Start Small When Going Live
Once a trader has done their homework, spent time with a practice account, and has a trading plan in place, it may be time to go live—that is, start trading with real money at stake. No amount of practice trading can exactly simulate real trading. As such, it is vital to start small when going live.
Factors like emotions and slippage (the difference between the expected price of a trade and the price at which the trade is actually executed) cannot be fully understood and accounted for until trading live. Additionally, a trading plan that performed like a champ in backtesting results or practice trading could, in reality, fail miserably when applied to a live market. By starting small, a trader can evaluate their trading plan and emotions, and gain more practice in executing precise order entries—without risking the entire trading account in the process.
Use Reasonable Leverage
Forex trading is unique in the amount of leverage that is afforded to its participants. One reason forex appeals to active traders is the opportunity to make potentially large profits with a very small investment—sometimes as little as $50. Properly used, leverage does provide the potential for growth. But leverage can just as easily amplify losses.
A trader can control the amount of leverage used by basing position size on the account balance. For example, if a trader has $10,000 in a forex account, a $100,000 position (one standard lot) would utilize 10:1 leverage. While the trader could open a much larger position if they were to maximize leverage, a smaller position will limit risk.
Keep Good Records
A trading journal is an effective way to learn from both losses and successes in forex trading. Keeping a record of trading activity containing dates, instruments, profits, losses, and, perhaps most important, the trader’s own performance and emotions can be incredibly beneficial to growing as a successful trader. When periodically reviewed, a trading journal provides important feedback that makes learning possible. Einstein once said that “insanity is doing the same thing over and over and expecting different results.”4 Without a trading journal and good record keeping, traders are likely to continue making the same mistakes, minimizing their chances of becoming profitable and successful traders.
Know Tax Impact and Treatment
It is important to understand the tax implications and treatment of forex trading activity in order to be prepared at tax time. Consulting with a qualified accountant or tax specialist can help avoid any surprises and can help individuals take advantage of various tax laws, such as marked-to-market accounting (recording the value of an asset to reflect its current market levels).5
Since tax laws change regularly, it is prudent to develop a relationship with a trusted and reliable professional who can guide and manage all tax-related matters.
Treat Trading as a Business
It is essential to treat forex trading as a business and to remember that individual wins and losses don’t matter in the short run. It is how the trading business performs over time that is important. As such, traders should try to avoid becoming overly emotional about either wins or losses, and treat each as just another day at the office.
As with any business, forex trading incurs expenses, losses, taxes, risk and uncertainty. Also, just as small businesses rarely become successful overnight, neither do most forex traders. Planning, setting realistic goals, staying organized, and learning from both successes and failures will help ensure a long, successful career as a forex trader.
The Bottom Line
The worldwide forex market is attractive to many traders because of the low account requirements, round-the-clock trading, and access to high amounts of leverage. When approached as a business, forex trading can be profitable and rewarding, but reaching a level of success is extremely challenging and can take a long time. Traders can improve their odds by taking steps to avoid losses: doing research, not over-leveraging positions, using sound money management techniques, and approaching forex trading as a business.
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