The transition from learning about forex trading to opening your first trading account can be an exciting one, as many beginners are eager to get started and to make money. There’s nothing wrong with being ambitious, but did you know that opening a trading account too soon is the top mistake that beginners make? If you aren’t ready, you’re likely to lose money, which isn’t reassuring in the beginning. This can even cause some traders to give up as soon as they’ve started because they assume that they just aren’t good at trading. If you think you’re ready to open a trading account, you should ask yourself these 5 questions first to be sure you’re really ready.
Question #1: How Much Do You Know About Trading?
The first thing you need to consider is how much time you spent learning about trading and how much you actually learned. Did you completely grasp each concept you read about? Your knowledge needs to go deeper than beginner material that focuses on terminology, the mechanics of trading, and explanations about what moves the market. You should have moved on to more technical aspects of trading, learned about risk-management, read about trading psychology, different strategies, and more. If you’re not sure where you stand, we’d suggest taking some online quizzes to test your knowledge. If you find that you’re getting a lot of answers wrong, write down the subjects you’re struggling with and use that as a basis for what you need to spend more time on.
Question #2: Have You Practiced on a Demo Account?
A demo account is a great hands-on tool that allows traders to trade in a live environment without risking real money. Instead, you trade using virtual currency. There are many benefits to using a demo account, as it can help you learn to navigate a trading platform, allows you to test your knowledge, check your results, and even try out different strategies. The best news of all is that it is completely free to open one of these accounts, so there’s no reason not to use one.
Question #3: Have You Developed Your Trading Plan?
Your trading plan has a lot to do with the whys and how’s of the way you plan to trade. Why will you enter and exit trades? What will you base those decisions on? How much do you plan on risking on each trade? What time of the day will you trade? It’s important to spend time thinking about all these factors before you open a trading plan.
Question #4: What’s Your Trading Strategy?
A trading strategy is different from a trading plan. There are a lot of strategies out there, so it’s important to consider more than one. Scalping is a good example where traders make multiple small trades per day in an attempt to profit from small price movements. Day trading involves opening one or more positions each day and closing them out before the day’s end. Swing trading is essentially the opposite of day trading and involves leaving positions open for days or even weeks at a time. Each strategy offers its own unique advantages and disadvantages.
Question #5: How Much Are You Willing to Risk?
Coming into the trading field, you might have an idea of how much money you’d like to make. However, you should also think about the amount of money you’re willing to lose. With forex trading, it’s better to limit your risk, even if that means making less profits. One large loss or a couple of medium losses could wipe out your account otherwise, so ask yourself if you’d rather lose what you’ve invested or walk away with profits. Experts recommend risking 1-2% of your account balance on a single trade, but this really comes down to your own personal preference.