How to become a successful forex trader
Successful forex traders are made, not born. The good news is we can all become successful FX traders.
The best forex traders don’t have any unique DNA or genetic advantage. There is no such thing as a trading sage who sees patterns and trends on charts that others can’t.
You become a better and successful FX trader through dedication and disciplined practice while sticking to a highly detailed trading plan, including the critical aspects of strategy and money management.
Here we’ll discuss seven fundamental building blocks you need to put in place to build the right foundations for trading success.
- Choosing your FX broker
- Devising a trading plan
- Setting realistic ambitions
- Understanding risk management
- Controlling your emotions
- Education and research
- Learn how to use tools like stop-losses
How to choose your FX broker
Brokers are not born equal. Therefore, it would be best to devise a checklist of broker requirements before considering opening a trading account with a specific broker.
Many forex brokers have gone to great lengths to ensure their customer service is five stars and the safety of your funds is guaranteed.
FX trading is a risky business, and you don’t increase that risk trading with an unreliable, costly broker with a bad reputation.
Here’s a quick tick box list you could use. If the broker doesn’t conform to these essential checks, then walk away.
- Are they ECN/STP and don’t operate dealing desks?
- Are they licensed to operate in jurisdictions such as Europe and the UK?
- How long have they been in existence?
- What are their typical spreads?
- Is their online reputation good?
- Do they publish educational content?
- What trading platforms do they provide?
ECN/STP is the gold standard of retail trading. It would be best if you traded through a broker who routes your order straight through to an electronic computer network with no delay and no interference.
Such ECN/STP brokers do not operate dealing desks. Instead, they concentrate on fairness and transparency. As a result, you get the best price available at any given time. An NDD (no dealing desk) broker does not work against you; they work for you.
- Licensing and authorisation
Getting licensed and staying licensed is an expensive and time-consuming business. So, if your chosen broker is authorised to conduct business in the UK by the FCA and by CySec in Cyprus for Europe, then you can be sure their compliance is first class.
However, these licenses don’t come cheap, and keeping them up to date requires an efficient compliance department that will need to follow a strict set of rules to ensure their clients trade in a safe and secure environment.
How long a forex broker has been in business is also a good test of their financial security and stability. Let’s say they’ve been in business for ten years; they’ll have survived a couple of recessions and adapted to the changing landscape of the industry, including the onerous compliance mentioned previously.
Wide spreads can ruin the best trading plans. It’s one thing to see competitive spreads quoted on the platform, but if those quotes don’t get matched in live conditions, your P&L can suffer. Therefore, it’s vital to pay attention to the actual spreads you get charged once your order gets filled. For example, you should be getting typical trading spreads close to 1 pip for EUR/USD.
Reputations are impossible to bury online, do a quick search to find out what your fellow traders think about your potential broker. Of course, you can’t expect to see a perfect rep because naïve and novice traders will carelessly lose money due to not understanding the process. But overall, if the broker appears untrustworthy, then why take a risk?
Educational and research material costs a lot of time, effort and money. Publishing quality content and analysis through blogs, webinars, etc., is an excellent metric to judge a broker’s commitment to your success.
Many brokers will offer their proprietary trading platforms, and some provide access to MetaTrader MT4 and MT5. Such independent platforms as MT4 and MT5 are a good sign of how the broker cares for its clients.
You should also look out for web and mobile applications of the platforms offered because you need to be ready to trade markets wherever and whenever an opportunity arises.
Devise a trading plan
When you trade forex online, you’re running a small business. You wouldn’t run a business without a business plan, and trading FX is no different.
It would help if you decided what currency pairs you’ll trade, what times, and how much money you’ll risk per trade.
You also have to figure out what trading style to employ - scalp, day trade, swing trade, or position trade? Finally, you need to develop an edge, a trading method and a strategy that has a positive expectancy.
Without a trading plan, you’ll be trading blindfolded. Don’t lose sight of the fact that with forex, you’re dealing with risk and probability. No one can say with any certainty if a currency pair will rise or fall during the next trading session.
But what you can do is limit your risk through effective money management techniques. Then, based on earlier sessions, you can make informed decisions as to what direction a currency pair could move in the upcoming sessions.
Setting realistic targets
The forex trading industry has many skilful marketers attached to it; vloggers and influencers will claim to have made tens of thousands out of the industry from hundred-dollar accounts.
Successful forex traders ignore such claims and concentrate on the facts, including the most prominent fact brokers must publish on their websites, the loss rate.
Approximately 78% of retail FX traders lose money, according to May 2021 statistics from the European regulatory body, ESMA. The reasons are various, and we’ve already highlighted some: no plan, no experience, no risk management, and no edge. Also, traders are an impatient bunch; they want the fast cars and fast fashion clothes the influencers advertise.
Your first task is all about survival. How long can you make that first small account last while you learn the trade? Then you build from there.
