There are a number of Forex trading tips which have withstood the test of time. Here are some tips that successful traders have used in the past and present and will work well into the future.
Always Trade Using Adequate Capital –
To trade Forex successfully you must have adequate trading capital that is in line with your goals. If you’re looking to replace a $50,000 per year job and become a full-time Forex trader consider the following information:
To make $50,000 per year using a $10,000 opening Forex balance you need to make a 500% return on your money in order to meet your goal of $50,000 per year. Naturally, if you have more working capital let’s say $100,000 then you need to make a 50% return on your capital in order to make the $50,000 you need.
As you can see from the information above the expected rate of return of your trading system or method as well as other factors will determine what amount you need to fund your account. If you are using a Forex trading system with an expected annual return of 100% it is quite clear that funding your account with $5000 will not allow you to reach your income goal of $50,000 per year.
Another important reason to adequately fund your Forex trading account is to make sure that you can continue to trade as your equity fluctuates.
Before you even start to trade you will need to know your trading system’s calculated maximum drawdown. Maximum drawdown is simply the largest negative move from an equity peak to an equity valley in a trading account.
If, for instance, your equity in your account drops from $50,000-$25,000 the drawdown in that case is $25,000. If a trading system has an expected maximum drawdown of $25,000 it stands to reason that starting to trade that particular Forex trading system by opening an account with $10,000 will not provide enough room for the system’s equity to fluctuate normally. What happens in this case is the account reaches a point in equity where it can no longer be traded.
A good trading system will recover from its drawdowns and go on to reach new equity highs. Insufficiently funded accounts will not survive the inevitable drawdown periods and therefore will not be able to take advantage of the many future profit opportunities a good trading system has to offer.
Always Have a Trading Plan And A Trading System –
Having a trading plan and a trading system are absolutely essential to success in Forex trading. There are very few people who ever lived who have an intrinsic gut feel for the market and can just shoot from the hip and profit consistently year after year after year. Just as with any business, a good business plan helps you do a number of important things. For one, it helps you review your goals including your profit objectives. This is extremely important because it allows you to see when you are off-track and provides you with the tools for getting back on track.
So in essence your trading plan is your roadmap to success. Think about not having a trading plan in the same light as not having a roadmap on a long journey. Does it make sense to start off on a long journey without a roadmap? It makes even less sense to start off on the long journey without a destination in mind and that is what many traders do when they start trading.
A couple of simple things you may want to include in your trading plan are:
Average yearly income projection –
Average monthly income projection –
Average weekly income projection –
Initial starting capital –
Forex trading system – A Forex trading system is simply a set of rules you will use which tells you when to enter a trade, how much to risk, when to exit a trade, and when to do nothing. Essentially a Forex trading system generates the signals which tell the trader which actions to take. A Forex trading system may also be referred to as a Forex trading strategy or a Forex trading method.
Money management system – This is part of your Forex trading system. Your money management system tells you when to increase your contract size as well as when to decrease your contract size. In Forex trading, money management is often called “the keys to the kingdom”. Legendary futures trader, Larry Williams, refers to money management in this way as well and he and many other successful traders believe that this is the key to building wealth.
Those are the basics of trading plans and trading systems. You can feel free to write down a quick one of your own. Don’t be put off by this because it needn’t be complicated. The fact that you will write down anything at all will put you ahead of 90% of the people who have ever traded.
Here are a couple of other things you may want to include your trading plan:
Living expenses – The cost of maintaining your household
Business expenses – The cost of anything related to your trading business such as monthly data fees or trading platform access or even office space.
Keep Good Records –
It should go without saying that keeping good records is important for any business. This is especially true of the business of trading. It is always a good idea to record your actual entry and exit prices and compare them with your expected entry and exit prices as well as expected profit and loss.
As part of your record keeping, keeping a trading journal makes perfect sense. In this journal not only will you list which trades you take, you list why you take them. You can also list here psychological factors such as how you felt during the trade. You can also note if you deviated from your trading system and trading plan and can explain exactly why you did that. This is the type of feedback that can help you more in sync with your trading.
Control Your Emotions While Trading –
To those who do not trade controlling your emotions in trading seems like a completely foreign concept. Some even asked, “why is that even important?”.
