When Not to Trade FOREX?
The foreign currency exchange market, or Forex, can be lucrative for those traders with the discipline and skill to execute winning strategies. Forex traders make predictions on where currency exchange rates are likely to move in the short term. Usually, Forex traders maintain positions for just minutes or hours as day traders. But Forex trading is not for everyone, and there are some important times when you should not trade Forex.
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Low Risk Tolerance
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The Forex market is among the most risky environments for any trader. This is due to the exceptionally high leverage inherent in Forex trading. The only way to meaningfully profit from small changes in currency exchange rates is to trade with vast amounts of capital. Since most traders do not have enough capital to make this lucrative, Forex brokers let you buy 50 times as much currency as your cash balance actually allows. This dramatically increases the percentage returns of your trading. But this can be disastrous if those returns are negative. If you have low risk tolerance and cannot endure huge swings in your trading balance, you should not trade Forex.
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One of the most significant challenges in Forex trading is maintaining the discipline to stick with a trading plan. First, you must actually have a trading plan. If you do not have a predetermined strategy of when to enter and exit trades based on strict objective criteria, then you should not trade Forex. But most traders still struggle despite a well-planned strategy. When you do not see the market unfolding based on your plan, do not trade. For example, consider a simple trend-line strategy. In this plan, you enter only when the market exhibits a clear trend as defined by a straight line that connects the recent lows. If this is your sole plan and the market is not trending, you should not trade. If the market is trending but prices penetrate the trend line, you should still avoid the trade. Only execute an order when your plan's pattern sets up exactly as you expect.
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Poor Internet Connection
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Some traders ignore the basic infrastructure requirements for trading. Forex trading is risky enough without the added burden of not being able to actually exit your positions. Most Forex traders use electronic software to execute their orders over the Internet. If you do not have a solid, reliable broadband Internet connection, you should not trade. The risks escalate dramatically without one. Suppose you were in a trade and became unable to exit due to Internet failure. The results could be devastating. The same is true for the computer itself. Keep your technology as dependable as possible, or do not trade Forex.
Warning
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If you are a novice in the financial markets, you should not trade Forex without careful study of many different strategies and significant time spent trading on a simulation account. Never trade a new strategy with real capital until you have acquired experience with how the strategy works. The Forex market is one of the riskiest markets in the industry, and it is possible to lose nearly all of your capital on a single trade that lasts only minutes.
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