Financial markets are a mystery to many; especially, those who seek a magical formula that will ensure they get the trade right every time. Successful traders are a little like surfers—they need skills in order to survive in the market. Where a surfer needs to have balance, talent, patience, an understanding of their surroundings, and proper equipment, a Forex trader needs a few of the same. You are not going to jump into an ocean filled with dangerous man-eating sharks, so why go into trading currencies without the proper tools and skills?
As a successful trader entering the currency market you will need to have good analysis skills and effective implementation. Skills that lead to good trading come from hard work and a degree of talent. If you can get yourself some strategies for trading in the Forex market then you can become a successful trader. Think of the four approaches like four legs on a chair that will support you. If you have one you are doomed to fall without decent balance and it is definitely risky. Two legs provide a better base. However, you are still leaving yourself open to mistakes. Three legs and you have a nearly complete strategy to trade successfully—why not have the full four legs to ensure you won’t fall.
Before you can start trading successfully you need proper planning
1. The Approach
Before you can start trading successfully you need proper planning. Your goals and emotional stability are two qualities that need to combine with Forex trading instruments and the market to ensure a proper trade occurs. You may want to start trading with something you know. For example if you have been in the retail world you might look at retail stocks rather than currency options. However if you follow the three concepts below it will help you to trade just about anything.
Time Frame Matters
To be a successful trader you need to understand the time frame you are working in. If you have an impatient temperament you might want to shorten the time frame you are going to invest in currencies or stocks. A long term trade can be too much. There are things that happen in a five minute chart for Forex trading that could lead to successful, even highly profitable trades. By examining a short five minute chart you are reducing your overnight risk of trading currencies. Of course you may be an individual who prefers to trade on the longer term where you are more comfortable with a weekly chart that offers some overnight risk, but the option to see if your position will bring profit through the next few days versus a short five minutes or half hour trade.
The time frame is also determined by the amount of time you can sit at the screen. If you have time to research throughout the day or to watch the screen to make sales of currency pairs you may find that short-term scalping with quick, small profitable trades is better than trading over long periods of time.
After the time frame is chosen it is time to figure out a consistent way to trade. Many successful Forex traders look for the support and resistance lines buying when the Forex pair is at the support line and selling when the resistance is met. Others examine the MACD and crossover charts to try to determine where the next big break out is going to occur.
It is necessary to test your methodology before going live to become a successful trader. If you can find a consistent profit throughout your paper trades in which you have a 70% reliability of methodology then you will have an edge. You want to see that your profits are more than any losses you sustain. This is a winning strategy. You are going to lose a few trades, but a strategy that consistently delivers a profit means a successful outcome over your trading time.
Think of currency pairs as instruments that do not all work the same. Some of the currency pairs are going to have erratic trading patterns which can affect the methodology you came up with. You may need to match your methodology to these new pairs to see if it will work and if it does not then you may need to adapt it. You may also find your personality requirements do not meet the trading pairs. The support and resistance levels work pretty well with the USD/JPY as one of the top seven traded pairs. However, there are other instruments that are also just as reliable with the support and resistance style of trading. You can always assess the different pairs to find the right instruments and vary the trades you make when it suits the current market changes.
The second leg of your chair is all about attitude
The second leg of your chair is all about attitude. There are four attributes that you need to ensure fit your mindset before you trade the first currency pair.
You created an approach to become a successful trader. This approach requires patience to wait for the price to reach the level your system indicated. It is okay if there are times when the level is never reached. You simply move on to the next currency pair. You should not chase after the same pair if it is not paying off. Yet have the patience to see the trade through.
Patience needs a partner called discipline. Discipline is necessary to wait as the system triggers a new action point. You might not see the price action you thought would occur, but you need to believe in the system you set up, let it stand and have the discipline not to change the trade. You have stop losses and other safety nets to protect you in place or at least you should.
Believe in the system you set up!
This is an emotional detachment that you need to have. If you are too emotional then your system tools and methodology is going to breakdown. By being objective you have reliability on your entry and exit strategies that helps you keep to the system, watch the signals, and make the right actions. A too emotional reaction usually means you make a mistake by staying into too long for that slightly higher profit that turns to loss or a loss when you know no profit is coming.
A too emotional reaction usually means you make a mistake
You must enter the current market with realistic expectations. You should not invest a certain amount such as $250 and think you will always make $1,000 on each trade. Short term trades tend to provide less profit, but long term trades are more risky despite the higher rewards. It is better to determine the risk versus reward you are willing to go after based on realistic expectations of market movements.
There are various instruments to trading. Hedge funds are one option and mutual funds are another. You also have spot currency markets, futures contracts, options, and commodities you can invest in. Sometimes you can look at what the larger players are doing or about to do, jump on the same train, and get a nice tidy profit as long as you do not stay too long. You can make it here: http://www.timingcharts.com/. It is important to assess what you will trade by the skills you have and discriminate against certain trades if they look too risky. There is also a need for alignment.
Choose some stocks, commodities, and a couple of currency pairs. Chart these different trade options for different time frames. Once you establish a methodology for the different trades then choose the one that is currently the most responsive. Repeat this process as you adapt to the changing market. When it is time to invest in Forex, do so. When it is not, consider if commodities or stocks are better for the moment.
Your system is not going to be 100% on profit every time you trade
4. Management or Implementation
This is the final leg of the chair. Your system is not going to be 100% on profit every time you trade. You may have a 65% to 75% profit to loss ratio. There is an art to gaining profit within the management and implementation of your trade.
Part of management is the risk control you have in place. You will take some losses, but you still need to try to get your trade successful right from the start. By trading with paper money you can perfect a methodology, but when it comes time to real money you do need to have some risk control in place. It is necessary to have patience and discipline to allow your trailing stops to sell your currency, stock, or commodities when it is time. A trailing stop will help you make a profit or at least break even most of the time. If you have protection in place it is less likely for you to have substantial losses.
The Bottom Line
Successful traders, even Warren Buffet has a strategy that he trades by. There is no magical trade option out there only the proper way to trade and the wrong way to trade. Follow the rules of trading that Warren Buffet established: rule one is never lose money and rule two is to remember rule 1. If necessary make small losses, but never wait for a big loss to occur.
Share this wisdom with your friends to help them build their strategy too.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.