Successful Forex traders aren’t born, they’re made. Many traders dream of becoming independent and profitable traders, but few of them succeed. Why is it so difficult to become a successful Forex trader? Some traders like the thrill of trading, but in reality, trading is much more than gambling. If you have a detailed trading plan, perform your analysis regularly, and manage the risks, you’re halfway to success. We’ve listed what it takes to become a successful Forex trader.
Step 1: Identify your mistakes
The first step to get better at anything is to identify your mistakes. The same goes for Forex trading. You need to honestly ask yourself a few critically important questions before you move on with the next step.
Reevaluate your trading strategy: Do you have a written trading strategy that covers all entry and exit rules of your trades? Do you feel confident with your trading strategy, and do you really follow each one down to the T? Your trading strategy needs to be comprehensive, effective, and well-rounded.
Reevaluate your initial investment: Trading should only be done with money that you can afford to lose. Not only is it a bad idea to open your trading account with your entire life savings, but it will also create an emotional burden that prevents you from trading effectively.
Reevaluate your risk: Successful trading essentially boils down to your ability to manage risk. You need to have a predetermined risk per trade threshold and stick to it. This way, you can avoid blowing through your account or losing a significant amount of money on a row of losing trades.
Don’t spend too much time on a demo: If you’re still on a demo account after a few months of practicing and trading, it’s time to switch to a real account. Start with a very small real account. Most brokers accept initial deposits as low as $100 or even lower. Your goal isn’t to make a fortune out of it, but to trade with very small position sizes (a few cents per pip) and get a feeling for the real market. The absence of risk in a demo environment can impact the number of trades and position sizes you take, which wouldn’t be the case with a real account.
A great way to spot your weaknesses and improve in trading is to have a written trading plan and keep a trading journal, which I will address in the next step.
Step 2: Devise a plan to fix your mistakes
Once you’ve reevaluated your trading technique and spotted all possible trading mistakes, it’s time to fix them. The following steps will help you achieve exactly that:
Have a written trading plan: Perhaps the main reason why so many traders aren’t successful in trading is the absence of a trading plan. Without a trading plan, you don’t know where to enter and exit the market, what position size to take, and how to handle losing trades.
A trading plan is a written plan on how you approach trading. It helps to have a focus on the rules you need to follow, which will minimise the impact of emotions in making decisions. Your trading plan should at least include the basic principles of your trading strategy, entry and exit points, reward-to-risk ratios, position sizes you take, and money and risk management rules.
Pick only one trading strategy: There are many trading strategies on the Forex market. Many beginners jump from strategy to strategy, which only increases the risk of making trading mistakes. Instead, you should pick only one strategy and stick to it. Decide which strategy could work best for your trading style. Do you want to scalp, day trade, swing trade, or position trade? Each style requires a different approach to trading and manages trades on different timeframes.
Following more than one strategy splits the time that you can devote to learning. The fact of the matter is that there is no strategy that is profitable all the time. It’s the way you manage trades and follow your trading plan and money management rules that makes the difference in the bottom line.
Manage your trades: When you have open trades, you need to manage them regularly. Is your initial trade setup still intact, or have the fundamentals of a currency changed? The way you manage your trades will have a great impact on your bottom line. Cutting your losses and letting profits run may sound too obvious, but many traders fail to put that into practice. In addition, if you’re not confident with your trading strategy, you’ll have a hard time managing your trades in the first place. With confidence in your strategy comes confidence in the exit points and in the trade setups you take.
Always use stop-losses: Using stop-losses is an essential part of successful trading. You never know what the market is going to do next, and you want to have a safe pillow when times get tough. Always place your stop-losses based on market conditions, and keep in mind that your stop-loss level determines the overall risk of a trade. Your stop-loss also impacts your position size, and not the other way around. By placing your stop-loss based on market conditions, you’ll determine the maximum position size you can trade in order to remain in your pre-set risk per trade.
Have a daily trading routine: Your trading day should start by taking a look at important market news and data scheduled to be released that day. Unexpected reports have a big impact on currencies and can ruin your trade setup, even if you’re a purely technical trader. Political and social factors can also have long-lasting effects on a currency’s exchange rate. Always follow market news to stay updated on key developments in the Forex market.
Make entries in your trading journal: A trading journal is simply a place where you write down the trades you take, including other important information like entry and exit points, position size used, entry trigger, and profit/loss. Regularly checking your journal entries can help you identify your weaknesses and improve your trading.
Keep practicing: You need to devote long hours to the charts and screen to get a feeling for the market and price fluctuations. The best way to do so is to follow the market regularly. Pay attention to various trade setups and how news and market reports impact exchange rates. Stick to your trading strategy and try to find as many trading opportunities as possible.
Don’t spend too much time on demo trading: Trading on a demo account is a must for new traders, but don’t fall into the trap of wasting months on demo trading. There are many benefits of demo trading, but trading with real money is where you’ll find out how you perform. Beginners in the Forex market try hard to perform perfectly on a demo account, only to find out that they can’t handle the emotions attached to winning or losing real money.
Demo trading involves no risk, which creates a trading condition very different to real trading. Aim to spend a maximum of three months on a demo account, depending on how fast you learn and how your trading strategy performs. You still need to be profitable on a demo before going real, although it doesn’t mean that you’ll see the same results on a real account. On the other hand, if you can’t make money demo trading, you certainly won't make any profit on a real account.
Step 3: Don’t deviate from your plan
Once you finished your entire trading plan, never deviate from it and start following it right now. Waiting for the right time will leave you in your current situation forever, which means missed opportunities for trading and learning. Instead of procrastinating, you should take action right now! Start making your plans a reality today and bask in the feeling of getting something done.
That’s the sole purpose of a trading plan. Without respecting the rules that you’ve written down yourself, you won’t be able to develop discipline in trading and all your previous trading mistakes will repeat again and again. Your trading plan needs to become a habit, so that you don’t “shoot in the dark” when trading.
It always takes a while to get used to doing something new, but once you start doing it you’ll feel better than ever. Follow the market every day, keep learning, and have your goal in mind. This way, you're already ahead of the game.
These are some of the key principles you need to adopt to become a successful trader. They’re easy to follow, but many traders lack the discipline to adhere to them rigorously. Staying disciplined when trading is one of the most important aspects of trading that you need to develop from the first day you decide to trade.
There is no master without experience, and experience is gained with practise. Like anything else, Forex trading is a skill that can be developed over time.