To be successful in Forex trading, you need a trading method that provides you with an edge in the market. Then execute trades whenever your edge presents itself with discipline and consistency.
An edge can be found with enough education, practice and experience. Discipline and consistency can also be cultivated through confidence in your methods.
What I will outline below are some of the most important things to focus on that will improve your probabilities of success.
So without further delay, let me give you the low-down on how to be successful in Forex trading.
What you need to know to be successful in Forex trading
To be successful in Forex trading, you have to start by thinking like a successful trader does. They think about the things that they can control while operating in the market. Such as limiting risk and maximizing the opportunity to profit. They think in terms of probabilities and cultivating the right frame of mind to trade.
Successful Forex traders treat trading as a business and they have a well thought out and researched plan.
Create a trading plan
Your trading plan does not have to be long or complicated. In fact, simple works best and it can be short enough to write on the back of an envelope.
It just has to be clear about what you are going to do and when you are going to be doing it.
A trading plan consists of three components. These are;
- The trading method or how you are going to go about analyzing the market.
- Risk criteria and money management protocols.
- The right frame of mind to keep everything working together.
They must work in synergy with each other for you to be successful in Forex trading.
Everything else mentioned in this article has a relationship to one of these three components. Each component should also provide its own edge in order to stack the probabilities of success in your favour.
Here are some typical examples of what should be included in a trading plan.
- Define what constitutes a signal to buy or sell.
- How much to risk per trade.
- What risk to potential reward ratios are acceptable?
- When to scale up or reduce your deal size.
- How to manage open trades.
- What currency pairs will you trade?
The point of creating a trading plan is to know in advance what you are looking for and to be consistent in your approach and disciplined when trading.
Focus on the process and not the outcome
Making money from the market is the natural result of successful Forex trading.
What will get you there is the edge inherent in your trading plan. The market is going to do what the market wants to do and you can’t control that. You can only control yourself and what you are going to do.
So the best thing you can do to be successful in Forex trading is to focus there.
You will have losing trades. There is no way of knowing with certainty the outcome of the next trade. The outcome of any single trade idea doesn’t matter that much. What matters more is whether your edge plays out to be net profitable over a series of trades.
Focus on finding and developing your edge and being detached from the outcome. Keeping a trading journal will help you do this.
Be consistent and disciplined
Once you have created a plan, the next step is to trade your plan. If you don’t follow the plan you will have a hard time finding consistency.
Consistency in execution is important because it leads to predictable results over time. Whether they are positive or negative, it allows you to identify what is or is not working.
Your trading will surely evolve as you gain experience and you can gradually make improvements.
What you should be aiming for is a positive expectancy. Which means that you are net profitable over a series of trades. Once you have your winning formula, it is simply a case of repeating the process.
Without the discipline to follow a trading plan consistently, your chances of being successful in Forex trading are slim.
Keep your emotions in check
This is easier said than done and is probably the most challenging aspect of trading.
The last thing you want is for emotion to creep in and make trading decisions on a whim. This is the stuff that self-sabotage is made of.
You have to be trading with real money to fully understand this. Fear and greed are like a couple of demons with a negative influence. Every trader has to grapple with them and master their emotions to be successful in Forex trading.
If your emotions hijack your discipline then none of the above matters. There will be times when you are fearful of taking the next trade due to a string of losses. At other times, you will get over confident after a string of wins.
Unfortunately, no one can help you with this but here are a couple of tips that might help you manage.
- Trade smaller lot sizes.
- Risk a smaller percentage of your trading account on any single trade idea.
There’s no need to tamper with or over manage your trade once they are on. Unless your trading plan dictates it. Enter your stop and take profit orders then walk away.
You should have done all the planning beforehand.
Protect your capital
When trading, you are either digging a hole that you will have to trade your way out of or growing your account balance.
It goes without saying that you can’t continue trading if you lose all your capital. Use a protective stop loss order on every deal to limit risk. You should know before entering the market where you will exit if the price moves against you. You should also know what the maximum loss will be if the price gets there.
Although losses aren’t entirely avoidable, they can be limited. Don’t risk too much of your account balance on any single trade idea.
Your first objective when trading is to protect and preserve your capital from loss. Your second objective is to grow it consistently over time. When you can maintain these two objectives you will be successful in Forex trading.
What I have already mentioned above will put you on the right track. Other ways to limit risk and be successful in Forex trading are;
Trade high quality set ups and refrain from over trading
The market gives plenty of opportunities to trade but not all opportunities are created equal.
Sometimes, the market provides opportunities with low risk and high probability of reward. Other times, it provides opportunities with high risk and low probability of reward. Knowing when not to trade is just as relevant as knowing when to trade.
The difference is in the context and confluence of indicators that stack the probabilities in your favor. Some confluences of indicators can include;
- The time of day.
- The direction of the longer term price trend.
- How clean the chart or candlestick pattern is.
- The number of signal overlays that exists across multiple time frames.
This is to name just a few.
To be successful in Forex trading, you must be patient. Successful Forex traders don’t chase price or force trades. They let the market come to them and trade when the odds are stacked in their favor.
Things should get easier with practice and experience.
Focus on one or two currency pairs
Each currency pair has subtle differences in the way they move. Furthermore, some trading strategies might perform better or worse on different instruments.
In the beginning, it would be a good idea to focus on one or two currency pairs. This will allow you to learn its characteristics and personality.
Following one or two currency pairs also allows you to keep your finger on its pulse and trade it consistently. Watching and trying to catch every move on many currency pairs can lead to over trading.
Furthermore, you run the risk of going from losing streak to losing streak on different pairs. As opposed to watching one pair and taking all the signals to let the probabilities play out.
The point is to be consistent with what currencies you trade and trade them over a period of time. Focusing on one or two currency pairs is more manageable and allows you to specialize.
It is entirely possible to be successful in Forex trading just from one currency pair.
With that being said, watching many pairs can create more trading opportunities. You can add more currency pairs to follow and trade at a later stage, if you want.
Aim for asymmetric risk to reward
One major key to success in trading is in how you manage your money. Risk management is the second most major component of your trading plan.
The actual trading method, or the way in which you generate buy or sell signals is not that important in the grand scheme of things. A trading method with a low success rate can be net profitable if the reward on the winners is high enough.
A simple way to stack the probabilities of success in your favor is to take trades with an asymmetric risk to potential reward. An example of this would be to risk $100 to try to make $300. Trading like this can provide significant margins for error in your analysis. Since this allows you to lose 7 times out of 10 and still come out ahead.
Ideally, you should strive for a high win rate as well as an asymmetric risk to reward.
The summary for success in Forex trading
Success in Forex trading means to be consistently profitable.
Use this as a general guide;
- Create a trading plan and execute it with consistency and discipline.
- Keep detailed records in a journal and make improvements to your performance.
- Leave your emotions out of the equation.
- Focus on the process, not the outcome.
- Specialize in one or two currency pairs.
- Trade high quality set ups with the dominant longer term price trend.
- Protect your capital.
- Aim for asymmetric risk to reward.