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There are certain facts about the market that many rookies wish they knew before they started trading on a platform and entrusted their money to a broker.
1. Regulations rule
The digital age has opened many doors when it comes to trading, but it has also left open a window for illegitimate brokers to take advantage of unsuspecting, inexperienced traders. Traders should consider brokers who are regulated in major financial centres in their region, in order to have the assurance offered by minimum standards, ongoing monitoring to ensure compliance, a framework for handling complaints from customers, and the power to enforce actions against regulated brokers for violations.
In South Africa, the Financial Sector Conduct Authority licenses forex financial services providers (FSPs) under the Financial Advisory and Intermediary Services Act, 2002. The FSPs are licensed to carry on business as a forex investment advisor or a forex investment intermediary.
Would-be traders would do well to consider the comprehensive list of brokers that can be found on the FSCA website: https://www.fsca.co.za/Regulated%20Entities/Pages/FAIS-Verifications.aspx. The link can also be used to verify if a broker is regulated by the FSCA. Keep in mind that others operate with the licenses of their parent companies.
Entrepreneur Musa Zondi, a trader in his personal capacity and founder of education hub Live Forex, says brokers do disclose a lot in their terms and conditions, and that rookie traders need to give themselves time to actually read through them. “But, honestly a lot of people don’t have time to read through all of it,” he says.
2. The risk is high
The forex market is high in liquidity due to the trading of currency, so it is easy to insinuate that there is plenty of money to go around for everyone to make a quick buck. What traders often forget is that it is a high-risk environment. Some statistics show that the majority of traders lose.
In order to counter or reduce the risk, one has to have a risk-management plan, which should include knowing what to trade, when to trade and when not to trade, when to exit a trade, and how big a position to open. “A trader can’t control the price movements and can’t be 100% sure of the results of their trade,” according to FBS.com.
Zondi agrees and cautions against trading based on other people’s experiences. “People should know that just because someone says they trade doesn’t mean they are making money.” Risk management is key when it comes to forex trading.
3. You can’t rest on your laurels
The forex market involves a lot of learning and constantly analysing the market and economy. An anonymous trader on forexfactory.com says they wish they had not wasted their time looking for tips on intraday trades. “Instead, I should have invested that time on research and gaining knowledge,” they said.
Says Zondi, “I would have loved to have a clear explanation about price manipulation because a lot of the time, as a beginner, when trading demo accounts it’s easy to make money. But when it comes to live accounts, they can push the prices to touch your stop loss or miss your entries by a few pips just so they [brokers] always have an advantage over beginners.”
There are two approaches to forex trading: reckless and controlled. According to FBS.com, a reckless trader has no systematic approach and does not use stop-loss orders. “Such a trader puts at stake the money they can’t afford to lose. As a result, this trader is under constant stress – something that drives him/her to ill-judged decisions.”
By contrast, a controlled trader is described as someone with a trading system that fits their personality. They use the rules of risk management and they trade with spare money. “Such a trader is an active learner, psychologically stable and consequently, will be able to stay in the market for a long time.”
4. Do your homework
Trading forums online reveal pitfalls in the journey for many inexperienced traders. Regrets range from not having a long-term strategy and doing random intraday trading to being driven by greed and borrowing money to invest.
The forums are useful for researching reviews on forex brokers. Here clients name, shame and share stories about unscrupulous brokers getting their accounts banned, not making payments, stop-loss hunting, sudden moves in spreads, and taking out stop losses.
5. Choose wisely
So it’s vital to find a broker with credibility, someone who cares about their reputation. Fees are a part of the package for trading on their platform. Usually there are advantages and disadvantages attached to the fees, so read the fine print and shop around for a broker that meets your needs and is best suited to your plan.
Finally, consider the security features. A trader needs to be assured that their wallet is safe. A broker that offers two or three security features on their platform might be better than one that only requires a password to access an account.
The number one rule? According to Zondi, “Always risk money you can afford to lose!”