Forex Trading Strategies - 10 Tips

ATFX

Publish date: Fri, 16 Apr 2021, 06:46 PM

A crucial part of becoming a successful trader is building a trading strategy aligned with your strengths and has an edge in the markets. The profits (or losses) you make are directly linked to how you execute your strategy and whether you follow it consistently. If you wonder how you can build a Forex trading strategy, stay with us as we explain the critical pillars of a profitable strategy in depth.

To build a profitable trading strategy, you should first identify your trading style and the time you can dedicate to trading. Building a day trading strategy, yet you have a full-time job, might not be the best idea. However, a day trading strategy may be appropriate for people who can allocate multiple hours to trading the markets each day. For traders with limited time for trading, building a swing trading strategy might be a better idea than day trading.

The next question is you have to assess your risk appetite and the size of losses you can tolerate. As a beginner trader, it is always best to start trading with a small size and then increase your trade size after becoming consistently profitable. Most new traders cannot handle the massive losses that usually accompany large trades. If you trade with a larger size (risk) than you can handle, you will end up being shaken out of good positions before your stop-loss is hit, only to see the trade go in your favour later.

Finally, spend time learning the markets and monitoring your trades. The most successful traders are in the markets 90% of the time; you do not have to be trading all the time. You could be monitoring a trade, waiting for a trade setup to be complete, or even researching a new strategy. Most new traders tend to stop looking at their trades once they put them on, which is a big mistake.

Always record your trades, both winning and losing trades, to track your performance over time. Remember that you cannot improve what you do not know. By keeping a record of all your trades and the reasons you took them, you can identify repeating patterns and work on getting better.

The above tips are a summary of what you need to do to become a successful trader. However, you need much more to be a consistently winning trader. We will outline the various actions that you must regularly implement to become a successful trader below:

10 Tips to Becoming a Successful Trader

1. Set Clear Goals and Choose a Trading Style

Before trading the markets, you must set clear goals for your trading and choose a trading style. If you choose to become a day trader, you have to be ready to execute a large number of trades daily. Not all your trades will be winners, and you must accept this and keep trading until you get to the winners. Being a swing trader means that you will execute much fewer trades with higher chances of success, but you must be okay having no trades on certain days. Regardless, you must always keep your eye on the markets monitoring developing trade setups.

Have a plan for your trading before starting your day and choose the setups you want to trade. While having a profit goal is okay, the most crucial part of trading is identifying the proper setups and trading them, which will lead to the profits you want. Having a plan for the setups you intend to trade will ensure that you do not jump into trades that do not fit your trading strategy, which could lead to unnecessary losses.

A trading plan will help you assess different trading opportunities and only choose the best setups to trade while avoiding low-quality setups. The suitable trading setups will have low risk and high-profit potential.

2. Choose the Right Broker

Choosing the right broker is an essential part of your overall trading strategy since you need a broker to access the Forex markets. The best brokers usually have low fees in low spreads and commissions combined with fast execution speeds. Such brokers also offer a wide variety of tradable instruments to their clients, giving them a wide selection of choices.

You should choose a broker regulated by top-tier regulators such as the UK’s Financial Conduct Authority (FCA) and the Australian Securities and Investments Commission (ASIC). You should also choose a broker who offers excellent customer service and has good reviews from past clients. The best way to choose a broker is to open a demo account and test their services. This way, you get a good understanding of their services without risking your hard-earned money.

3. Have a Consistent Trading Routine

You should have a consistent plan of action before entering the markets each day. The only way to have a consistent trading routine is to have a framework that you can use to make decisions in the markets. A trading framework is a plan of action that helps you decide whether to buy or sell an instrument based on certain factors. You could decide to sell an asset because it just broke below a support level, or you could buy an asset because it just broke above a crucial resistance level. Your plan needs to be as detailed as possible to cover the many scenarios that characterise the markets. A detailed strategy will help you avoid making mistakes by covering all potential scenarios in the market.

4. Identify Your Trade Entries and Exits Beforehand

Many beginner traders tend to have an entirely random approach to trading the markets where they keep shifting their trade entries and exits based on emotion. It is not uncommon for traders to move their stop loss higher or lower as a trade goes against them to give it more room. The opposite is true of winning trades; most losing traders tend to cut their winners short before hitting their profit targets. Such actions result in bid losses and small wins, which is why most retail traders end up losing long-term.

