Zoe Fiddes from Easy Forex explains her five steps to becoming a profitable trader on the market
Did you know that $4trillion dollars-a-day is traded in the currency market alone, making forex the largest financial market in the world?
With round-the-clock trading, accessibility to low spreads and no commission it is becoming an increasingly popular market to trade in. But to be successful you have to plan and work hard at it. Here I set out five steps to take to be a successful forex day trader.
(1) Develop a system. You must have a defined trading method with a specific signal to sell and a signal to buy. And you need to know where you will exit, either on a loss or a profit, before you hit the trade button, otherwise you will be executing trades on gut feeling rather than the facts. Write down your method and use the tools available, such as charts and technical indicators. Test this system, making a log of all your trades with comments for the reason behind your trade.
(2) Manage your risks. There is a lot of truth in the quote 'manage your risk and the profit will look after itself'. All too often novice traders don't consider how much they are risking in an investment. You should never risk more than 5% of the total equity in your account.
Why? Because you will lose trades as well as win trades. Losses are part of trading and you have to accept them. However, the aim is to ensure the level of your losses is less than the level of your profits. That is why you control your maximum loss with a stop-loss order that will automatically close your trade at a set level. You should always consider your risk rewarding ratio (RRR); if a trade's risk is larger than the potential reward then stand aside and wait for a better opportunity.
(3) Have realistic targets. A currency pair is only going to move a maximum number of points in a day and there are indicators that calculate the size of this move. If the average daily range of EUR/USD is 130 points then how do you expect to make 100 points from one trade?
It is very hard to take most of the range. Instead, if day trading, you could increase your probabilities and aim to take smaller pieces of the pie. This will also decrease the risk you need to take. A scalping strategy uses this method where you have small risk and small profits and are in the market just for a few minutes, if not seconds.
(4) Discipline is very important. You need this to be disciplined with your strategy and risk management rules. You may find your mind telling you to trade based on your psychological instinct but you have to ignore this and stick to the rules you have outlined in the proven system. This is where writing your method down and keeping a trader's log will help you the most. Trading without emotions is the hardest aspect to overcome but with practice it can be done.
(5) And, finally, you need patience. It is no good trading just for the sake of it. You cannot make things happen; you have to wait for a signal and then react.
Overtrading is dangerous and you are most likely to do this after making good profits when you become too confident, or after a string of losses when you are desperate to make the money back. Both of these situations may lead to you taking trades of less quality.
The forex market is exciting and volatile hence it provides many trade opportunities. However, without a trading strategy there is a high chance of failure. It is a matter of finding what works for you and sticking to it.
Like most things in life it takes practice to get good at trading. Find a broker that can provide you with free education and training and make the most of your opportunities to learn.
To learn more about trading strategies, please visit www.easy-forex.com
Please note that Forex trading (OTC Trading) involves substantial risk of loss, and may not be suitable for everyone. Do not invest money you cannot afford to lose. The information provided is for informative purposes only, and can under no circumstances be considered as a recommendation to engage in any trade. Easy- Forex Trading Ltd is regulated by the Cyprus Securities and Exchange Commission (CySEC) (Licence Number 079/07).