Until the late 1990’s, the only market players allowed to speculate in the foreign-exchange market were large banks, hedge funds, and very wealthy investors. The reason was rather simple—a minimum contract size was generally between $100,000 and $1,000,000, so automatically, the entire investing public was eliminated from consideration except for the wealthiest and most powerful.
The forex market remained like this throughout the 1970’s, 80’s and 90’s. Then, in the late 90’s, the advance of technology and internet allowed small retail forex brokerages to begin forming all over the world. These small retail brokerages negotiated with banks. Banks set minimum contract sizes at $100,000 because they want heavy order flow, so brokerages negotiated with banks and convinced them that they could send through huge amounts order flow each day, but instead of it being a few very large orders, it would be hundreds of smaller orders. Thus, the retail forex market was born.
Today, traders can open a small account with under $100 at an online forex brokerage and begin trading in the fx market. This very low risk threshold into the world of fx trading has caused innumerable small, retail traders to enter the market over the last 10 years. Unfortunately, a very high percentage of these new traders lose money. In fact, most estimates state that around 90%+ of retail forex accounts are closed out at a loss, and many accounts are closed out with $0. There are a few practical guidelines that are essential to follow if a trader is serious about becoming an fx trader.
Develop A Strategy
Many new traders simply read and e-book and start trading. It is best to take adequate time to develop a strategy that fits your personality. Consider taking several months at least and demo trading the strategy to prove that it yields positive expectancy in a forward-testing environment.
Keep A Trade Log
There are generally two types of traders—proactive and reactive. Be a proactive trader. This means you keep a trade journal that outlines specific trades you are looking to take, why you are considering taking the trade, how it lines up with your strategy, etc. This will prevent overtrading, which is one of the leading causes of failure among new traders.
Most new traders are still very attached to the emotional pain of losing money; therefore, after a losing trade, the first response is to move on as quickly as possible, so that the pain of the loss of money will subside. This is a huge mistake. New traders should take time to analyze losing trades in order to determine exactly why a trade was a loss. This information is invaluable. If done properly, a trader may begin to notice certain market conditions that consistently lead to losing trades; then, he can adjust his approach and not take those entry signals in the forex market.
This should go without saying, but unfortunately many new traders have a very difficult time cutting losses. This is strictly a matter of trading psychology, and it is up to the trader to make the conscious choice to never let a loss get out of control. This is easier said than done for many new traders, but it must be seen as an act of the will.
Employ Conservative Risk Management
This ties in with our last point. Along with cutting losses, new traders should employ very conservative risk management. It is best to risk very little of account equity on each trade, perhaps even less than 0.5%. This will allow a trader to keep his account intact while undergoing the initial challenging stages of loss that all traders will face. Employing very conservative risk parameters will also help a trader remain emotionally detached from each position, which is absolutely essential. Forex trading is risky and keeping leverage low and cutting losses is an important measure to decrease the likelihood of being wiped out by a string of losing trades.