It’s important because as you already know money can be a very emotional issue. One of the biggest emotions that beginning traders have is fear. That fear is fear of loss. It is completely legitimate to feel this way because no one really wants to lose money. What we all must understand is that to be successful in trading we will have losses along the way. In fact, the longer you trade the more losses you will have. In order to be profitable it is simply important that the sum total of your losing trades be less than the sum total of your winning trades.
This is a tough concept for many to grasp and as a result many traders or would be traders are always seeking the “Holy Grail” of Forex trading. The Holy Grail would be described as the Forex trading system with a super high percentage of winners such as 96 to 100%. In reality there is no successful trader who has such a high percentage of winning trades. Successful traders leave clues and the clue being left here is that it is not necessary to have a high percentage of winning trades in order to be profitable over the long term.
Emotions may limit your profit in a number of ways. If you find yourself afraid of taking a loss you may move your stop loss (simply put, it is the amount you are willing to risk in the trade) in order to give the trade more room. This can have disastrous results as what may have once been a risk controlling small loss can easily grow into a catastrophic large loss.
Emotions can even be your enemy when you are in a winning trade. If you are in a winning trade you may fear that what little profit you have may disappear. You may grab that small profit even when your system says you should let your profits run. It may make you feel good to do this and take profit consistently but eventually it will throw the amount of your profit loss ratio off balance and take your equity into negative territory.
When you gain experience and confidence in Forex trading you’ll begin to understand that you must accept losses as part of doing business. Once you’ve done this you will find yourself much less controlled by your emotions and less likely to second-guess your trading system. There is no doubt that this is easier said than done and that takes a lot of practice. Your reward will be not only be increased trading confidence, but increased consistency and trading profits as well.
Control Your Risk –
Keep these words in mind, “When you control your risk, You control your reward”. In trading, truer words were never spoken.
The first step in controlling your risk is to have a trading system with a positive mathematical expectation. Even though this may seem self explanatory many people may not understand it. If you do not know what the expected returns are on a trading system, then you should simply not trade it.
Included in every good trading system is a method to limit losses. This is done by setting what is known as a “stop loss”. It does exactly as the name implies, it is designed to “stop” “loss” .
A stop loss is designed to limit the amount you risk on each trade.
Here’s an example of a stop loss:
Let’s say that your trading system tells you to go long (buy) the EURUSD (Euro Dollar/US Dollar) at 1.30249. Let’s also say that the system you are trading should only risk $1000 per trade. You would set your stop loss at 1.29249.
1.30249-1.29249 = 0.01000 = 100 pips 100pips x 10/pips (standard contract size) = $1,000
The $1,000 stop loss was just set up as an example. Your stop loss will depend on the system you are trading. A stop loss of this size is not reasonable for a $5,000 account as it would only take five consecutive losing trades to blow out your account.
Controlling your risk using a stop means making sure that the size of the stop loss is such that you can survive runs of consecutive losing trades without zeroing out your account.
Set Realistic Expectations –
Setting realistic expectations is tougher these days than it used to be. As there is a lot of money in the Forex market it seems that everybody and his brother has created and is selling the trading system to end all trading systems. Believe it or not there is even a trading system that advertised “no losing trades”.
With such hype it’s no wonder so many people enter Forex trading expecting to strike it rich over night.
It’s pretty easy to ground yourself with realistic expectations. Simply ask yourself this question, “What is the greatest percentage return on investment I have ever made?” If the answer is 5-15% then obtaining a yearly return of 3000% is simply unrealistic. Remember that I said “unrealistic”, not impossible.
There is tremendous leverage in Forex trading and that means there can be enormous profits. We do not gravitate towards Forex trading to get the same type of return we might get in an average mutual fund. We accept the risk of greater leverage because of the greater potential rewards.
With that said we could safely say that 50-100% per year is not an unreasonable rate of return. Successful Forex traders can do much, much better than that.
Tips On Choosing A Forex Trading System –
When it comes to trading Forex systems you have 2 choices:
Create your own trading system
Buy or lease a commercially available trading system
Whether you are creating your own trading system or buying a commercially available one the characteristics of a good system remain the same.
