10 Tips to become a Forex Trader
Getting started in forex has never been easier. Easier access to currency markets and brokerage platforms that fit a range of trading needs has become widely prevalent. However, becoming a successful forex trader requires an arsenal of important tools, skills, and insights. Let’s take a deep dive into what this all means.
1. Become better educated
If you’re thinking about getting into forex trading, research and knowledge is key. A daily trading volume exceeding $6 trillion makes the forex market one of the largest and most liquid financial markets globally. While there is money to be made, a proper understanding of the market is crucial before taking a stab at real trading. There are various ways to do this. At a minimum, make use of forex educational tools or trading classes online. Look for credible sources of videos, webinars, articles, e-books, and guides. Become familiar with the different tools for trading and analysis. Study as many forex trading strategies as possible to find one that is best suited to you.
2. Set your trading goals
Setting goals is an important component of successful online forex trading. This is because how your trades perform, and the profit earned, may differ from month to month.
Goals give a trader something to work towards when trading on the forex market. Identify what you want to achieve, be this in terms of the types of trade you want to engage in and the level of risk you’re prepared to take. Then put in place a strategy to help you reach those objectives.
3. Identify your tolerance for risk
Trading forex comes with a high level of risk. A forex trader needs to know how to manage this risk in a way that won’t see them losing large amounts of money. This includes:
- Identifying the risk (quantifying potential losses) in a trade to have the ability to take (or not take) certain steps relative to your goals or risk tolerance.
- Knowing what tools to use to minimize risk. This could be the use of stop-loss orders to limit your losses if the market moves against your position. It could be the use of a take-profit order (reaching a profit target and exiting a trade before it moves in the opposite direction). Alternatively, it may be using trailing stops which set the stop price at a fixed amount below the market price with an attached “trailing” amount.
- Exercising patience and constraint. These are vital for making sensible forex trading decisions. They will also enable to you to wait for the right time and price to buy and sell.
4. Define your trading strategy
Trading forex requires a well-thought-out trading strategy to mitigate risk and minimize large losses. There are various strategies that forex traders follow. This is what they look like:
- Forex scalping is a day-trading strategy that typically sees the forex trader drawing on technical analysis to place multiple short-term trades to profit from small and recurring trades. This method of forex trading can be relatively time-consuming.
- A swing trader attempts to make gains from short-term price swings. They’ll mostly use technical analysis to make trading decisions but turn to fundamental analysis when required. A swing trader usually holds positions for more than a day (sometimes up to several weeks), to buy at swing lows and sell at swing highs (or vice versa). They are at risk of significant overnight or weekend losses when price gaps may occur.
- Day traders typically open and close multiple short-term trades daily using different techniques. They are generally skilled in technical analysis. A forex trader can earn large gains through day trading but the probability of losing money quickly is also high. To reduce overnight risk, day traders tend close all open positions before the trading day concludes.
- Ignoring short-term price swings, a position trader instead holds onto trades for a longer period. They commonly use a combination of technical and fundamental analysis to identify trends and the investment that will profit from that trend. They also try to ascertain accurate entry and exit orders in advance.
Building a forex trading strategy provides a framework to set objectives and measure trading performance. It also includes criteria like risk parameters, trade size, market environments to trade in, speculative profit potential, losses per trade, and more.
5. Select a CFD forex broker
Look for a CFD forex broker with a robust reputation. Ensure that the broker:
- comes with top-tier forex trading expertise
- offers an innovative trading platform with automated tools for market analysis and sentiment, advanced charting capabilities,
trade automation, and customizations
- gives access to a wide range of educational materials and other useful resources
- provides up-to-date news and insights on the financial markets and geopolitical news and events
- delivers a high-quality customer experience in terms of support
- offers flexible leverage options (just know that leverage is associated with higher levels of risk)
6. Learn to trade with a demo account
Open a demo account with a trusted CFD forex broker and practice trading forex with virtual money. Simulating a real trading environment, a demo account will allow you to place real-time trades and see potential outcomes. It also gives you access to real-time market data and expert insights.
In essence, a demo account demonstrates what potential losses and gains would be like if you were trading with real capital. In fact, even after gaining live trading experience, a forex trader may continue practicing with a demo account, especially for testing new strategies.
7. Trade-specific currency pairs
Forex traders typically trade specific currency pairs on the forex market. The most popular pairs traded are usually EUR/USD and GBP/VUS. Traders will usually speculate on forex prices without taking possession of the currency. In other words, they predict the direction that exchange rates will take to profit from price fluctuations.
The forex market is most active during peak hours. The currency pairs most renowned for their high liquidity are:
Choosing a pair is usually based on multiple factors like timing, volatility, trends, geopolitical events, or economic fluctuations.
8. Start off trading small
Before risking large sums of money, consider starting off your trading journey by trading small. As you gain more skills and experience, think about increasing the amount of capital you wish to put on your trades. Every trade is a new learning experience but be patient and take your time. Master the trading platform from which you will process your trades but understand the risks you may experience due to market volatilities and price fluctuations.
9. Keep reviewing your trades
Spend some time creating historical data to look back on. Do this by recording your trading activity in a journal. Use this to analyze and better understand why and how your trades have performed the way they have.
Allocating time to reflect on the types of trading decisions you’ve made, what the outcome was, and what you could have done differently to achieve a more successful result. Use this information to make necessary adjustments to your trading strategy, where required.
10. Perseverance is key
The key to garnering any type of success in forex trading is strict discipline, practice, skills, and experience. However, opportunities to make a big profit come with high risk too. Equip yourself with as much information as you can about online forex trading. Never stop learning. Even professional forex traders continue to test strategies using a demo account and tweak their trading strategies where appropriate.
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