Questions To Ask Before Starting To Trade In The Forex Market

Forex trading platforms like MetaTrader 4 can be a perfect entry point for a beginner as this trading software incorporates intuitive features and powerful trading tools that will make things easier for new traders. However, how can you evaluate yourself and know if you are actually ready to go live and risk your hard-earned money in the trading process? 

Well, one way to understand this is by checking if you can answer the 4 questions in this write-up and if you pass the test, you can be confident about your knowledge and skills as a new trader.  

• How do Market Hours and Trading Sessions Affect You? 

The forex market is one of the most active financial markets as the market hours are not decided by a centralised exchange. The forex instruments, which are international currency pairs, are tradable throughout the day and even at night with 4 major trading sessions, making it a 24/5 market. However, the trading experience you get will not be the same throughout the day as the liquidity and volatility keep changing in each trading session. Some sessions are more active than others and session overlaps are perfect to trade some major pairs.

In fact, many currency pairs are more tradable during specific trading sessions and session overlaps and you must be able to trade during this time to get the best prices along with tight spreads. Those who don’t understand the impact of trading sessions will not be able to find the best time for trading and this will limit their profit potential. Hence, you need to include the ideal trading hours and trading sessions in your trading plan to make a convenient schedule. 

Because, if you choose the wrong time to trade, your trading cost may increase due to higher spreads and slippage. You will also struggle to find ideal trading opportunities when the market is less active. The timeframe you want to analyse for trading should also be considered while choosing the trading session or time to trade. For instance, scalpers and day traders using short timeframes need to trade during major sessions to get an advantage of liquidity. 

One thing you can do to understand more about the market hours and trading sessions is trade on a demo account where you get to see the real time market movements and test your strategies without any risk. This is the perfect place to explore the market without being exposed to any real risk that comes when you trade on a live account.   

• How does the currency market work? 

If you don’t know about the workings of the currency market, then you need to take your time to understand the market before becoming a trader. You will have to learn about different currency pairs and their peculiar features to choose the most suitable pairs for trading. You should also learn about the impact of various economic indicators and news events on the forex market and various currency pairs. This is what we refer to as fundamental analysis.

Learning about the market fundamentals is essential as the currency price fluctuations are driven by these factors. For instance, all major pairs get impacted by the Federal Reserve’s decisions and any key economic data releases in the US. Similarly, the decisions made by the ECB will affect pairs including the Euro. As a forex trader, you should be aware of all such aspects that influence the exchange rates. This knowledge is useful for making sound trading decisions. 

Other than this, you should also learn about technical analysis as that is the most comprehensive method to understand the workings of the global currency market. In technical analysis, the market data will be presented in a visual format on candlestick charts and you will be able to understand the price patterns and recurring trends by analysing these charts. Having market knowledge is important to devise a solid strategy that can work well in the market. 

Staying updated about the changes that happen in the forex market allows you to remain flexible and adapt to the market situation as and when needed. Because you cannot expect one strategy to work forever when the market is changing over time. Another thing to do to increase your market knowledge is to keep learning. There are many trading platforms and websites where you can learn for free and you should use such opportunities for a level up in trading. 

• How much risk is involved? 

You should be aware of the fact that a certain amount of risk will always be present in the trading process and we cannot control the market. We can only predict the potential price movements based on market analysis but we can get it all wrong at times which results in the risk of loss. You should be ready to deal with this risk while deciding to trade forex. You should be able to assess the risk level of each trade and make sure that your choices are well-aligned with your trading goals and risk appetite. The risk tolerance is different for each trader but taking some risk is essential for making profits.

Knowing the amount of risk that is there is important to manage it effectively. Risk management is the key component for success in any venture including forex trading. As a trader, you should take calculated risks by staying rational and sticking to your plan throughout your trading journey. Many beginners underestimate the risks and start trading without a plan to manage the risk. They often use excess leverage or risk a lot of capital for big gains but end up losing it all in the end. 

In order to avoid such terrible trading mistakes, you should have a clear idea about the risk and take steps to minimise the potential losses if the trade doesn’t work out. You should never risk more than 2% of your trading capital in a single trade and placing an optimal stop loss is a must whenever you are entering a trade. Having an exit strategy for a trade is just as important as opening the trade at the right time and right price. Because the closing price is what helps you to control the risk.

You need to plan for the worst-case scenario as that helps you to stay in a safe zone when things go wrong. You should always test your strategies beforehand and work on your risk management plan before trading on a live account. Having emotional control and following a disciplined approach are also important for risk management. The purpose of risk management is to keep the losses within the limit and thereby preserve your trading capital. For risk management, you can also choose to invest in the market with the help of a MAM/PAMM account where your money will be handled by an experienced fund manager. It’s a good way to earn profits from the market without taking as much risk as you would by trading in the market. 

• How To Choose the Right Broker?

The last question that you should be able to answer before getting into forex trading is about choosing the right broker. You should be able to find the most suitable broker for yourself based on your preferences and requirements. For instance, if you are a scalper, you need to find a broker offering tight spreads, low commission and fast order execution. You should be able to compare and evaluate different brokers based on the trading conditions you get on their platform.

The criteria for the best broker will be different for each trader as all of us have different needs and a broker that is perfect for one trader may not be the ideal match for everyone else. You should also be aware of regulations and find a broker that is reliable and has a good reputation in the market. Don’t forget to check their customer support systems as having a responsive customer support team at your service is important for a smooth user experience. 

The account types offered by brokers should also be considered while choosing every trader to look for specific features while opening a trading account. The majority of traders will be using a regular or standard trading account but some may want other types of account due to various reasons. 

Those who want to start small may wish to trade on a micro account that allows you to trade with smaller lot sizes and Muslim traders who need halal trading conditions will have to find a broker offering a swap-free account. Hence, all of us need to be sure about our requirements for finding the right broker for ourselves. 

Final Words

With that, we have covered the 4 most important questions that you should be able to answer as a forex trader. Finding answers to each of these questions is easy when you spend enough time to learn, practice and develop your skills as a trader. Hence, knowledge and preparation are the keys to finding success in the forex market.