Successful forex trading doesn’t happen overnight, you have to be prepared to put in the work and improve yourself. This isn’t just about finding the perfect trading system or perfectly timed entries (though this can’t hurt!), in fact some would argue that the proper mindset and risk management practices are much more important. In this piece we will discuss a few of the factors that together combine to make a successful forex trader. Psychology is an integral part of all aspects of successful forex trading, so we will interweave this throughout, rather than discussing it separately.
Managing Risk & Greed
Manage your risk, manage your risk, manage your risk. This can not be repeated enough. You’d surprised how hard it is to blow up an account if you are only risking 1% per trade. We’ve actually never heard of anyone doing it. When you ask someone who blew up an account what they did wrong or see an account that’s been blown up, how it happened is always bleedingly obvious: the trader risked too much of their account on a single trade or series of trades. Remember the old tale of the Tortoise and the Hare? Forex trading is exactly like that: slow and steady wins the race. It’s a marathon, not a sprint and the majority of those who go too fast won’t be there to cross the finish line at the end of the day.
In general you should be risking no more than 2.5% of your account per trade and no more than 5% at any one time. Like taking quite a few trades at once? Then 1% per trade is probably more appropriate. If you are having trouble calculating your trade size on the fly then check out the Vantage FX Smart Trader Tools package which actually does this for you. Remember, if you are risking too much per trade you have to ask yourself ‘why?’ The answer is almost certainly greed, you want to make a lot of money from this one trade. The problem is, more often than not this mindset actually leads to you losing money, not making it. People make 6 figure salaries due to compounding effects, not betting the house on a Monday morning before the CNY fix is in.
You can’t properly manage risk without a stop loss, that should be a given.
Accurate Forex Trading
How accurate are your entries? If the market usually moves against you before it moves in your favour chances are there is room for improvement. Accurate entries allow you to have tighter stop losses, larger trades and more achievable targets. A lot of traders make the mistake of buying into perceived ‘momentum’ only to see this ‘momentum’ dissipate entirely, this is especially true in the Asian session. In general, genuine momentum only comes from big data releases and at bottoms and tops, you should be wary of ‘momentum’ when it is occurring without any fundamental driver or in the direction of the trend when it’s already over extended.
Buying into false momentum means you just broke the golden rule of investing: buy low, sell high. All of a sudden you are in a position that is too large and way too far from support. The best breakouts tend to occur after prolonged periods of consolidation and nearly always come back to test the breakout level before the next leg higher. Lots of successful breakout traders actually trade the re-test rather than the breakout itself. Once the re-test occurs, the breakout level is now support rather than resistance and you can enter a limited risk trade with a decent size. Patience is the key here.
If you want to see just how accurate your entries are, connect your account up to myfxbook platform. This is a great tool for taking a critical look at all aspects of your trading, but will actually show you how far each one of your trades moved against you and whether you bought the top or bottom in a short term cycle.
Managing Your Trades and Taking Profit
Okay, so you snatched a perfect entry from the market and it was sized perfectly: you managed to get in with decent size and limited risk. What now? If you do nothing now, chances are you will get nothing. There is no be all and end all answer to trade management: different methods work well for different strategies and different people. You have to find something that works for you and your strategy.
The most basic way of exiting a profitable trade is a simple take profit order, when the market moves a certain direction in your favour, your order is automatically closed at a profit. The problem with this method is sometimes the market doesn’t quite reach your take profit order or even overshoots it dramatically. In the first scenario a profitable trade turns to a loser: you could have taken 4%, but instead you lost 2.5%. How much did you really lose? 2.5% or 6.5%? The second scenario isn’t quite as bad as you still made money, but is arguably more annoying: you only made 5%, when you could have been laughing with 15%.
This is where dynamic trade management comes in, using breakeven stops and trailing stops allows you to let your winners run and removes the loss aspect if the market turns against you. Having said that, these methods have pitfalls too: if you move your stop to breakeven too early, or trail it too early you can get taken out of the trade without reason. Some traders hate this form of trade management for this reason. One thing’s for sure, you should avoid the default trailing stops built into the MT4 platform, the simple mechanics of these ensure you are almost always stopped out on a 50% retrace. Manually trailing your stop using moving averages, ichimoku, fibonacci levels or OHLC values is likely a better option.
Remember this are just the essential ingredients that contribute to successful forex trading, proper psychology is a topic in itself which many authors have devoted entire books!