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Forex Trading: Four Factors to Consider Before you Start Trading

Amid the global Covid-19 pandemic, Forex trading has been undergoing a resurgence in popularity as more South Africans are working from home and looking for alternative sources of income.

While this has been good for Forex brokers and cautious, educated traders – it has also had a negative impact on many new traders who have jumped into trading without the necessary preparedness, risk management or financial knowledge.

For those considering a foray into online CFD Forex trading, there are four essential factors potential traders must consider before spending a single cent with a Forex broker.

1. Can you trust your Forex broker?

Infamously, the South African Forex trading industry is still a bit like the wild west. It has its fair share of conmen and frauds and not all Forex brokers are what they seem. The recent fiasco involving one of the larger South African brokers, JP Markets, is a good example. 

JP Markets is a legal business on the surface, with an FSCA licence to trade, a large client base and a huge marketing department. But complaints had been mounting up over the last few years. Traders were not receiving their money when they tried to withdraw their profits, deposits were not showing up in trading accounts and people were reporting strange market movements that seemed to have no basis in reality, suggesting manipulation from the broker’s side.

While there were a few warning signs on JP Markets website (they don’t publish their trading fees or the “spread” and Forex education was thin on the ground), for many beginner traders there was no way to tell that they were a bad broker. This is why it’s so important to check out trusted reviews of South African Forex brokers before you start trading. JP Markets was poorly reviewed, especially compared to their competitors, and this should have been enough to send most beginner traders running.

2. Do you have the financial knowledge about Forex Trading?

Forex trading has a low cost of entry, so low that almost anyone with a mobile phone and a bank account can start trading in minutes. This can be dangerous for those with little financial knowledge as it leads to the temptation to treat Forex trading like gambling. But Forex trading is not gambling and should never be treated as such. The Forex market moves according to financial events occurring around the world and large shifts in the interbank market. When the US posts a high unemployment rate, the US Dollar will fall against the Euro. When the British electorate finally agreed on a date for Brexit, the British Pound gained in strength against the US Dollar, as this banished some of the uncertainty surrounding the Britain’s exit from the EU.

When the large international banks move large amounts of currency through the market, this also leads to price fluctuations. It is important to understand how the financial markets operate and what drives the changes in the Forex market before you start trading. If you want to gamble, go to a casino. Forex trading rewards those who are willing to learn and will punish those who don’t.

Most good brokers will have a large, structured education section and will offer frequent and detailed market analysis. It is important for new traders to use these resources until they feel fully comfortable with how the market operates.

3. Do you have the discipline?

Even the most financially knowledgeable people in the world can be bad Forex traders. Forex trading requires discipline and a rigorous risk management. Without both a Forex trader will eventually fail. 

Risk management is important because the Forex market can turn suddenly and without any warning. As long as traders take appropriate risk management measures (only trading with a small percentage of available funds, setting a cautious stop loss, hedging their trades, etc) they will only lose a small amount of money if the market moves against them.

Discipline is equally important, because a risk management strategy is useless if a Forex trader does not follow it exactly, every time they trade. Many traders struggle to achieve the correct level of discipline when trading and the Forex community is full of stories of people losing heavily because they let their emotions get the better of them. Unfortunately, discipline is not something that can be easily learned – most people either have it or they do not. It is important for new traders to be brutally honest with themselves before they start trading. If they are not sure that they have the requisite discipline, then it is probably best to steer clear.

4. Have you used a demo Forex Trading account?

Demo accounts are probably the most valuable tool a Forex trader has. Most brokers will offer Forex demo accounts, and the best Forex brokers will offer demo accounts that never expire. This allows beginner traders to make sure they are fully comfortable with the markets before they spend any money at all. 

Unlimited demo accounts also allow traders to get familiar with their trading platform, the mountains of Forex terminology, the complex order types and get a feel for how their broker operates. Unlimited demo accounts will always remain useful. More experienced Forex traders love to use them to test out new strategies or learn how to trade a new currency asset. 

So, there you have it, the four most important things for potential traders to consider before they spend any money trading Forex. While trading Forex is a high-risk endeavour and can lead to heavy losses, it can also lead to a steady stream of revenue for cautious, educated traders.

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