Synopsis: There are no foolproof strategies in forex trading, but there are pointers that can help you avoid failure and boost success. Read along to know the most important forex trading ideas you should remember.
Anyone claiming to have forex trading tips and strategies that guarantee success is lying. There is no such thing as a failure-proof forex trading strategy. It is even impossible to find a method that works for all kinds of traders and trading scenarios. However, tips and advice can be sorted as sensible and trash. Avoid heeding pointless and platitudinal advice. Focus on the ideas that matter, those that have real-world implications.
Addressing the pitfalls
Being able to identify and counter the pitfalls of foreign exchange trading is an essential strategy. Traders should pay close attention to the following.
Not having a plan and being unable to adapt to the market – Benjamin Franklin may not be a forex expert but his “If you fail to plan, you are planning to fail” dictum is highly applicable in this case. Planning helps establish trading discipline and consistency. It does not equate to fixed paths and courses of action, though. There exists contingency planning, which addresses the emergence of unexpected events.
Traders need to anticipate unexpected developments and adapt to survive and take advantage of opportunities. Strategies need tweaking or a complete overhaul to match the changes in the markets. Even contingency plans cease to make sense in the long run, so they need to be modified eventually. It is also essential to adapt to exploit new opportunities, especially with the rise of digital technology.
The growing importance of the internet and digital currency merits attention among forex traders. As an analysis report from Gainsky Investments suggests, there are profit opportunities at the intersection of forex and digital currency trading. “Despite the fears concerning the enormous financial impact of the COVID-19 pandemic on the worldwide market, both forex and cryptocurrency trading is still flourishing,” the report points out. Traders should consider adapting to the financial markets that are now gradually embracing digitalization.
Failure of trading discipline – Arguably, the biggest mistake for any forex trader is not maintaining discipline in trading. A study by Forex Training Group emphasizes the need to be consistent, organized, and disciplined, noting that these help build confidence and the more effective execution of trading plans. “It is very important that you have confidence in your process and approach, because if you don’t, you will pull the plug quickly when something goes wrong.” Experts traders argue that trading should not involve impulses and emotions, positive or negative.
Trial and error – Learning experiences from failures are valuable. However, it is counterproductive and costly to learn via trial and error. It is good to learn from mistakes, but it is better to learn about the possible errors beforehand to avoid them and succeed in trades without having to go through failures as much as possible. Learning from the experiences and insights of more successful traders is preferable.
Money and risk management
Many neophyte forex players mistakenly avoid stop-losses and other similar tactics because they think they might be retreating too early. They fear losing the possible profits if they leave their position even after hitting or overshooting the predetermined loss level. In contrast, successful traders do not hesitate to stop as they know how much of their capital is at risk. Until newbies develop a similarly reliable intuition, they only have their trading plan to rely on.
Noted professional trader and coach Nial Fuller says that capital preservation is a key element in successful forex trading. “The key point there is capital preservation and money management; properly controlling the amount of money you risk per trade is the primary thing that will make or break you as a trader,” Fuller writes in an research report. Like many other experienced traders who are averse to a gambling mentality, he believes that great traders are more concerned about how much they could lose than what they can gain.
It is inevitable to take risks in trading in the foreign exchange market. Risk taking does not mean going all out, though. A sensible trader manages stop-loss orders mindfully and prudently. Setting thresholds in closing trading positions is something experienced traders do.
Traders use leverage or borrow funds to increase their trading position usually because they want to take advantage of an opportunity they cannot access with their limited resources. The forex market provides traders the option to leverage their accounts by up to 400 times (400:1). However, leverage can be very risky. It can result in either a substantial gain or loss.
Most professional traders stick with an average leverage ratio of 2:1. This minimal level is mostly manageable. Ideally, traders should avoid leveraging their positions and only do so if they can see a clear advantage. Risk taking is not about sticking with ideals, though, so it can still be sensible to go as high as 100:1. Also, some set thresholds like a possible loss of 3% of the trading capital. More experienced traders may set higher loss percentages based on their experience.
In leverage management, what traders need to remember is that they should be confident that they can protect their capital. Also, they need to understand how the price movements affect their trades and how transaction costs can shoot up.
Market intelligence and financial planning expert James Garrett Baldwin says that experience dictates the level of leverage one can take. Those who have been trading for a long time may go high based on what they find comfortable. Newbies, however, should be on the conservative side. “Using trailing stops, keeping positions small and limiting the amount of capital for each position is a good start to learning the proper way to manage leverage,” writes Baldwin in an analysis report.
The COVID-19 pandemic has imposed unprecedented setbacks to the economies of countries around the world. These unwanted effects raise the unpredictability of financial markets, reducing the success rates of trades. Do not expect any strategy or solution to automagically deliver success. Focus on the basics by addressing the pitfalls, reducing risks, and improving leverage management.