You have possibly seen the many forex trading ads on television or online. You have also possibly heard stories about people who have made a fortune as day traders. You have also possibly created an account with a forex broker only to see your money disappear. Sadly, this is part of the process of becoming a successful trader. In this article, we will look at the three important stages you need to follow in your trading journey.
Stage #1: Training
Like in all professions, it is almost impossible to succeed without some training. Since trading is a bit complex, it is important that you get some training before you invest your real money. Fortunately, you don’t need to go to school to do this. Like many other successful traders, you can use the many resources that are available online.
First, we recommend that you start by reading books on forex trading, macroeconomics, finance, and finance. You can also read biographies or autobiographies of successful and unsuccessful traders and investors. These books will introduce you to the world of finance, highlight the common strategies, explain the common mistakes, and guide you on the best way to get started. While there are hundreds of books, we recommend that you start with the following.
Millionaire Traders by Kathy Lien. In this book, Kathy interviews 15 successful traders where they share about every important detail in their trading journey.
The New Trading for a Living by Alexander Elder. In the book, he highlights the most important details in forex trading such as fundamental and technical analysis and risk management.
A Complete Guide to Volume Analysis by Anna Couling. In the book, she writes about the use of volume analysis in technical analysis.
The Wave Principle by Ralph Nelson Elliot. In the book, he introduces the world to Elliot Wave analysis and how to use it in the market.
Second, we recommend that you use the various online resources that coach people about trading. One of the best resources is BabyPips, which has almost all the materials about Forex that you can use. You can also watch the many free YouTube videos that have been made about trading. Further, you can enroll in one of the many online trading courses.
Third, you should try and find an experienced person to be your mentor. This should be a friend, family member, or colleague, who has been in the industry for many years. The knowledge you will receive from such experienced people is priceless. They will guide you on how to approach a trading day, how to initiate trades, and how to manage your risk. If you don’t know any such person, you can get in touch with the experienced people you see on TV or read in the media. While most of them won’t reply to your outreach, chances are that a few of them will. Also, you can attend financial conferences and seminars in your town.
Fourth, you should learn to adjust your preferences in life. For example, you should adjust to watching a lot of financial media. The most popular financial televisions are CNBC and Bloomberg. These channels are excellent in delivering the breaking news. They also bring many experienced financial analysts to share their insights. While not all of these experts are worth emulating, you will gain knowledge on how successful investors think. You should also spend time reading financial papers and websites like Wall Street Journal and Financial Times.
Stage #2: Strategy Creation
After learning briefly about trading, you should now create your forex trading strategy. A good way to start is to find a good broker, open a demo account, and start creating your strategy. To succeed, this step should take a few months to complete.
There are many forex trading strategies. There are scalping traders who believe in opening and closing trades within a short period. There are others who swing traders who believe in leaving the trades open for a few days, and long-term traders who leave trades open for a few weeks. There are technical traders who believe in the concepts of mathematical indicators and fundamental traders who believe in looking at the broader perspective of macroeconomic data. There are others who believe in using algorithms or expert advisors to help them make trading decisions. Other traders use the arbitrage strategy, where they use the concept of correlation to open two consecutive trades.
In this stage, you should test a few strategies and find the one that suits your trading style. Some of the things you should consider in this stage are:
Ideal Currency Pairs
There are three primary types of currency pairs you can trade. The majors are currency pairs of the big western economies. Examples are the EUR/USD, GBP/USD, and the USD/JPY. They must have the USD as the base or counter-currency. These pairs are known for their liquidity and lower spreads.
The minors are currencies of advanced economies that don’t include the dollar. Examples are EUR/GBP, AUD/NZD, and EUR/AUD. Exotic currencies include a currency of a major economy and that of an emerging market economy. These pairs have relatively lower liquidity, are often volatile, and have higher spreads. Examples are EUR/TRY and USD/HKD.
Technical Indicators to Use
There are hundreds of custom indicators that you can use when trading. There are also thousands of others that you can buy in the marketplace. As you start your trading journey, you need to select the indicators that you want to be using. A common mistake we often see is traders who use many indicators to analyze the price action of a currency pair.
We recommend that you select a few trends, oscillators, volumes, and custom indicators that you will be focusing on. Examples of trend indicators are moving averages, parabolic SAR, and average directional index. Oscillators include the relative strength index, relative vigor index, and commodities channel index (CCI) among others. Volume indicators are the likes of accumulation and distribution, money flow index, and on-balance volume. The custom indicators you can use are ColorBars, awesome oscillator, and force index among others.
