There are many different outlooks on trading Forex, some will swear by fundamental analysis, while others will deem it pointless and tell you to focus all your energy on reading technical charts. Some experts will tell you to take advantage of the leverage you are given in the Forex market, while others will tell you to stay far away, as the higher the leverage, the greater the risk. Here are some universal pieces of advice for the Forex trader. They can all be summed up by one crucial principle, objectivity.
You do not have to follow each one of these rules to the letter of the law, but rather take them as an indication of the type of philosophy you have toward Forex trading. Some of these might not be right for all traders, but they are general tips, which are meant to lead you down the path of success.
1. Preliminary Self Knowledge: This pretty much applies to any endeavor you take upon yourself in life, especially one that comes with such high risk. Before you trade even one pip on the Forex market, it is imperative that you know yourself. What does this mean? There are endless methods of trading, so before you begin this journey, choose your method. However, do not choose it randomly. Define your short and long term goals, determine how you intend on reaching those goals, and decide on your trading method based on your personality.
Each trading method has its advantages and disadvantages, and its own risk profile, so when choosing one, choose it based on the kind of person you are. For example, only you can know if you are capable of going to sleep with open Forex positions with the hope that they will bring you profits in the long term. If you are not this type of person, it will lead to a raise in your anxiety levels which will inevitably lead to future failures.
2. Compatible Forex Broker: Once you determined the type of Forex trading that suits you, you need to find the Forex broker that suits your method. Do not rush into this. This might be one of the biggest decisions you will make when it comes to trading Forex. You can be sure the Forex broker you choose will have the biggest effect on your success or failure as a Forex trader. Choose a broker as if you are choosing a car. No one just goes into the first car dealership and buys the first car they see. You need to read up on the various brokers, each one's advantages and disadvantages. You need to do an extensive comparison of the large number of available brokers.
Once you have narrowed down your selection to a few brokers, you should compare their platforms based on the method you chose in step 1. If you believe you are more of a short term trader for example, make sure the broker you choose offers comprehensive tools to support this method as part of their platform. Make sure the broker you choose meets your every need from their customer service all the way to their headquarters location.
3. Methodology Selection and Application: As we mentioned above, there are two primary schools of thought when it comes to analyzing the market and predicting future trends. The technical analysis school of thought is based on the famous sentence “The trend is your friend”. They basic assumption is that the market has some sort of consistency and logic in its movements. If it moved in this direction today, there is no reason it wont move the same direction tomorrow. There are various types of charts to help you analyze the market and its trends, as well as indicators, and levels.
Then there is the fundamental school of thought that what really gets the market moving is the news of a specific country. This method will tell you to focus less on what was yesterday in the charts and more on what was yesterday on the news. Like many things in life, neither method is perfect, and a good trader makes use of both. However, before trading, you must decide which methodology is going to be your primary one, and be consistent with it. If you think fundamentals play a bigger role than trends, focus your preparation and analysis watching the news and not analyzing the charts. Consistency is the name of the game.
4. Chart Synchronization: Irrelevant of the methodology you choose in step 3, you will spend a significant percentage of your time looking at charts of the Forex market. As we explained, there are many different types of charts, however, most of them are simply showing you the same thing with a different visual effect.
Having said that, there are some charts that are very different and must be viewed accordingly. You must pay close attention to the time frame of the chart you are using. If for example, you are viewing a weekly chart and based on your analysis, it is showing you a great buy opportunity, make sure to open a chart with a lower time frame, such as daily or hourly, and make sure they are telling you the same thing. If not, sit back and wait till all your charts are in sync with each other. A solid rule to guide you is to use a longer time frame for direction analysis (where the market is going) and a shorter time frame to decide entry or exit into the market.
5. Expectancy Calculation: Until now, we were discussing choosing an effective trading method and taking precautions before trading. But, when and how do you know if you made the right decisions? For this, you need to calculate your gains and losses from time to time. You should go back into your trading history and count the number of winning trades vs. losing trades. Once you have done this, calculate the amount traded in all your winning trades vs your losing ones. A good number of trades to analyze is your last 10. If, however, you are still learning and have not actually traded yet, you can do this calculation as well. Simply go back and look at all the instances in which your system indicated to you that now would be a good time to open a position. Then check if you would have profited or lost from that transaction. Do this for 10 instances and WRITE IT ALL DOWN! This is a good indication of whether you are on the right track or not.
6. Money Management: This might seem obvious to some, but it is not as simple as it seems. It is all about your philosophy and the way you view the money with which you are trading. A good idea is to think of your Forex trading money as vacation money. You are using this money to trade and there is a good chance it will be gone tomorrow, but at least you came away with something; important and useful experience. However, this comparison is only good for this specific area, it should not fool you: Forex trading is no vacation! Thinking of it as such will enable you to psychologically accept small losses, which will in turn assist you in becoming a better trader.
Another useful tip when it comes to money management is knowing how to use the leverage you are offered. Many experts will warn you not to use more than 2% leverage on your account. So if for example, you have $10,000 equity, you should never risk more than $200 on any one specific trade. We have said this many times and it is important to understand that as great as the potential for gain using leverage, so is the danger of devastating loss in the Forex market.
7. Confidence Build Up : By following your defined trading methods, you not only become a more trained Forex trader, you also build your confidence, which is of course the basis to succeeding in this market. This is obviously true when you have a successful trade as a result of your trading method, but it also applies to a trade that eventually leads to a small loss. No matter what happens, it is important to stick with your decisions. Do not let emotions get in the way, try to stay objective and calculated when trading Forex. This will in turn make you a more professional trader, which will of course lead to your success.
8. Weekend Homework: If you have not noticed by now, many basic rules of life apply to Forex trading and this is one of them. Anything you want to accomplish in life and in Forex trading requires preparation. Over the weekends, when the markets are closed, it is crucial to do your analysis. Read the news, watch the movements of the past week, and make important decisions about the upcoming week. This is a highly effective method for a lot of reasons, but the main one being that over the weekend, you can work with the luxury of objectivity. There is no pressure of the markets, no need to make quick decisions, take your time, sit back and make educated decisions about how and when to trade.
As important as this is, it is not as important as sticking to it. If you decided to go in to the market at a certain point, wait for that point. Do not jump the gun because of anxiety, if the market does not reach your point, practice self control and restraint Wait patiently, your time will come and if it doesn't, you did not lose anything, there will always be another. Your main objective here is to try to stay as scientific and empirical as possible.
9. Record Everything: This might seem silly to some, but this really might be the one tip that will differentiate a successful trader from one that is not. Nobody, no matter how sophisticated they think they are is completely objective when it comes to their own money. The best way to stay objective is to write everything down.
When deciding whether to open a position, make a chart with the reasons leading you to believe it is a good trade. This includes technical indicators as well as fundamentals. Then make the same chart listing the reasons NOT to open this position. Include your entry and exit points if you do decide to trade this position and make yourself notes about the trade. This might include your emotions about the trade, your anxiety, as well as your level of optimism. Specify if you were too greedy when closing the trade, and always refer back to this document when trading. By doing this, you are ultimately objectifying your trades, which will quickly grant you the ability, mental control, and discipline to execute trades based on your system and not your habits.
With all its charts, numbers, and rations, Forex trading is an art. As with all artistic endeavors, talent is important but not nearly as important as practice and discipline. The above tips will help you become a more structured and refined Forex trader , which will eventually lead you to become a more successful trader as well. The stricter you are at sticking to these rules, the faster you will see success.