops to check the market movement. They will help you exit if things become unfavorable. Another option is to consider advanced stop-loss orders.
Stops can be reassuring for traders, helping them manage risks and remain open to other trading options instead of putting all their eggs in one basket.
Forex trading requires balance at each step. It is an exercise in strategic thinking – from deciding your position to the risk you’re willing to incur. Approaching it with caution and balance can help make the exercise lucrative without consuming every aspect of your life.
