John Warui, a trader, trainer and consultant in forex trading, has been at it since 2014 and shares his tips on what works.
1. Select the best brokerage firm
Study brokers carefully and understand their spread. Confirm that they’re licensed, that they are under a regulatory body.
The spread is the difference between the bid (buying price) and ask (selling price). A majority of brokers usually get their commission through the spread, so it’s basically the cost of brokerage fees. That difference should be as small as possible for you to make money.
There are brokerage firms that are corrupt and manipulate markets, so you need to select brokers who are very good in terms of the spread, which should be friendly. It should also be accommodative, so that you don’t enter the market at a negative.
2. Have general knowledge of forex trading
There are a few platforms usually used by traders. These include MT4, cTrader and MT5. You need to be conversant with these in terms of even configuring the platforms.
You should also seek to understand technicalities like forex candlesticks, line graphs and bar charts. Learn what the bull (when the market is going up) and bear (when the market is going down) represent.
When the market is going up, it’s gaining value, which is when you’re supposed to buy. When the market is losing value for a certain currency, you’re supposed to sell that currency.
A book I’d recommend to understand this type of trading is Forex & Securities: Art of Trading done by the Royal Institute of Business.
3. Know the lot size and leverage for you
Usually, you get a live account and a demo account. Before you progress to a live account, get familiar with forex trading through the demo account.
Under this account, you get the chance to understand leverage and lot size, which is the amount that most brokerage firms accept for you to place a trade. Leverage is where you’re given a borrowed fund so that with a small deposit, you’re able to enter a market that you’d not have had the capacity to enter.
When you’re given leverage, it is as if you’ve been given a loan. So you multiply your deposit with the leverage so you have more capacity to enter the market. This is very crucial because a majority of traders lose money when they use big lot sizes and big leverages.
You need to have a prudent lot size so you can trade for a longer period that’s more sustainable.
4. Understand the market
There are three areas you need to understand to be a good trader: technical analysis, fundamental analysis and sentimental analysis.
Technical analysis is just analysing the up and down movement of the prices. It makes you aware of the patterns of the market, which are called the highs and lows of the market.
This helps you understand the history of the market, which is how the market repeats itself. In forex, history always repeats itself. There are also technical indicators that can help you predict movement.
Fundamental analysis is a study of the news. You need to understand how global events will affect the market. This will help you know whether to buy or sell a currency.
Sentimental analysis is behavioural. Sometimes human beings have a taste for something. That can affect price. It’s psychological. For example, people may have a feeling that this week, because of elections, there’s a currency that may lose value. These are the feelings of the markets, and they affect prices.
5. Start small
Start with a small amount and progress as you understand forex trading. Discipline is very crucial.
6. Focus on one currency pair for a long period
We trade currencies in pairs. When you’re buying one, you’re selling another, and vice versa. Start with one currency pair and try to understand it before you move to other currency pairs.
Don’t try to trade all currencies at once; that’s indiscipline. Focus on one thing at a time.
7. Manage risk
With anything financial, you need to understand the risk of the venture. For example, it is advisable to not borrow money to trade because the risk in forex is rather high. When you understand the risk, you’ll use the best lot size.
Also, this way, you’ll not trade using your emotions. You will trade while focused on your plan. For example, if you’re trading $100 (Sh10,200) or $1,000 (Sh101,200), you need to have calculated how much you want to get monthly, and in the worst-case scenario, how much you’re prepared to lose.
In forex, there are orders that can help minimise loss called stop-loss orders. There are also take-profit orders, which guide you in terms of how much you want to get in a day.
8. Restrain your emotions
You need to have the traits of a trader, the patience of a saint and the emotions of a rock when it comes to forex.
That means that if you lose money, calm down, restrategise and think about how you’ll tackle the next trade. Don’t panic and don’t be in a hurry to make a killing in a day.