No matter what strategy you trade, the currency pair or your level of experience, the same five pillars of Forex trading success remain the same. These are key building blocks that you will need as a foundation for your trading if you want long term success.
Be sure to read them and take them on board. Most importantly ensure that you use them as the basis for your trading.
1. Stay Focused
The number one rule to ensure you achieve Forex trading success is to stay focused on your objectives. On the surface this may seem obvious and yet it is surprising how difficult it can be in practice.
The environment of Forex is a busy one with a huge number of distractions. Each day constant news flow becomes available which can easily distort your perspectives. It can also at times cast doubt upon our strategies. This makes it particularly easy to get distracted from the task at hand.
Trading is very much a personal affair. It is therefore very easy to succumb to doubt and self-criticism, particularly if things start going against you. An understandable reaction is to want to change things. Taking a different approach to analysis, changing currency pairs or even strategies may all seem reasonable solutions.
However there is a big difference in making adjustments to your strategy using planned reflection and knee jerk reactions because of a break in focus.
Stay focused on your methods and avoid distractions. Concentrate only on what you are trying to achieve.
The objective is to master your Forex strategy. The alternative is to succumb to what can only be described as a ‘scatter gun’ approach to your trading. This will almost certainly break down the discipline needed for consistent trading and foster further bad trading habits.
2. Learn To Deal with a Loss
Dealing with a loss often proves to be one of the most difficult psychological hurdles to overcome. For this reason it is particularly important that you spend time addressing this aspect of your trading.
They key reason for this is that most traders take the standpoint of always wanting to be ‘right’. The assumption is that an incorrect trading outcome, i.e. a loss, is the end product of insufficient or incorrect analysis. Consequently the corrective action taken is to engage in ever more analysis.
A loss is an inevitable par of trading.
It is important to remind yourself at this time that the market is not an entity in itself. It is simply made up of a number of buyers and sellers. These can at any point, dictate price movement price by simply ‘buying or selling’. This can instantly impact your trading results. It is not the market you are competing with, just other buyers and sellers.
You aim is to tap into this collective consciousness on a consistent basis. While you won’t get it right all the time it is important is that you align yourself with this consciousness sufficiently to tap into the potential gains on offer.
The key point to take from this is that predicting market moves cannot be a precise science. Just one buyer or seller can turn a market. To develop a trading mindset you need to accept any loss and move on.
3. Trade in Probabilities
A concept that many new traders find hard to understand is that you don’t have to win more trades than you lose to make consistent profits.
A strategy could be considered successful with only 1 winning trade out of 10. This is of course provided that the winning trade you do have covers your accumulated loss and delivers a profit.
Successful Forex trading is ultimately a game of probabilities. To become a consistent trader you have to stack the odds in your favor.
In order to increase the probability of success it is important that you work out your risk to reward. This needs to be done for each opportunity you come across. What you need to identify is a potential for profit that is proportional to the level of risk taken. Risking 10% of your account on a position that you think can only yield you a 1% return doesn’t make sense.
Since the more you stack probabilities in your favor the greater the chance of achieve trading success, it is critical to address this area.
A simple fix is to disregard opportunities where the potential rewards are simply not balanced by a set level of risk. 1 unit of risk to 2 units of profit provides a good starting point. By disregarding signals with a risk-reward less than this level, you will instantly reduce trading risk and at the same time increase your profit potential.
4. Reward Yourself
Don’t forget to pay yourself as you trade. By this I mean take some profits along the way.
Have you ever sat watching your open positions in your trading account to see them move from a profit to a loss in just minutes? Unfortunately this is not uncommon and is a consequence of not regularly taking your money off the table.
It can be hard to make money from Forex. Therefore rather than watching your gains evaporate you need to frequently realize some profits in your account.
Forex markets move quickly and are characterized by their volatility. Open positions can quickly move from profit to loss. It is important to accept the random nature of the markets. If you do, then booking profits as you go is the only logical action.
One way to do this is to split trades into multiple orders. You can then close out incrementally as your targets are reached. At the same time you can move your stop to protect gains made on any open positions. Done correctly, you should often find yourself in position for free.
Always ensure you lock in some of your profits. This is preferable to sitting and watching your gains evaporate.
5. Execute Your Strategy Flawlessly
Setting up a strategy for trading Forex and understanding how to accept risk and balance probabilities is vital. If you don’t stick to your trading plan then you are almost certainly going to deviate from the path to success?
There are various psychological barriers which we put up, that ultimately obstruct the path to our objectives. These need to be identified and overcome in order for us to stick to our plan.
First and foremost your trade execution should be methodical. At the point of placing your trade the process should most probably be mechanical, because if removes subjectivity. When placing your trade you should be simply acting upon the prior validations that signaled the opportunity. At this point you should know the exact rules of the trade. This should include the stop location and the trades exit criteria.
It is vital to build consistency into the process of trading. Consistency throughout the process naturally in the end leads to consistent performance. It also helps minimize destructive forces such as self-sabotage.
A consequence of developing an efficient trading mind-set is long term consistent performance, a level of trading success that we all aspire to.