What To Look For:
Long track record – A good trading system can profit in a variety of market conditions. Look for a track record that spans many different market conditions
Reasonable rates of return after transaction costs
A system that fits your lifestyle – If the system only trades when you are asleep you aren’t going to be able to trade it (except for those who use an automated order execution system).
What To Avoid:
Claims of a high percentage of winning trades such as 95%, etc.
Products with a guarantee of success
Products with claims but no proof that their system works
Products with a short track record – Even a bad system can have a good day – don’t rely on a short track record when making your decision to buy commercial trading systems.
Avoid relying on reviews – Most of the Forex trading reviews that you will find on the internet will cast a favorable light on the product. As you probably already know many Forex trading reviews are written by those who make a profit when you purchase the reviewed Forex product through the link on their website.
This is a big problem for those wanting objective Forex trading information. Reviews are typically a great way to get an idea of how a product performs and they are helpful for many different types of products. Unfortunately the Forex market is littered with thousands of positive reviews for products that just won’t cut the mustard in the long term.
Decide Why You Want To Trade Forex –
If you ask most people why they want to trade Forex they will typically laugh and say, “To make lots of money”. That is a realistic answer. The Forex market provides the leverage and liquidity to enable individuals to start with a modest sum and do quite well.
Some people trade Forex for the action or the rush they get from trading. No doubt, Forex trading is very exciting, but be cautious about trading for the rush.
A tricky part of trading is that the rush can be positive even when your trading habits and results are negative. That’s why it’s important to monitor your results closely and refer to your trading plan to make sure that they are in line with each other.
One thing you want to avoid in trading is the “get rich quick” mentality. This is an easy trap to fall into especially when you start winning consistently. Just remember that your objective should be to profit over the long term.
It may be that you just like to gamble and Forex is another version of a slot machine or roulette wheel. Many would say this is a bad idea. It is a bad idea if the amounts you are risking will affect your lifestyle in any way. If you want to trade in this “just for fun” way, make sure that you only risk small amounts of money and trade in a “micro” account. By small amounts we are talking about $25 or so, as long as that $25 does not put you in an uncomfortable financial situation.
Choosing The Right Forex Broker –
Choosing the right broker is an important step. The first thing to do is to go to the broker’s website. Look around the website for contact information. If you are satisfied with how easy it is to get in touch with the broker then we can proceed.
Give the broker a call or send them an email. It’s always nice to see how quickly a company responds to you before you actually do business with them.
Check the company out with the U.S. Commodity Futures Trading Commission
They will have a wealth of great information including select financial data for certain firms. This type of data can give you an idea of the liquidity of the firm that you are dealing with. An important figure is the Net Capital Requirement which is linked to the Excess Net Capital. It is suggested that firms with a very small Excess Net Capital be avoided.
Phone Access – Certain firms may not have phone access for certain types of accounts. It is best to know this ahead of time to avoid any potential problems.
Ease of Withdrawal – You shouldn’t have to jump through hoops to get access to your money. Make sure that the broker’s withdrawal policy meets your needs.
Spread – The spread in Forex is the difference between the bid and the ask prices and is how most Forex brokers get paid. Although many brokers tout that you can trade Forex commission free the spreads at some Forex brokers can be costly. Make sure that you shop around for the smallest possible spreads.
Trading Software/Platform – It’s pretty easy to get a free demo account from most any Forex broker. A demo account will allow you to practice placing orders without risking any real money. Demo accounts may have from $10,000 to $100,000 in virtual money in them.
Getting The Right Setup For Forex Trading –
Successful online trading relies heavily on technology. Make sure that your computer has sufficient memory and processor speed to handle your everyday programs as well as your trading platform and any other trading-related software you need to run.
A reliable high-speed internet connection is of paramount importance. Your internet connection is your lifeline to your online account and your Forex trading profits. Having a backup such as wireless broadband adapter for your laptop can help you to continue trading even if your internet connection at your home or office goes down.
Another handy item to have is an uninterruptable power supply. This will keep power going to your PC in the event of a power outage.
One additional item of importance is a backup hard drive. There are many external drives available which you can quickly and easily connect to your PC. With this drive you can have a backup of all your important files in case your main computer has a hard drive failure.
