When you get into forex trading, you are looking for ways to make money from favourable fluctuations in currency prices or exchange rates. You risk a certain amount of capital in the hope of making profits, but in the process, you can lose as well. So, you need to understand that losses are a part of the trading process, and you have to deal with all the situations, even if you think your analysis is right. The risk of losses is very much the same for beginners, but the lack of knowledge and experience often increases this risk.
However, there are some easy and effective ways to avoid losing money in forex. This article will educate you about the same so you can minimise your losses and maximise your profits.
Table of Contents
1. Take Your Time to Prepare
The first thing that you need to do before going to trade on a live account is to take your time to prepare. This applies to all types of traders, including beginners and seasoned traders. Even the most experienced trader can suffer from losses if they enter a trade without proper analysis or planning. This is due to overconfidence, which is the main reason behind the failure of experienced traders. It is better to be cautious and responsible while trading, irrespective of your knowledge or skill level.
Beginners need to be extra cautious as they are prone to making mistakes and jumping to conclusions. So, take some to learn all the essential aspects of trading if you plan to trade on your own. Those who are not that confident in their skills can still get into trading using services like managed forex accounts. Investing in forex MAM/PAMM accounts is a good way to get market exposure and the benefits of trading with minimal risk.
Managed forex accounts are for beginners and passive traders who want the support of an expert trader to manage their trading activities. You can explore such viable options if you have this hesitance or fear to get into forex trading all by yourself. Those who struggle to find time to learn or trade can also depend on these innovative solutions for making profits from forex trading in a passive manner.
2. Utilise Demo Account Facility
Forex demo accounts are an excellent place for beginners to practise and get familiar with real-time market conditions. They can trade freely without the fear of losing real money and can also enhance their knowledge and skills by exploring the different sets of tools on the demo account. But unfortunately, many beginners don’t utilise the free demo accounts well as they are too eager to go live. But you should not be making this mistake, as demo trading is the best place to obtain practical knowledge about forex trading.
You can also test your strategies and trade ideas on a demo account first and see if it will work well in the current market scenario before trying it on a real account. But you need to keep in mind that demo account results may not be 100% accurate in every situation. Still, it can give you a rough idea about the possible trading results, allowing you to improve yourself as a trader.
3. Decide How Much You Can Afford to Lose and Manage the Risk
Regardless of what you do to avoid losses in forex trading, losses will happen. The wise thing is to manage your losses. That is where risk management comes into the picture, which allows you to trade by managing your losses.
So, here you need to decide how much you can afford to lose as a trader and plan your trading activities based on that. Assess your risk tolerance and set your risk/reward ratio for every trade. Make use of risk management tools like stop loss orders, and never take excess risk in your trades. This way, you can keep your losses within limits and avoid unwanted situations.
4. Take Less Risk in the Beginning
Professional traders may take huge risks for bigger wins in their trades. This approach might work for them as they are well-versed in market conditions and know how to deal with losses if it happens. But taking such huge risks will not be ideal for an average beginner in the forex market. You still have a lot to learn and know about forex trading, and risking a lot while starting out can end up badly. So, newbie traders should always start small and mark a humble beginning to their trading journey.
You can think of risking more when you gather more knowledge and experience by staying in the market. Because over time, you will better understand your own skill level and winning rate in trades, and then you can add more funds and take more risks for growing your account. But don’t trade with a huge sum of money right from the beginning to stay in the safe zone.
5. Choose the Best Broker for Live Trading
Another thing that you need to do to avoid losses in forex is to choose the best broker for live trading. Trading with a reputed broker gives security for your funds during deposit and withdrawal. Make sure that they provide favourable trading conditions such as tight spreads, low commission and no hidden charges because many traders lose a good amount of money as trading costs.
The trading experience you get on a broker platform is also significant, as it will have an impact on the end results of trading. Trading on a platform that does not give essential support will make trading harder for you. So, make sure your broker has transparent pricing and always test their demo accounts before going live.
6. Customise Your Trading Space
The trading platform you choose will have a default look and layout, but you can always customise your trading account for a better trading experience. Usage of the right colours in charts, adding fewer but relevant indicators and adding shortcuts to relevant tools can make trading a lot easier for you. Because the time we take to place a trade depends a lot on the intuitiveness and user-friendliness of the platform we use, make sure your trading account and charts have been set in a way that allows you to navigate easily.
7. Limit Your Leverage
Leverage is a powerful tool to grow your trading account if used with caution. Leverage allows us to open bigger trades with smaller capital as margin requirements. This gives you higher profit potential even if you don’t have a huge amount of capital to trade with. But if you lose the leveraged trades, the losses will also be equally huge. But not using leverage at all is not the right approach for traders who wish to maximise their profit potential. So, the key to trading success is using limited leverage and managing the risk. That way, you can avoid unwanted losses and safeguard your capital.
8. Learn About Tax Impact on Trading Profits
The profits you earn from trading are also taxable based on the tax laws of the country in which you are operating. So, you should be consulting with an expert to make sure you have all the taxes covered if they are applicable. As a beginner trading with smaller capital, taxes may not be relevant. But when you grow your account and start earning significant profits, you will have to learn about the tax laws related to trading profits.
9. Set Long-term Goals and Take It Slow
As a new forex trader, you cannot think about making huge profits within a short span of time. And trying to do so will only enhance your risk as a beginner. You need to take it slow and focus on long-term goals for the time being. You may not be able to reach your profit targets at the beginning, but not giving up and making consistent efforts will surely take you closer to success. You will have to treat trading like a profession or business
The Bottom Line
To sum it up, losing some money in trading is not that unusual, given the volatile nature of the forex market. But you should try your best to minimise these losses; that way, you can keep trading for a long time and gradually attain your trading goals. You don’t need to give up on the idea of trading due to fear of losing money. Because a skilled trader can always recover the losses with a profitable trade, reaching that level of success should be your goal.