The world of forex trading has global appeal. Rapid technological advancements combined with an evolving forex market have seen currency trading become far easier to access.
The ability to trade 24/5 across multiple time zones is a major attraction. This feature is drawing in new traders from around the globe. People with little to no knowledge of financial markets are getting involved. Thanks to this convenience, the platform is becoming accessible to a wider audience.
But is engaging in this highly volatile decentralised market with limited information and zero experience a smart decision? Or are you setting yourself up for considerable losses that may prove incredibly challenging to recuperate?
What are the risks of trading forex with insufficient knowledge?
1. Lack of market knowledge
A key risk of forex trading is the lack of understanding of how the forex market works. The market is the largest and most active in the world. Trillions of dollars’ worth of trades occur daily. As a result, it is incredibly complex to navigate. This sheer scale and activity make it challenging for new traders to understand and operate within.
It is also influenced by a huge range of factors that drive currency prices up or down, virtually in seconds. These factors vary extensively, from geopolitical events to financial news, and from environmental disasters to economic indicators.
Without understanding the pivotal role each of these factors plays, a forex trader is essentially flying blind. Price fluctuations are driven by various market forces. Without knowledge of these dynamics, it becomes difficult to make informed trading decisions. But what does this mean exactly? Well, let’s look at interest rates.
They change frequently, impacting currency values, sometimes positively, sometimes not. And if you’re not aware of the knock-on effects of interest rate changes, you’re likely to make poor trading decisions. These changes can significantly impact currency values. Failing to understand their influence can easily lead to losses in the market.
2. Ineffective risk management
Just as important as having a strong understanding of market dynamics is having knowledge of effective risk management techniques to safeguard your capital. There are myriad of risk management techniques and learning what these are in order to protect your money is critical.
Without this knowledge, you’ll likely make investing decisions that lack proper reasoning, or even chase losses. The goal is to minimise losses wherever possible.
If you neglect to set up a stop loss order for instance and the market moves against you, the potential for loss increases exponentially. It is therefore vital to identify what risk management techniques will work best for you and implement them before executing trades.
In addition, ensure you pick an investment strategy that takes into consideration the level of risk you’re willing to incur. Different trading strategies come with high or lower risk factors, so risk management techniques must be aligned accordingly.
3. Using leverage irresponsibly
The use of leverage in forex trading is incredibly common. With it, forex traders with limited capital are able to open larger positions in the hopes of maximising potential profits.
The problem is, if you don’t have any prior knowledge of how to use leverage or the massive risk that leverage incurs, you may experience losses that exceed your initial investment.
You must study leverage very carefully to properly understand how it can magnify both losses and wins. If you still haven’t grasped the devasting impact of leverage, consider other very real potential dangers of using it irresponsibly:
- Using leverage with no real thought can create a false sense of security, seeing forex traders open larger positions than what they would have had leverage not been an option.
- Limited knowledge can lead to psychological stress leading to adverse financial decision-making, holding onto trades for too long, or selling positions out of fear.
- The use of leverage may sometimes lead to an overreliance on it, sometimes at the expense of proper market analysis, risk management, or budget, resulting in devastating losses.
4. Trades driven by feelings instead of data
A lack of trading knowledge inevitably causes trades to be executed based on emotions rather than objective data or sound judgment.
Remember, the forex market is highly volatile, with currency values rising and falling in seconds or minutes. So active does the market become that it is easy to get overwhelmed by feelings like fear, stress, or panic in one’s attempt to deal with it. It therefore becomes imperative to master your trading psychology, i.e., your feelings, so that they don’t influence your trading psychology.
But how does one do this? How does one gain better control over their emotions to be able to trade with a calm mind and a clear head?
- Some traders choose to exercise as a way to relieve stress. This may be a short walk, going to the gym, a Pilates session, etc. Others may pursue hobbies as a distraction, be this cooking, reading, etc.
- There are those that set themselves specific trading hours and avoid trading outside of those hours to maintain a strict boundary between trading and personal time.
- The use of a journal is another way that traders seek to limit adverse emotionally driven decisions. By recording your trades and the behaviours that led to certain decisions, you’ll be better equipped to mitigate them later.
It is clear that the risks of not having forex knowledge ultimately increases the potential for negative trading outcomes which makes gaining a forex related education imperative.
So how do traders learn more about trading?
Demo trading account
- One of the most practical ways that forex traders learn how to trade effectively is by signing up for a demo trading account. A demo account offers a simulated trading environment in which traders can open and close positions using virtual funds, keeping their own money safe.
- Traders can mimic real-life market conditions and learn how to use technical analysis to make sound decisions. They also acquire knowledge of automated trading for faster investment execution.
Wealth of educational resources
- Many reputable CFD brokers offer a wealth of educational resources for traders to become more knowledgeable and skilled. This includes blogs, podcasts, webinars, seminars, e-books, videos-on-demand, and many more.
- Additionally, forex brokers also offer tools like Economic Calendars (to monitor key releases and economic indicators), trading calculators, and more.
Trading communities
- Another way to accumulate more insights is by joining online trading related communities, in which traders connect to share concepts, ideas, tips, strategies, etc.
Trading psychology
- With the rise in popularity of trading psychology, traders are also investing time in working on their trading mindset to achieve goals in a methodical, rational way.
- One of the ways to strengthen one’s psychology is to build a trading plan that establishes the rules by which you’ll trade. By sticking to this plan, traders maintain more discipline and focus, even in volatile market conditions.
Remember, knowledge is power so before you start trading, ensure that you learn the basic fundamentals about forex. Study currency pairs (the majors, the minors, and the exotics), and how the forex market operates.
Read what you can about the factors that impact currency prices so that you are better prepared when market moving events occur and you’re having to make trading decisions in a split second.
Build a strong foundation, and continue expanding on your knowledge, regardless of how much experience you acquire. Learning is ongoing, it should never end so take the time to learn as much as you can by consuming a variety of resources.
Trading with T4Trade
T4Trade is a popular global broker with clients worldwide. The broker offers top-tier, 24/5 multilingual customer support, cutting-edge trading platforms, and flexible trading conditions. T4Trade is also a great go-to resource for traders looking to learn more about forex trading in a user-friendly way.
A variety of videos, podcasts, eBooks, webinars, and videos-on-demand are curated by in-house specialists, catering to all types of traders.
T4Trade traders can also choose from a wide range of trading instruments across 6 asset classes, and enjoy flexible leverage, competitive spreads, fast trade execution, and seamless deposit and withdrawal options. Traders can also choose from multiple trading accounts that best suit their needs and individual preferences.
Disclaimer: This material is for general informational and educational purposes only and should not be considered investment advice or an investment recommendation. T4Trade is not responsible for any data provided by third parties referenced or hyperlinked in this communication.