How To Handle A Loss –
Handling losses is one of the most difficult things for people getting started in Forex trading. Fear of loss is completely natural especially until you get a handle on trading successfully.
Overcoming the fear of loss will put you on the road to becoming a successful Forex trader.
One way to overcome fear of loss is simply to gain more experience in Forex trading. A simple way to do it that won’t cost you an arm and a leg is to trade on a micro account, where the amount of leverage you use is smaller than that of the standard account. For instance, whereas a standard account may have a value of $10 per pip, you can set the value to 1/10 of that or $1 per pip or even less if you wish.
Now, trade your system as you normally would using less leverage. You’ll typically find that with less at risk per trade, your level of anxiety about taking losing trades is severely reduced. You may then go on and continue to trade and get accustomed to the fact that losing trades are a very natural part of Forex trading.
Once you gain experience and feel comfortable then you can make adjustments to your level of leverage.
Here is a simple exercise that will work wonders for those frozen in front of the screen afraid to take a trade because of fear of loss. First make sure you’re on an account where you can adjust your leverage to something small such as using $1 per pip.
Now we’re going to do something completely crazy. We are going to place the trade at random, buy or sell, it does not matter which. Make sure that you adjust your risk in the form of your stop loss to a very small level such as 10 pips which in this case would be $10. At this point we’re going to let the market stop us out and we’re going to intentionally lose $10.
Truthfully, that wasn’t so bad was it? It was basically about the cost of the last bad movie that any of us have gone to see, but in reality is much more valuable.
You have just eliminated another “unknown” by taking your very first loss.
You don’t want to ever be in a position of hesitating to pull the trigger because you fear the next trade may be a loss. Many beginning traders miss numerous profit opportunities because of this. This simple experiment can help you to eliminate any fear you may have of taking a losing trade.
Never Add To A Losing Trade –
It is very easy to fall into the trap of adding to a losing trade. As we discussed above many inexperienced traders have a fear of taking a loss. One common way Forex traders may try to compensate for being in a loss is adding to a losing trade.
There are a few ways to add to losing trades. One of the most common methods is to take your predetermined stop loss and make it larger to give the market more room. This is most commonly done to give the trade an opportunity to reverse and go in the direction you want it to. To many it “feels better” to widen the stop than it does to take the loss. It is important that you exercise discipline in place your stop loss as dictated by your trading system and keep it there.
Another common way to add to losing trade is to add another position or positions when you are already in a loss. This is very common for traders who have “the market has to go my way eventually” mentality. Unfortunately, “eventually”, may be a long time and many, many thousands of dollars away. The fact of the matter is the market does not have to do anything at any time except exactly what it does.
While you may get lucky trying either of these methods and come out ahead, it is not advised to do so. What will eventually happen is that we avoided taking a small, but manageable loss and we magically transformed it into a huge catastrophic loss.
Don’t Fret When The Market Moves Against You –
In the world of real trading there will be days when you enter a trade and the market immediately moves against you. No matter how you look at it is not fun, but it does happen.
While we would all like for the market to immediately move in our direction after we’ve placed our trades that is not really what we should be focusing on. What is more important is that the trade that started out moving against us ends up being a winner. As long as the sum total of our winners is greater than the sum total of our losers we will be profitable and that’s what’s important.
Don’t Let Losing Trades Get You Down –
Not letting losing trades get you down is easier said than done. You’re going to take losses so it’s important that you dismiss your loss as “old news” after your trading day is done and go home with a clear mind.
Clearing your mind will make it a lot easier for you to face the next trading day. You do not want to enter your trading day filled with negative emotions about any past trading day.
Never Brag About Your Winnings –
Keep your trading results to yourself. If someone asks you how you are doing after you have a huge run-up in equity simply tell them, “Things are going fine”.
As you gain more experience in trading you will find that the desire to brag about your winnings will diminish, (if you ever had that desire in the first place). Many traders start off having a run of beginners luck and believing that they are some type of financial genius. After trader has gained some experience and gone through some “much less than perfect” trading periods they tend to become more humble.
So keep your trading results private. After all, the only person it is necessary to impress is you.
