While Forex trading is often mistaken as a get-rich-quick scheme, the truth is it requires a great deal of experience and discipline to succeed in. A combination of the right strategies can help you avoid trading mishaps and maximize your winnings in currency exchange. Here are eight tips to keep in mind to succeed in forex trading:
Build a trading plan
Many traders make the mistake of jumping into the forex market without having an idea of what they’re getting themselves into. Without having an idea of how much you can risk losing or what your contingency plan is, you will undoubtedly set yourself up for losses. It is surprising to find out how many traders go in without knowing what to do when things do go, or don’t go their way. In worst-case scenarios, a trade that looked extremely profitable on paper sometimes turns into a massive loss because traders don’t know when to exit.
Such scenarios can be avoided if you take out time to build a concrete trading plan before you take any action. This step will give you a flow on how the trade will be executed.
An effective trading plan typically includes the following:
- The time when you should enter the market
- Amount of money you can afford to risk
- Exit strategy
- The amount you’d earn if the trade is successful
- Stop-loss in case of a potential loss
Select your broker carefully
While choosing a broker is a vital part of forex trading, it’s often overlooked by traders who are just starting. Of course, it’s crucial to select a legitimate broker who is registered with the regulatory body in your area. Apart from that, it’s also essential to choose a broker that offers excellent customer service and has an efficient trading platform, amongst many other factors. To make an informed decision you should explore comparison guides of the best forex brokers and choose the one that suits your trading style.
Use a money management strategy
Experienced traders realize the importance of an excellent money management strategy. The approach involves managing your risk by using protective stops, which prevents you from losing too much capital in case a trade goes south. While money management may seem like a tedious task, recovering from a loss and building back to your original equity amount is a much more difficult task. Instead of potentially losing years’ worth of hard work in a single trade, it’s better to follow the one-percent-risk rule. Just as the name suggests, the rule entails not risking more than a single percent of your account value on any given position thus preventing you from overweighting a single position.
Exit profit-making trades at the right time
Many traders make the mistake of exiting trades too early or late, resulting in reduced profits or increasing losses. This error tends to happen when traders don’t follow a plan, resulting in making minor profits after incurring a few losses, even if a trade had the potential to make a considerable profit.
Contrary to what most people think, closing trades prematurely or too late doesn’t just occur amongst beginners or novice traders – it happens amongst professionals, also. When you enter a trade and things aren’t going your way, it’s tempting to wait until the market turns back around, something which rarely happens. Placing stop-loss orders before starting a trade can help prevent these problems.
Maintain the same rate of risk if you succeed
With a series of successful trades under your belt, it may be tempting to increase the amount of capital you’re willing to risk just because your balance has improved. While it’s good to be confident about your skills once you’ve started to succeed, it doesn’t mean you should take more risks. Going against your initial risk strategy has the potential to set you back more than anything else.
Grow your account size organically
It’s imperative to begin trading forex by starting with small sums and low leverage. Instead of depositing large amounts from time to time, you should aim to grow it organically by reinvesting your profits.
If your profitable trading decisions grow your account organically, that’s excellent. On the other hand, if you keep incurring losses, then it would not be a good idea to pump money into your account until you figure out what’s wrong.
Keep track of your successes and failures
While trading strategies and technical and fundamental analyses of price trends are vital to your approach to trading, analyzing every decision at every step is the most important thing you can do. Recording every dollar you place in an open position and keeping track of every mistake made in trading methods and calculations will help you keep a check on your trading activity.
Recording trading activity is especially important when you want to reflect on your trading decisions and want to determine what’s precisely going wrong. Successful traders understand the importance of this step and keep a journal that records their trading activity.
Start with a single currency pair
Jumping into the complexities of forex before you get the hang of the market will only set you up for disaster. Hence, it’s always better to start forex trading with one currency pair and add others to your portfolio once you become more skilled. You can’t master various forms of financial activity overnight; it takes practice. Choose a currency pair that you’re already familiar with and then you understand. You can start with your own country’s currency or choose a currency that’s more liquid. Additionally, you can also select a currency pair that’s widely traded.
Just like any other profession, succeeding in forex trading requires practice and adherence to specific rules. It’s not just about investing money; you need to make an effort and take out time to start making profits. What are other strategies essential to succeed as a forex trader? Let us know in the comments below!
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