Trading forex successfully is in no way a simple task. Successful trading requires time, knowledge and market understanding and of course a large amount of self restraint but the most important thing is a profitable forex trading strategy.
Anyone who says it is easy to consistently make money in foreign exchange market is not honest. Forex is by nature a highly volatile market. The practice of trading with leverage only adds a exponential factor to this volatility. It is a very ‘fast market’ which is by nature inconsistent and unpredictable. The most important variable in trading successfully is timing a trade correctly as possible but invariably there will be times where a traders’ timing will fail. Don’t let it get to you if you loose on some trades. Experienced traders do not expect that every trade will be a profitable one.
Let us write about some basic rules that every profitable trader will have to follow in order to be successful in a long run.
Always trade only with money you can afford to lose:
Every trade in foreign exchange market is of speculative nature and can always result in a loss, it can be exciting, exhilarating and it can even be addictive. In some ways it is very similar to gambling. The more you get ‘involved with your money’ the harder it is to make a clear-headed decision. Money you have earned is very precious, but you should never trade with money you need to survive.
If in doubt, stay out:
If you are not sure about a trade and have doubts about your decision, stay out of the trade. Never make a trade just because you have the time to trade at that particular moment.
Trade logical transaction sizes:
Trading with leverage allows the forex trader to trade with sums of money that can be up to 400 times higher than the actual money deposit on the forex account, trading at full margin capacity can make for some very large profits or losses. At 400:1 leverage a trader can lose all of his money at only 0.25% change in the wrong direction. Scaling your trades so that you may re-enter the market or make trades on other currency pairs is generally wiser. In short, don’t trade amounts that can potentially wipe out your account and never put all your eggs in one basket.
Always Identify in what state the market is:
What is the market doing right now? Is it trending upwards, downwards or is it trading in a range. Is the trend strong or is it weak. Did the trend begin long time ago or does it look like a new trend that is forming. Getting a good perspective over the market situation is a solid foundation for a successful trade.
Determine what time frame you’re trading on:
Many traders get in the market without thinking when they would like to get out, after all the goal is to make money. This is true but when trading, one must extrapolate in his mind’s eye the movement that one expects to happen. Within this extrapolation, resides a price evolution during a certain period of time. Attached to this is the idea of exit price. The importance of this is to mentally put your trade in perspective and although it is clearly impossible to know exactly when you will exit the market, it is important to define from the outset if you’ll be ‘scalping’ (trying to get a few points off the market) trading intra-day, or going longer term. This will also determine what chart period you’re looking at. If you trade many times a day, there’s no point basing your technical analysis on a daily graph, you’ll probably want to analyze 30 minute or hour graphs. Additionally it is important to know the different time periods when various financial centers enter and exit the market as this creates more or less volatility and liquidity and can influence market movements.
Time your trade:
You can be right about a potential market movement but if you enter the trade too early or too late you have lost your advantage. Sometimes there are some high expectations about market data like CPI, retail sales or a Federal Reserve decision and that can incorporate large movements in the market even before the market data is released. When such data are the released a trader must know how much of the past movement has been triggered by the expectations of the traders. Timing your move means knowing what’s expected and taking into account all considerations before trading. Technical analysis can help you identify when and at what price a move may occur.
Gauge market sentiment:
Market sentiment is what most of the market is perceived to be feeling about the market and therefore what it is doing or will do. This is basically about trend. You may have heard the term ‘the trend is your friend’; this basically means that if you’re in the right direction with a strong trend you will make successful trades. This of course is very simplistic; a trend is capable of reversal at any time. Technical and fundamental data can indicate however if the trend has begun long ago and if it is strong or weak.
Market expectation:
Market expectation relates to what most people are expecting as far as upcoming news is concerned. If people are expecting an interest rate to rise and it does, then there usually will not be much of a movement because the information will already have been ‘discounted’ by the market, alternatively if the adverse happens, markets will usually react violently.
Use what other traders use:
In a perfect world, every trader would be looking at a 14 day RSI and making trading decisions based on that. If that was the case, when RSI would go under the 30 level, everyone would buy and by consequence the price would rise. Needless to say, the world is not perfect and not all market participants follow the same technical indicators, draw the same trendlines and identify the same support & resistance levels. The great diversity of opinions and techniques used translates directly into price diversity. Traders however have a tendency to use a limited variety of technical tools. The most common are 9 and 14 day RSI, obvious trendlines and support levels, Fibonacci retracement, MACD and 9, 20 & 40 day exponential moving averages. The closer you get to what most traders are looking at, the more precise your estimations will be. The reason for this is simple arithmetic, larger numbers of buyers than sellers at a certain price will move the market up from that price and vice-versa.