Trading forex is not investing, and you should be targeting a higher return through active trading versus passive investing, but you need to be realistic.
However, if you grow your account by 0.5% per week, that’d be close to 25% per annum, an ROI that many hedge fund managers would drool over.
If you’re trading part-time with a $5,000 account, you’ll be enjoying a $1,250 (non-compounded) yearly gain if you hit a 25% target. It’s not a life-changing sum but could provide a superb foundation from which to build.
So, here’s something to get you excited while keeping your feet firmly on the ground.
Your $5,000 compounded by 25% ROI over ten years with interest calculated monthly would increase your $5,000 account to $59,367. Such a goal is not fantasy; it’s achievable.
Managing your forex trading risk
Managing your money and the risk you take is critical to your trading outcomes and overall progress.
Consider this; if you risk only 1% of your original balance in your trading account per trade, you’d need to lose 100 transactions in series to wipe out your budget.
That’s such an impossible scenario to imagine that an army of institutions would take the other side of your losing streak if you could guarantee it.
In contrast, let’s look at substantial losses and how much of a turnaround you need to recover your money back.
- A 25% loss takes a 33% gain to get back to break-even.
- A 50% loss requires a 100% gain to recover.
- An 80% loss needs a 500% gain to get back to where the investment value started.
OK, let’s consider a practical example of risking too much. If you bet 10% account size per trade and lose five forex trades in a row, you need 100% gains to get back to level. Such a sobering statistic should encourage you to consider how critical risk/money management is.
Control emotions – do not overtrade, revenge trade or go on tilt
Trading forex is not a contact sport, the FX market is not the enemy, and it’s not your competitor. Successful forex traders work with it, not against it.
Why not try to establish the current market trend and trade with the trend direction, potentially tipping probability in your favour?
Referring to risk, you can avoid overtrading by deciding that you might only trade a couple of major forex pairs and never take more than a specific number of trades per session. If you’re a trader who uses technical indicators, you could avoid pulling the trigger until your precise conditions have materialised.
You will have losing trades, and you will have losing days. Your challenge is to stick to your plan after making sure your method and strategy develop into an edge with positive expectancy.
When your plan is not conducive to market behaviour during a specific session, you need to accept it. You can’t force trades that don’t match your entry criteria. Patience gets referred to as a virtue; in forex trading, patience is an absolute necessity.
Education and research
There are no shortcuts to success with forex trading. Investing time and money in your education is essential in your efforts to become a successful forex trader.
You must self-educate yourself in this industry. While credible brokers have built trading academies for your benefit, there is no accepted universal accreditation to become an FX trader. Instead, you learn by doing and through trial and error.
The typical degree in Europe takes three years to achieve, and you cannot reasonably expect to become a highly proficient and profitable forex trader in a shorter period.
You must familiarise yourself with many parts of the industry even before trading your first real money account in live conditions. Understanding technical and fundamental analysis and applying them to market behaviour (and your charts) can take several years to perfect.
In addition, becoming familiar with all the various trading tools and platforms takes lots of patience and practice.
You need to subscribe to blogs, newsletters, articles, daily updates and much more as part of your dedication to this industry.
If you don’t commit because it takes too much effort, then you’ll be denying yourself an invaluable education that could serve you well in other aspects of your life.
For example, consider this: Are you more likely to make prudent, life-enhancing financial decisions if (as part of your forex education) you develop a thorough understanding of macro and domestic economics as part of your forex education?
Learn the value of FX trading tools
To give yourself a great chance of becoming a successful FX trader, you need all the help you can get. Most credible brokers will provide a compilation of tools to help your decision making.
These could be position size calculators, risk calculators and sentiment meters. But perhaps the most valuable tools include stop-loss orders and take profit limit orders.
You must learn how to use both effectively. Your stop-loss order prevents losses from getting out of control and fits in with your risk per trade calculations. Your limit order closes the trade when it’s reached your profit expectancy.
In some ways, stop-loss orders are more uncomplicated to apply than limits. After all, who wants to limit their profits, right? It seems counter-intuitive to not let your profits run.
The effective use of tools in the technical indicator toolbox can prove invaluable at this point. For instance, the average true range (ATR) indicator can pinpoint the middle trading range of an FX pair, and you could decide to set your limit using it rather than risk a winning trade turn into a loser.
OK, here’s an idea. Let’s say EUR/USD has traded in a range of 1% during the past two days. Do we expect it to rise by over 1% on any given day, exploding out of that range, or should we think about banking our profit before this increase gets hit?
How often do the major currency pairs rise or fall by over 1% during the day’s sessions? Investigation reveals it’s less than 5% of trading sessions. So anxiously waiting for our profits to run once a currency pair has breached a 1% rise or fall on the day looks overly optimistic and risky.
We’ve covered many topics here under the overall title of how to become a successful forex trader. However, if the content has piqued your curiosity, then you can probably add other qualifications.
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