Choosing the right instruments to trade

For any trader preparing to enter the markets, one of the most important decisions is choosing the right financial instrument to trade. The financial markets offer hundreds of instruments across various asset classes, each providing unique opportunities to capitalise on price movements and potentially profit from investments.

Before deciding which financial instrument to trade, traders should consider key factors, including liquidity, volatility, transaction costs, and the information available.

In this article, we will discuss which trading instruments, markets, and techniques are more suitable for beginners and which ones you should avoid.

Major currency pairs

Major currency pairs are generally regarded as the best choice for beginners. These include the world’s major currencies traded against the US dollar.

The major currency pairs are the most popular and most traded instruments and include the US dollar, Euro, Japanese yen, British pound, Canadian dollar, and Australian dollar. These currency pairs usually have high liquidity, which means you can enter and exit trades quickly and easily. They also have narrow spreads, and moderate volatility.

Low volatility currency pairs

This group includes certain cross currency pairs that exclude the US dollar but are still relatively stable. These pairs, such as EUR/GBP and AUD/NZD, tend to have slower price movements. Their lower volatility means less risk, making these pairs a good choice for beginners looking for easier trading opportunities.

Currency pairs with clear fundamentals

Some currency pairs are strongly influenced by key economic events, like interest rate decisions, employment reports, inflation or economic growth. These factors create more predictable price movements, offering traders a clearer understanding of market trends.
 

Currency pairs with clear trends

Currency pairs is a popular instrument with well-defined trends are ideal for beginners, as trend-following strategies are easier to identify and often more successful. Trading in the direction of a trend generally has a higher success rate than counter-trend trades.

Beginners should look for trends on higher time frames, such as daily or weekly charts, for a clearer and more reliable view of market direction.
 

Gold: a beginner friendly option

Gold is another popular instrument that can be suitable for beginners. It has an inverse correlation with the US dollar. When the dollar strengthens, gold usually weakens, and vice versa. Gold typically offers reasonable spreads, but it comes with slightly higher volatility, which can be bit risky for new traders. For this reason, it’s often recommended to trade gold in smaller positions. Remember that less is more in this case.

S&P 500 stock index

The S&P 500 index is a solid choice for beginners. This index tends to have lower volatility compared to other indices, like the NASDAQ. Additionally, there’s often a strong correlation between the S&P 500 and the NASDAQ, which can help you make better trading decisions.

What new traders should avoid

Exotic currency pairs instrument

Exotic currency pairs ,another popular instrument, involve currencies from less developed countries. These pairs can be highly volatile and often have wider spreads, which increase trading costs. Additionally, lower liquidity may lead to delays in execution.

Exotic currency pairs include:

USD/SGD

USD/HKD

EUR/TRY

High volatility pairs

While some traders are drawn to volatility due to the potential for quick and significant profits, trading high volatility pairs can be risky without a solid understanding of market fundamentals, proper risk management, and emotional discipline.
 

Highly volatile stock indices

Indices like the DAX atau US 100 experience high volatility, especially when the market opens, making it difficult to predict their future direction. Experienced traders often use this volatility for quick, scalping trades that last only a few seconds. However, scalping needs strong psychological resilience and is not recommended for beginners.

Trading instruments with high leverage

Leverage allows you to larger positions than your account balance would usually allow. This can increase profits, which is tempting for a beginner. However, leverage is like a double-edged sword as it also magnifies losses. Instead of focusing solely on leverage, it’s more important to prioritise proper risk management by deciding how much you’re willing to risk on each trade.
 

Avoid complicated trading strategies

Beginners should avoid complicated strategies on minute time frames, like scalping orintraday strategies. These strategies require a deep understanding of market behaviour and significant experience. Start with simple strategies on higher time frames, such as swing trading, where trades last for several days. This allows you to observe market movements and gradually build the skills needed for more advanced strategies over time.

Useful tips for beginners

Start with on a demo account and try instruments

Demo accounts allow you to gain forex trading experience without risking real money. The demo helps you become familiar with the platform and provides a risk-free environment to test your strategies. However, for a demo account to be effective, you need to approach it as if you were trading with real money.

However, demo accounts don’t replicate the emotional challenges of trading, such as fear and greed, which are normal when trading with real money. Also, demo accounts don’t have slippage during order execution like there is on a real account. Keep this in mind when backtesting your chosen strategy and avoid relying on transactions where these limitations could affect the outcomes.

Switching to a real account

One of the most common mistakes that beginners make is switching to a live account too quickly, often without a proper strategy. However, the combination of uncertainty from an untested strategy and the emotions of fear and greed often results in losses.

Before opening a live account, make sure you test your trading strategy in a demo environment. Once you’re ready to trade with real money, start with small positions, such as micro lots to limit your risk. This approach will help you adapt to the emotional challenges of live trading, which are often more intense than on a demo account. Starting small will also allow you to build confidence and sharpen your skills without taking on unnecessary risk.

Keep a trading plan and journal

Having a solid plan is essential for success. Clearly define your trading goals, preferred markets, and entry/exit strategies. Follow this plan consistently, both when practising on a demo account and when trading with real account.

You should also record the trades you make in your trading journal. This allows you to reflect and improve continuously. In your journal, you can include charts of your trades and write down the emotional factors that influenced your decisions when you entered the trade. Understanding these factors will help you improve your strategy and boost your trading performance.

Focus on risk management

Effective risk management is essential for trading success. Always decide how much you’re willing to risk per trade and set a clear risk/reward ratio. Use tools like stop loss orders to limit potential losses and protect your capital. Most importantly, never trade with more money than you can afford to lose. Sticking to your risk management strategy will help you handle market fluctuations while protecting your funds.
 

Educate yourself about instruments

Keep learning about forex by staying updated with economic news and analysis. Understanding what moves the markets will help you make more informed trading decisions.

In summary

Choosing the right financial instruments is a crucial step for any trader, especially beginners. By focusing on highly liquid and less volatile instruments such as major currency pairs, low volatility currency pairs, and commodities like gold, traders can reduce risk and gain valuable experience. It’s important to stay disciplined, start small, and prioritise risk management, especially when moving from a demo account to a real account.

In addition, having a well-structured trading plan, keeping a detailed journal of your trades, and committing to ongoing education are essential for enhancing your strategy and improving your trading performance over time. Remember, trading is a journey that requires patience, continuous learning, and emotional discipline. By following these principles and avoiding complex strategies and high-risk instruments in the beginning, you can increase your chances of success and build a solid foundation for your trading career.

Disclaimer: This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.