Almost every Forex trader dreams of trading Forex profitably. It is one of the primary factors that drive many to take up Forex trading. By Forex trading, we mean, not just the currency pairs, but also other instruments such as commodities or equity indices and many other CFDs. Traders are usually drawn into Forex trading for many reasons. But fundamentally, there is a mistake in the fact that a trading strategy alone will not help you progress in trading.
There is a lot more work to be done rather than just purchasing an off-the-box trading system. Just as with any other form of investment, Forex trading, which is more dynamic and active requires a lot of groundwork. Hence, you cannot treat this lightly and expect things to be easy. Reality is far from the truth in this aspect. It is not surprising to see why many traders end up losing their trading capital within the first year of trading.
This article aims to focus on the key things that traders should bear in mind if they want to trade Forex profitably.
These five aspects may seem simple, or at times even ignored. But as we explain, you will notice how closely they are interlinked. So, if you are serious about trading Forex and want to really see your profits grow, following these five steps below can be very beneficial.
However, just reading this article will not automatically make you a better trader. You also need to put it into practice, to see the effects.
5 tips for building Forex strategy
1. Pick one instrument
Many traders usually start off their trading journey, by trading the EURUSD currency pair. This can be for a number of reasons. For one, the EURUSD currency pair is the most liquid instrument in the forex markets.
There are also a lot of trading strategies and trader discussions that one can come across. However, the forex markets are made up of numerous other instruments too. Besides forex, a broker who offers forex typically offers you a chance to trade other instruments such as commodities, equities, and even crypto.
To be successful in trading, you need to develop your own unique style. This unique style of trading emerges based on your personal preferences. These preferences start with the instrument that you are interested to trade.
Furthermore, depending on your geographic location, it may be impossible to trade the EURUSD instrument. This can be due to timings and other factors.
The key factor that will determine your access as a trader is an instrument that you choose to trade. There are no good and bad Forex trading instruments. It is all about how familiar you are with the instrument that you want to trade.
Traders often ask on forums about the best currency pair to trade or the best instrument to trade. The answers of course vary quite a lot, from one trader to another. But the truth is that there is no “best forex currency pair” to trade.
The best instrument to trade is the one where you have a piece of good knowledge about its history and learn about its characteristics. Trading is not just about blindly hitting the buy and sell buttons on the screen. There is a lot more to it besides the trading strategy as well. Learning about the currency pair will enhance your knowledge and also gain familiarity with the instrument.
2. Have a goal before making forex strategy
Having a trading goal can help to discipline you as a trader.
Traders do make money. However, keeping the money or the profits that they make is difficult. You can initially see your profits rise. But keeping these profits, and building upon them, can be a herculean task. Having a goal when trading forex is therefore essential. Since the markets are so dynamic, it can be easy to let go of your trading strategy. This often happens when you take a string of losses. Emotions can quickly distort your decision-making, leading you to make more mistakes. In the end, you only end up with a smaller balance, if not blow up your trading account.
A trading goal can be as simple as making x pips in profits per day. It can also be, making $x in profits per day or over a defined time horizon. Once you have this goal set, you can then build a trading plan and a forex strategy.
There are numerous tools available these days for traders. You can therefore easily make use of these trading tools in order to manage your goals.
Some online tools can also help to break down how well you are achieving these goals. In the end, without a trading goal, you are merely shooting in the dark. Without a goal, there is no plan. And without a trading plan, there is no strategy.
Sure, you may end up picking up some profits here and there, but your trading journey will not last long. Forex trading needs to be taken seriously. Just as you would if you were to make an investment. In fact, any investment, be it a mutual fund or any other form always has an investment goal. Thus, forex is no different from any other form of investment.
3. Build and test your forex strategy
A trading strategy is the obvious next step in your journey as a trader. By the time you reach this step, you would have already decided which instrument you want to trade.
You would also have a trading goal in place. The next step is to figure out how to achieve this goal. It should be relatively easy if you have the first two steps firmly in place.
A forex strategy will now become a function of your trading goal.
Say, for example, your trading goal was to make x number of pips a day. Therefore, the best forex strategy ideally suited to realize this goal would be a breakout trading system.
Alternately, you can also use a trend-following or a countertrend trading system. Still, the goal will determine how you plan to trade with this strategy. If your aim is to capture a certain number of pips a day, then your take profit and stop loss levels will reflect that.
