As lucrative as trading Forex may sound, it is not without its pitfalls.
Being able to trade successfully in Forex requires patience and an understanding and knowledge of the market.
It also requires self discipline and lastly, proper Forex trading strategies.
The Forex market is an extremely volatile market.
Coupled with the fact, margin trading increases the volatility of the market exponentially, a Forex trader must formulate a proper trading strategy before he start investing his money into this fast paced market.
List of the Best Forex trading platforms
In view of the inconsistencies that the Forex market presents to a trader, he must use a trading strategy to help him adopt a consistent approach toward his investment. By adopting consistency, a trader will have a higher chance of profitability as compared to when he adopts a haphazard way towards Forex trading.
Some of the things that a Forex trader must bear in mind when formulating a trading strategy are:
Trading only with “risk” capital
As much as we only want to make profits, we have to acknowledge that the Forex market is a very speculative market. Thus, chances are we will not be able to guarantee that all our trades will profitable. As such, you must only trade with money that you can afford to lose.
This is in order that you will not be emotionally affected when you suffer a loss as you are aware that the loss of your capital is not tied to your everyday financial upkeep.
The market situation
Any trading strategy must always take into account the market condition. A Forex trader must try to discern whether the market is on the up trend or down trend. In addition, he must also try to get an indication whether a market is weak or strong.
By knowing all these factors, he is able to lay the foundation for a successful trade by plotting the correct entry and ext point of his trade.
The Time Frame Of The Trading Session
As the Forex market is continuously trading all over the world, it is essential that you determine when is your entry point and the exit point of your trade.
Entering the market at the correct time is only half the part for a successful trade. The other half consists of knowing when to exit and realize your profits.
If you want to learn the best times to trade check out my article on the best time to trade Forex.
Timing Of The Trade
Although you maybe able to discern if the market is on the uptrend or downtrend, moving into a market position too early or too late can result in losses.
It is crucial that before making any trades, you know what is expected by using fundamental and technical analysis so you can take into account all factors before moving into the market. And if you have any doubts about the circumstances, then you should avoid trading.
The fact that margin allows a trader to leverage his capital doesn’t mean a trader should use all his margin capacity on one trade.
It is better to spread your transactions over several other currency pairs rather than just putting all your eggs into one basket. This will help minimizes the risk that a fall in one currency pair could wipe out your entire capital.
Utilizing All the Tools At Hand
Formulating a Forex strategy involves collecting as much relevant information as possible. To do this, a Forex trader need use all the available tools at his disposal. Not only is this approach highly advisable, but other Forex traders will also be using the same tools and hence draw the same conclusion about the market.
The ultimate result will be the fact that the market will be driven in the same direction by the aggregate “conclusions” of all the Forex traders in the market.
It is only when a Forex trader takes in consideration all the above stated factors can a proper trading strategy be drawn up. Without a proper trading strategy on hand, a Forex trader is just relying on instincts and this is a sure path towards catastrophe.