To use these indicators well, we recommend that you do two things. First, read and watch videos about the common indicators. Second, you select a few of them and spend a few months training on them.
In addition to these indicators, you should also learn more about technical tools like Fibonacci Retracement, Pitchfork, Elliot Wave, and Gann.
Timeframes to Use
There are two main things you should consider when creating your trading strategy. First, you should consider the ideal time that you will be trading. This is because there are primary three sessions that matter. You can trade during the Asian, European, and American sessions. The Asian session is known for low volumes compared to the other two sessions. You should consider your daily activities as you decide on the best time for you to trade.
Second, you should decide on the chart timeframes that you will want to use. Most charts have timeframes that range from one minute to monthly. If you are a scalper, who opens and closes trades within a few minutes, you should use short-term charts of between 1 minute and 15-minutes. If your goal is to leave your trade open within a day, you should use charts between 30-minutes and hourly charts. If you are a swing trader, who leaves trades open for a few days, you should use longer timeframes of between four hours and 12 hours. Finally, if you are a long-term trader, you should use daily and weekly charts.
You should consider these timeframes very carefully as you develop your trading strategy because they will determine how successful you are as a trader.
Risk Management Strategy You Will Use
Risk management is essential in trading. You can be a great trader but you will fail if you don’t use the right risk management strategy. In the past, we have seen very successful investors lose money because of not having a good strategy to manage their risk. A good example is Bill Ackman, who lost more than $4 billion when his investment in Valeant Pharmaceuticals failed. It would have been impossible for him to lose that money if he had a good risk management strategy.
As you develop your risk management strategy, you should consider a few things. First, consider the forex broker that you will use. Using an illegitimate and unregulated forex broker can lead to serious losses even before you start trading.
Second, consider the leverage that you will want to use. Leverage increases your trading power. It also increases the amount of profits your trades can generate. However, it can also lead to significant losses. Therefore, in this stage, you should test the various leverage ratios and see the most ideal for you.
Third, consider the lot sizes that you will be using per trade. A big lot size can mean more profits. It can also mean more losses. Therefore, you should find a balance that meets your trading criteria.
Finally, you should learn and practice how to use a stop-loss and a trailing stop-loss to reduce the risk of making big losses.
After creating the strategy, we strongly recommend that you take the time to backtest it. Many trading platforms like MT4 and MT5 have strategy tester tools that you can use.
Stage #3: Trading
This is the stage where you deposit your real funds and start applying the strategy you have created. It is also the toughest stage of your trading journey because real money will be on the line. As you start trading, we recommend a few things.
You should use a good broker, who you selected in the second step. The broker should meet some criteria. For example, they should have been in the business for many years. They should also be regulated by a credible regulator like the Cyprus Securities and Exchange Commission (CySEC), Financial Conduct Authority (FCA), and BaFin. They should also have a good reputation from their traders. You can read their reviews online. Also, they should have low execution costs. Finally, they should offer additional tools like a newsfeed and a good trading software like MT4.
As you create your account, the broker will ask you to chose the amount of leverage that you want to use. As you start your trading career, we recommend that you start by using the least amount leverage. With a small leverage, your profits will be a bit smaller but it will be worth it. You can increase the leverage as you advance your trading career.
The amount you decide to start trading with is so important. These days, many brokers allow their traders to start with as little as $200. However, as you have likely learned before, opening such a small account will increase the risk of losing money. For example, if you have a $10,000 and your account loses 20%, you will still have $8,000 to trade. However, it will difficult to make a good recovery on your $200 account. Still, you should only trade with funds that you are ready to lose.
Protect Your Account
As you start trading, you should always protect your account. You do this by not being very leveraged, using relatively small lot sizes, and by always having a stop-loss. While you won’t make a lot of money using a tiny lot size, you won’t lose a lot of it as well. A stop-loss will help you in risk management by preventing unwanted losses.
We recommend that you be calm because anxiety can make you make irrational decisions. Accepting that a trade can move in either direction is a good place to start. To anticipate this, we recommend that you only risk a small portion of your account. As a beginner, you should not risk more than 2% of your account in a single trade.
Forex trading is an exciting industry where many people have made a fortune. However, as many people have realized, it is also a risky business. Indeed, more than 77% of all people who start trading lose all their money. To succeed, you need to take trading as a journey with two choices. You can decide to take the short cut – and lose your money – or the long and winding journey and succeed.