Trading Forex successfully is a not an easy endevour and if you approach it as an amateur you will join the 95% of new traders who lose and give up. In this article we’ll take a look at a variety of factors which are necessary to master the game of Forex trading.
1. Plan The Trade & Trade The Plan – If you want consistent results then you need to trade consistently. This sounds simple and obvious but because as humans we have emotions and emotional reactions it can be easy to get sidetracked. Most professional traders have a written trade plan and make notes each day to ensure that they follow the plan. In order to stay level-headed it’s important that you believe in your strategy, which generally means you have experience trading it and believe that you will gain consistently over the long run by following your plan.
2. Have Faith In Your Broker – A lot of Forex brokers are in the business to take your money and are not concerned with ethics. Take your time and do a lot of research on forums, blogs and chats to get an unbiased view of how the broker you are considering stacks up. Having the wrong broker can cost you your hard earned profits.
3. Be Very Careful Trading Around News – Look at the Forex Factory online calendar before getting into a trade. The news events noted with orange and red icons are major events and can substantially move the market. These news events can cause whipsaw and stop you out.
4. Simulated Results – Watch out for systems that show extraordinary results, especially “black box” indicator systems. You’ve probably seen systems like this that show a green dot when it’s time to buy and a red dot when it’s time to sell. When you look back on the charts they look amazing, what you don’t know is that often they “re-paint” which means that the wrong signals are deleted so you are not seeing the true performance history.
5. Leave Scalping To The Professionals – Scalping is when you go for small profit targets, usually anywhere from 1 to 20 pips. With most currency pairs you will need to give them a breathing room of at least 15 pips. If you are taking 5 pips profit and have a 15 pip stoploss, this means that one loss will wipe out 3 wins. You are now needing to win 75% or more of your trades to be profitable. When you take the spread that you pay to your broker into consideration the scenario gets much worse. With a 3 pips spread, to earn 5 pips you will need to have the trade go 8 pips in your favor and to lose you will only need the trade to go 12 pips against you.
6. Accept Your Losses – Another dangerous situation involves traders who don’t want to accept a loss. They will get into a trade with a “mental stop”, thinking that if it goes against them say 50 pips then they will take the loss – however when they are -50 pips they decide to give it more room and before they know it the trade has gone a great distance against them and their account is close to a margin call.
7. Risk Management Is Key – Trading involves risk, it is important that you set a comfortable risk level for each trade. Without risk management you may as well go to a casino and play roulette. Most professionals will not risk more then 2% of their trading account on any one trade. This way after an inevitable string of losses their account will not be devestated and they will be able to continue trading. Amateurs who play big and quickly lose half their account, now need to double their account just to get back to even – often this results in a downward spiral. Risk management is often the difference between an amateur and a professional and is crucial for making consistent gains.