Therefore, once you have identified your entry and exit points, stick to them no matter what the markets do. If the trade moves against you and hits your stop-loss order, you will still be a winner if you did not move your stop loss. Holding on to your winning trades until you hit your profit target will also help you win long-term. By sticking to your plan, you can later improve it as you will have gathered consistent data.

5. Know Your Limits and When To Stop

To be a successful trader, you must know your limits and when to stop. You must be clear about how much loss you can handle and trade in small sizes or avoid certain expensive assets. For example, traders with small accounts should trade in small lot sizes and should avoid expensive instruments. Such traders should trade very liquid assets such as the EURUSD currency pairs, which also have tiny spreads. They should avoid exotic currency pairs that have wide spreads and are expensive to trade.

As a beginner trader, you might be best served to step out of the markets for a while after encountering a losing streak.

6. Choose the Right Trading Approach

Most experts recommend that beginners trade with fixed profit and loss amounts until they are successful with this method. There is an excellent reason for taking the fixed targets approach as a new trader. This approach will build your confidence and discipline as a trader. By not changing your stop-loss and profit targets regardless of what your trade is doing, you will learn to appreciate how the markets work. You will find yourself having to watch as the market moves against you and reaches your stop-loss order taking you out of a trade. You will also watch as the market heads towards your profit target, stops and reverses, before heading back and hitting your profit target. Finally, you will end up learning to give your trades space to work out either in your favour or against you.

Once you are successful trading with fixed profit and loss targets, you can then move to a variable trading approach to use trailing stop-loss orders to lock in your profits as a trade moves in your favour. You will also learn how to cut your losing trades before your stop-loss order is hit once it is clear that market conditions have changed. Do not skip over the fixed part of trading, as that is where you build a firm foundation for your long-term trading success.

7. Master Your Trading Psychology

You cannot become a consistently profitable trader if you have not mastered your trading psychology. The hard part about trading is your mindset and how you react to what the market does. As human beings, we are wired to avoid pain and seek pleasure, which is why we hold onto our losing trades for much longer than we should and cut our winners short. We hold on to bad trades for too long because we do not want to feel the pain of closing such trades and booking a loss. On the other hand, we cut our winners short to enjoy the pleasure of a win while avoiding the pain of watching the trade reverse and erode our wins.

You must conquer these feelings if you want to be a successful trader and beat the statistics of being one of the many losing traders.

8. Keep Track of All Your Trades

Many of us are familiar with the phrase “You can’t change what you don’t know.” To become a great trader, you must know your weaknesses and strengths, and you can only do this by tracking your trades. You should keep a journal of all your trades and the reasons why you took them. By tracking your trades and outcomes and the reasoning behind your actions, you can identify flawed thought processes that lead to bad trades. You can identify the trade setups that work best for you and maximise on these in future. You can also spot the patterns behind trades that did not work out for you and work on eliminating them. The best traders are good at recording their trades and analysing them to improve over time. The only way to become a successful trader is by constantly improving your mindset and trading processes, which you can only do by tracking all your trades.

9. Prepare for Your Trading Week Over the Weekend

The best traders prepare for the trading week over the weekend, looking for trading opportunities when the markets are closed. The weekend provides an excellent opportunity to review the trades you took the previous week and plan for the coming week. You should look at the long-term charts during the weekend to identify trading opportunities aligned with the long-term trends. Trading opportunities based on weekly, daily and 4 hour charts are more reliable since they are long-term trends.

You should also prepare for your trading day before you start trading. Start by checking the daily and 4-hour charts to see if the trend is still the same and then move to the lower timeframe charts to identify the best trading opportunities for the day. You should do this every day to ensure that the opportunities you identified over the weekend are still valid.

10. Keep Learning About Trading and the Markets

The top traders are constantly working at their trade to get better each day, regardless of their experience. You should do the same to ensure that you become a better trader each day. Remember that the financial markets are constantly changing, and strategies that worked in the past may stop working with time. Therefore, you risk being left behind if you are not constantly analysing the changing trends in the markets. For example, You might have to adopt entirely different strategies in a market crash compared to normal trading conditions. Traders who did not adapt their trading styles to the market crash in March 2020 booked significant losses as they kept fighting the trend. Many expected the crash to result in a recession that would last for months, only for it to last for less than a month. Traders who adapted and turned bullish as the markets rallied booked significant profits on the way back up.

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