When You Develop A Winning Trading System Keep It To Yourself –
Keeping a winning trading system to yourself probably sounds selfish to many people. Your objective in trading is to profit over the long term and hopefully not only be successful but to build wealth as well. Simply ask yourself this question, “How does telling someone about my successful trading system benefit me?”
It is more likely that your winning trading system will remain effective for a longer period of time if you and only you use it.
How To Properly Use A Practice Account –
When you begin trading one of the first things you want to do is to become familiar with your broker’s trading platform through practice.
Here’s a suggestion that will place you leaps and bounds ahead of other traders. Rather than just opening up a practice account and trading with play money, we suggest that you open up a micro account and trade with a small amount of real money.
Micro-accounts can be opened up for as little as $25 to $100 and your leverage can be scaled so that a one pip movement is only $0.10. Using this type of leverage means that if a 30 pip stop gets hit that you are only out of $3.00.
It’s amazing how this simple difference between using a practice account with no money and a practice account with a small amount of money can make in your trading. This will help you avoid the pitfall many traders have faced as they transition from trading a demo account to trading in real account. Often times the move from a demo account to real account has been met with disastrous results because of how the demo account was handled.
As there is no real money in the demo account, no real emotions are tied to making trades in the account. It is frequently used more as an online video game. More often than not traders take much greater risk than they otherwise would because there is no chance of even the smallest financial loss.
So fund a Forex micro account with a small amount of money rather than using a demo account with no money. The trading you do there will more closely match that you will do once you fully fund your account.
Always Use A Protective Stop –
We have touched upon using a protective “stop” (stop loss) when we discussed controlling your risk. It is important to be reminded to always, always, always use a protective stop. This should be placed immediately after your entry order is placed. Some traders use what is known as a “mental stop”. With this type of stop the trader has already predetermined price point and keeps in it his mind rather than placing it in the market. If and when the market price gets close to the mental stop the trader can either place the stop order at that time or wait until the price travels to the stop price and place an order to exit the trade.
Past Performance Is No Guarantee Of Future Results –
This is just a reminder that even if you are evaluating a trading system that has a full track record and all the information that you would ever want that “past performance is no guarantee of future results”.
This is true even if you are looking at a real-time, real-money Forex account statement. All track records are just footprints that provide no guarantee that the trading system in question will perform as well in the future.
Keep in mind that just because there is no guarantee of future performance does not mean that there are not “indications” of future performance. To the trained eye there can be “indications” of future performance which is why we advocate learning to evaluate a Forex trading system’s track record properly.
A quick example would be when we see a Forex trading system advertising 95% winning trades. We know from experience that it is extremely unlikely that any trading system will be able to produce 95% winners over the long term. We then dismiss such a Forex trading system as an over-hyped pipe dream.
Balancing Life And Trading –
As exciting as Forex trading is it can also be mentally exhausting. In order to maintain your health and peace of mind it is suggested that you work to balance life and trading. This isn’t always so simple as it is easy to become obsessed with your trading….especially during a winning streak!
It may not seem so at the beginning, but a weekend spent away from your computer can work wonders for your trading.
A successful trader’s lifestyle includes healthy mind, healthy body, and healthy relationships. Don’t ever let your trading have a negative impact on the other important aspects of your life.
Selecting A Trading Style To Fit Your Life –
One of the nicest things about Forex trading is that you can trade at most any time of the day or night. If you work a fulltime job and want to trade Forex for part-time profit you definitely have the opportunity to do so.
Listed below are the Forex market hours:
New York opens 8:00 am to 5:00 pm EST
Tokyo opens 7:00 pm to 4:00 am EST
Sydney opens 5:00 pm to 2:00 am EST
London opens 3:00 am to 12:00 noon EST
As you can see you can trade at any time that’s convenient for you.
You can also fit the type of trading system you use to your lifestyle. For those that have the time to watch the market and like fast-moving market action there’s daytrading (trading in which trades are opened and closed during the same day).
Traders who want a more “hands-off” approach may choose to trade a system that uses a long-term approach such as one that enters a trade once every several weeks or months.
Your trading must also match your tolerance for risk. If not you will most likely find it too difficult to continue trading as the risk levels may make you nervous every time a trade is signaled. Although some systems will look more attractive because of the projected returns typically trading systems with greater returns experience a higher level of risk than those with smaller returns.
