The foreign exchange market, or forex market, is not only the largest in the world but is also one of the fastest moving. This means that traders have the potential to make large sums of money in a relatively short time, as fast as they can lose all their investments in a few minutes. Traders should conduct the necessary research to ensure that they are ready to capitalize on even the smallest market fluctuations but, at the same time, minimize their exposure to risks.

As with any investment, foreign exchange trading carries some degree of risk, and there is the potential for investors to lose money if they fail to make the right moves. There are ways to mitigate against the risks of losing money, but one of the main ways is to conduct thorough research, listen to predictions from financial experts, and maintain a strong understanding of how financial markets respond to various political activities.

The most common mistake made by first-time forex traders is failing to research their markets effectively. There are plenty of online resources to help you learn everything you need to know about spread betting or trading CFDs on forex pairs, from reviews of online brokers to detailed statistics such as historical information about your chosen currency pairs like GBP/USD, EUR/USD or AUD/USD (see the derivative AUD/USD chart) 

Being able to predict when a currency’s value is likely to rise or fall is the holy grail of forex trading, but some not so easily avoidable mistakes can make it less likely that you will make a profit from trading foreign currencies: 

Failing to plan is planning to fail

As is so often true, the secret to potential success when it comes to trading currencies is to have a plan. A trading plan should incorporate a whole host of different scenarios but should focus on the rules that you want to set for yourself when it comes to making trades and putting your strategy in place.

Your first consideration would be your budget, and, of course, it is only sensible to invest as much as you can afford to lose. While it is very unlikely that a currency will completely lose value, it can happen, and global destabilization can cause several currencies to crash at once, so it’s never a good idea to over-extend yourself when it comes to your investments.

This should include plenty of considered plans such as:

  • Which currency pairs do you want to trade with
  • What degree of loss are you comfortable with?
  • At what price will you sell any currency to mitigate against the chance of losing when selling a currency that has become devalued?
  • At what point of profit will you choose to sell?

It is also important to consider how you will evaluate the success or otherwise of trade and at what point you will consider selling a currency to ensure that you limit your losses to a level you are comfortable with. You can set up stop-loss trades on each currency that you trade in to ensure that you sell if its value dips below a certain point. 

Research is the key to minimizing risks

The foreign exchange market doesn’t exist in a vacuum, and almost any major event can have an impact on the value of a country’s currency. Sometimes this is relatively predictable, such as fluctuations around the time of global political events.

These can include the implementation of new legislation, the outcome of local and general elections, and other scheduled events that have the potential to change the way a country is perceived. Whether these cause a currency to appreciate or depreciate usually depends on whether the change is viewed as a stabilizing factor or not.

Global economic news can also be used to great advantage when considering forex trades. Big changes in the value of certain commodities can indicate widespread confidence (or lack thereof) in a particular country’s economy, and this can impact the value of its currency.

Throwing good money after bad 

All traders occasionally make a poor decision and end up with a currency that they can’t shift without making a loss. The important thing to do in such a situation is to avoid panicking, which can lead to costly mistakes. 

Often, the best thing to do with a bad trade is to mitigate your losses and move on. While it can be tempting to hang on to a currency rather than sell it at a loss, it’s worth bearing in mind that you cannot be investing your money in a more profitable position if it is tied up in an unprofitable one, so sometimes selling at a loss is the most logical thing to do.

Chasing a quick profit without seeing the bigger picture

Just as it can be a mistake to hold on to unprofitable positions, it can also eat into your profits to jump too quickly when a currency appreciates and end up missing out on potential gains over the longer term. While this can still net you a profit, consistently failing to truly maximize your profits will eventually mean that you lose out. 

This is probably one of the hardest mistakes to mitigate against as it relies on traders taking a rational view that may seem at odds with their knee-jerk response to the changes they are witnessing. 

As with any investment, CFD trading can be a great way to make your money work harder, but traders do need to understand the high risk they are exposing their capital to. Thorough planning is the cornerstone of any forex trader’s success, but in-depth research and an interest in global affairs will all help you to make informed and potentially profitable decisions.  

*Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

 *Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.

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