Building consistency to meet your trading goal will be important in this aspect. Even if you do end up losing money, your goal will help you stay on track. But it doesn’t just end with using a trading strategy. You also need to constantly backtest and forward test your trading system. The goal of this testing is to figure out any weaknesses in your forex strategy.
Identifying these loopholes will help you to manage your risk better.
Testing a trading strategy is not as difficult as it seems. The MT4 trading platform has an inbuilt trading strategy tester. You can utilize this to visually backtest or automatically backtest your system.
Alternately, you can also use a forex demo account to forward test your trading strategy. This will give you more realistic results as the market unfolds
4. Pay attention to the risk that you take
Last but not the least, the most important aspect of trading is in how you manage your risk. Traders don’t pay much attention to risk management in forex.
One reason for this could be the fact that you often hear about the 1% rule. The one percent rule states that you should not risk more than one percent of your trading capital on a trade. This can be hard to implement especially if your trading capital is just $1000. This would mean that you will have to trade with micro-lots.
The end result is that even with a streak of good winning trades, you won’t be able to realize any meaningful profits. Therefore, understandably, traders tend to ignore this rule. The advantage, in some ways, is that you are able to capture better profits.
However, your risk exposure also increases. Traders need to find a balance on how they can capture meaningful profits, without compromising on risking too much. To attain this, the previous steps mentioned can help you overcome this hurdle. The more familiar you are with the instrument that you are trading, the higher the chances of you better managing your risk.
Familiarity with the trading system can also help you go a long way when it comes to risk management. Another factor to bear in mind is that risk management is not just about how many lots to trade. It starts with how leveraged you are. These days, brokers who offer forex are limiting leverage to 1:100 at best. This means that traders with lower capital cannot truly find meaningful returns from the market.
Therefore, the trading capital you have also played an important role. Typically, the higher your trading capital, the better your chances of capturing meaningful profits. Therefore, leverage, trading capital are something worth thinking about.
5. Learning from your mistakes
If you do not learn from your mistakes, then you will never grow as a trader.
While traders spend a lot of time fine-tuning their strategies, not many look at how their trades fared. A losing trade can give you valuable insights. Therefore, it is important for traders to pay attention to the mistakes they make while trading. This will help you to be more astute in your next trade.
Analysing your trade at the end, regardless of whether it was a winning or losing trade is beneficial. It will help you to gain familiarity with the strengths and weaknesses of your trading system. Analysing your trades and learning from the mistakes also helps to keep you focussed on your goals. It is a great way to remove emotions when trading the markets.
One of the most common mistakes that forex traders make is to enter a trade on impulse. There is a saying in the markets about the fear of missing out, also called FOMO. This happens when traders feel that if they don’t take on a trade, they are missing out on a valuable opportunity. This is far from the truth.
The markets will give you multiple opportunities. Just because you missed one opportunity doesn’t mean that you will not get another opportunity.
Because of FOMO, traders end up trading on emotions. This is where mistakes happen a lot of the time. Eventually, your trading goal suffers and you end up looking at losses or the profits that you made which were given back to the market. To overcome this, traders make use of various online tools providing deep insights into the trades. You can learn aspects such as how good your entry and exit were, the average holding time of your trade, and so on.
Is it really possible to trade forex profitably?
In conclusion, one question that may come to mind is whether it is indeed possible to make profits trading forex.
The answer is yes! However, as we mentioned, this is a wrong question to ask. The bigger question is whether you can keep the profits that you made, and be consistent at it.
Consistency in forex trading is important. Since the markets are very dynamic, the profits you made one day can turn into losses the next. This is where the above five mentioned tips on forex profitably can help you a lot. Traders need to take forex trading more seriously. They need to go beyond the usual trading systems or use a social trading account. These can make you profits, but only to a certain extent.
To be successful in trading forex, you need to have the commitment and perseverance to continue. Learning will become an everyday aspect and at times, following the five tips to trade forex profitably can be daunting. However, as someone wise once said, no pain no glory! This couldn’t be further from the truth. The question is about how you can continue to trade forex without losing money.
This is where the above five factors can play a very big role in your trading journey. While it can seem intimidating, the fact is that you can make this into an enjoyable learning journey.
