Forex is one of the most liquid and exciting markets with huge daily trading volumes and a large asset class, and this is why it attracts so many participants. Individual forex traders are excited by the idea of investing from the comfort of their own home with the potential of making some extra money, or even turning it into their main source of income. However, in order to have a sound chance of long-term financial security, they have to follow a plan. Just like a football team has a plan when facing an opponent, traders should enter the markets armed with a strategy.
Traders enter the forex markets because of the 24 hour operation, the ability to both buy and sell, and most importantly the leverage offered by forex brokers. They are in a rush to make easy money in the short term but inevitably they end up with an empty account after a string of bad results. Successful traders are similar to professional football players in the sense that they are disciplined. Some of them are serious about this, and the first thing they usually do is to create a trading strategy.
It’s not really strategic to enter a position just for the sake of it. The excitement of opening a forex account and entering the markets sometimes tricks newbie traders into picking a random currency pair. However, there should be a good reason behind the choice of that pair. It can be either technical or fundamental data. It is also a good idea to focus only on a few currency pairs or CFDs and observe their behaviour in the long term. This by itself will make you more informed in those markets. Remember, Confucius once said that a man who chases two rabbits catches none.
It is of paramount importance to apply take profit and stop loss orders. The usual pattern that many inexperienced traders follow is that they take profits too soon and they allow for the losses to accumulate with the hope that the market will eventually turn to their favour. Setting up these limits will help in having discipline and will keep the emotions of greed and fear at bay when you are in the middle of a trading position.
Arguably the most important consideration of a trader new to forex who wants to take measured steps in the markets is money management. Nobody is always successful at trading, not even Warren Buffett, so putting your eggs in one basket is definitely a wrong practice in forex trading. Each trade should be made with a pre-specified percentage or amount of the account balance; many experienced traders risk about 1% – 4% of their balance. In this way you are not likely to make huge gains, but you are secured from big losses also.
The considerations and practices described above are being used by some of the market’s most successful traders, and probably the reason they are so successful is that they follow them. Applying these principles along with trading methods such as fundamental and technical analysis could increase your chances of becoming a long-term forex trader.