So, you want to know all about forex investing? Well, you’ve come to the right place!
Actually, I might not know any more about forex investing than you do, but I do have some limited knowledge. So the purpose of this article is to pass on a few tips that I’ve learned over the years, to try to offer some basic advice to anyone who might be interested.
In summary, there are three main things you should remember when investing in Forex.
- Get into the mindset of cutting your losses and letting your profits run
- ALWAYS place a stop loss order against an open position
- Never risk more than you can afford to lose.
Let’s look at each of those guidelines in a little more detail, starting with the first one. Any successful trader, whether they invest in forex, in stocks, in commodities, bonds, derivatives or whatever, will always tell you the same thing. Cut your losses and let your profits run. Unless you are a very short-term swing trader or a volatility trader, the trend is your friend. If you have a winning position, let it ride and only close it out when you are sure the market has turned. Likewise, if you have a losing position, make sure you always limit your losses. Which brings us nicely on to our second point.
Whatever you do, whenever you have an open position, ALWAYS have a stop order in the market. Whenever you open a new trade, the first thing you should always do is to place a stop order to limit your losses on that position. If you are not sure exactly what a stop order is, allow me to explain. If you have bought a currency (i.e. you are long), then you place an order in the market to sell and close you position if the price drops below a certain level. Likewise if you have sold a currency (you are short), you place a stop at a higher price to limit your losses if the price moves up. For example, say you buy GBP/USD at 1.4270. This means you are long and you want the price to move up. Now, to limit your loss on this position, you could place a stop-loss order to sell and close the position if the price moves below 1.4200. That way you would be limiting your losses to 70 bps.
Stops are not just used for limiting losses. You can use trailing stops to follow the trend on a winning position too. This is the method many forex traders use to let their profits run and close their positions out once the market has turned. Let’s continue with our example. Say over the course of the next week, the GBP/USD price trends upwards to 1.4300, then 1.4350, then 1.4450 etc, and by the end of the week it has reached 1.4590. What you can do is to move your stop order up in line with the price, so each day you move it to 1.4230, then 1.4280, then 1.4380 etc, all the way up to 1.4520. Now, it just so happens that 1.4590 is the top of the market and the price now starts retreating. As it hits 1.4520, your stop order is triggered and you close out your position. Congratulations, you rode the trend and saw a profit of 250 bps!
Which brings us on to our third rule of forex investing. Never, ever risk more than you can afford to lose. Decide before you start trading how much cash you are going to set aside for your investment in forex, and set this amount in stone. Then, when you start trading, start small and don’t risk that amount all at once. If you find that all your trades are losers and your initial investment is eaten away so you have nothing left, take it as a lesson in life that maybe forex investment is not for you.
One of the things you can do as a novice trader is maybe join a forex investment group. There are a number of of forex investment clubs out there made up of a good mix of seasoned and novice traders. The great thing about these groups is that you don’t feel you are alone and you can get some advice from the more experienced traders who can probably tell you a lot more than I can about forex investing.
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