Don’t Take Trading Advice From People Who Do Not Trade –
The markets are one of those topics that everyone has an opinion about. Just for fun the next time you are with a large group of people just ask the general question, “Does anybody have any idea where the market is headed next?” There is a high probability that you will get an opinion from someone complete with their justifications for the direction the market will take.
It might be best not to mention your trading activities to anyone at all. Although your associates may be well meaning, they often view trading either through their own unfruitful trading experiences….or the unfruitful trading experiences of others they know. Don’t let this fill you with fear and keep you from your potential profits in the Forex market.
Don’t Make Trading More Complex Than It Really Is –
Trading does not need to be rocket science. Once of the nicest things about trading is that it is not the smartest person that will do the best in trading it is the most disciplined person.
As humans we tend to make things more complicated. Maybe it’s because we feel smarter when we are able to do something that very few people are able to do.
Don’t fall into the trap of thinking, “If trading is so simple why doesn’t everyone do it?” We believe that many people don’t get involved in Forex trading because they think it is only for the select few intellectual elite. Not true. Although some in the trading and investing industry may want you to believe it is impossible for the average person to succeed at trading without their advice, that is not accurate. If all the industry professionals were financial geniuses wouldn’t we all be rich by now?
When you find something that works stick with it. If a trading system is not broken then don’t try to fix it. By keeping your trading simple you help to keep it profitable.
Learn To Be Patient –
This is one of the toughest things for traders to learn. This can be especially tough for daytraders and other short-term traders.
There is a lot of waiting in trading. You wait for market to move to a point where a trade is triggered. After that you simply get in at the price your trading system dictates.
Being too anxious to trade gets many traders in trouble. You may be tempted to get into a trade when you see the market is near your entry price. Do not do it this, but instead let your trading system get you into the trade at the right time. Don’t allow your anxiousness to trade to let you second guess your trading system.
Getting Paid In Trading Is Not The Same As Getting A Steady Paycheck –
Those looking for supplemental or full time income should realize that trading profits don’t necessarily come with the same regularity as a paycheck from a steady job. Let’s take a look at an example.
Below is a table of monthly profits for a EURUSD (Euro Dollar/US Dollar) Forex trading system. The monthly amounts you see are in US dollars and are the result of trading 1 Forex contract.
As you can see not every month is a profitable month. This means that if you were planning on pulling out $2,000 per month there would be some months that you wouldn’t be able to do that based on the fact that there are some losing months.
Since the total profit was over $27,000, however, you would have been able to “average” $2,000 per month profit. Once your account has built up enough equity you can make regular withdrawals while still leaving enough in your account to continue trading.
We are making this illustration to point out that you may not be able to draw a steady paycheck from your Forex trading initially, but only after you have traded successfully enough to build your account up to a sufficient size.
Discipline, Discipline, Discipline –
There should be no mystery as to what we are going to cover next. Discipline is extremely important in Forex trading. It is discipline which helps to keep you focused and on track.
Proper trading discipline helps to keep your emotions in check especially during difficult periods. Taking another trade immediately after a losing trade because your trading system tells you to takes discipline. The natural tendency is to want to avoid the pain of another losing trade by “standing aside”. In reality you need to follow your trading signals without hesitation. The more you practice taking trades without hesitation the better you become at it.
Pulling the trigger and taking the trade is always easier when you know what to do ahead of time. That is part of the purpose of having a Forex trading system…so that you know exactly what to do and when to do it.
If, for any reason you find yourself doing things you are not supposed to do, i.e., adding to a losing trade, widening your stop loss, etc then it’s time to take a break from trading. Go outside and take a walk or call a friend to help you clear your head. If that doesn’t quite do it then consider taking the rest of the day off. Don’t go back and start trading again until you feel certain you will take the needed actions to be successful.
Remember that trading discipline is about not letting temptation slip in and throw you off your game.
Resist the temptation to:
Add to a losing trade
Not take a trade when you are supposed to
Trade while you are sick
Trade with inadequate capital
Grab a quick profit when your trading system says “let it ride”
This collection of Forex trading tips was gathered from successful traders around the globe. The tips and techniques presented were specifically designed to help you become a more successful Forex trader.
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