The foreign exchange market is a place that offers great opportunities for anyone, regardless of their previous background in the world of finances. Every trader has a chance to be successful and earn a profit by trading smartly and with caution. Clearly, you should set up some ground rules of the trade in order to prosper and follow them religiously. One of the most valuable virtues a trader could have is discipline. Sticking to the rules you have previously set for yourself is an excellent way to minimize the losses and increase your future profit.
Impulsive trading will lead you nowhere
Many will argue that impulsive trading on the foreign exchange market is not gambling but if you take a closer look on the aftermath, it surely resembles gambling losses. A trader could be on a streak, without a single loss and lose everything in just a couple of minutes. It is that simple. However, if you are careful and not prone to gambling, you might not win as much as impulsive traders, but you will remain constant. Careful traders who are thinking about the process of currency exchange and analyze the market more know how to take a step back and protect their funds.
A trader who relies on his feelings will invest by following some kind of sense which is not supported by analysis or logical thinking, while a trader who uses his intellect will do their homework and learn as much as they possibly can about the currency pair they wish to trade. They will spend a lot of time reading the charts which are a part of technical analysis, and following the news and current affairs in order to be sure that a currency will go exactly where he or she thinks it will. An impulsive trader will continue trading even though they might not be on the right track, hoping that the luck will turn in their favor and that they will eventually make a profit.
Surely, impulsive trading might seem interesting for some since it is more exciting and unpredictable, but most of those traders who advocate this type of approach will eventually give up and focus on analyzing the trends and the market. It is the only way to be consistently successful while trading on the foreign exchange market.
Match up your currencies properly
Every single exchange on the foreign exchange market is done with a pair of currencies placed against each other. Each trader has an opportunity to pick and choose the currencies they want to trade and they can pair up any currencies they might think of. However, they should know how. Not all currencies are equal – some are stronger and some are weaker. The best way to trade on the foreign exchange market involves placing a strong and solid currency which is not prone to fluctuations, against a weaker one. It is the formula a majority of traders use and you should do so as well, regardless of your previous trading experience.
When it comes to strong currencies, one thing is certain – they will not be easily influenced by the outside factors. Surely, they do change their value sometimes, but that difference is not huge or shocking. Stable currencies come from countries that have strong economies and they are the safest choice when it comes to currency trading. The releases of economic reports are extremely valuable in these situations and reading them on a daily basis can help you out with your decision. If a currency you want to include in the pair you wish to trade is popular on the market and it is traded regularly, the economic reports will be more frequent, allowing you to be more thorough with your research and analysis.
The strength of a currency is determined by the reports from a central bank and if data is not positive, a central bank cannot raise a price of a currency. Studying the available information can help you determine which currency is a weak one and you should use that in your advantage.
Interest rates are another indicator of the power a currency possesses. Choosing two currencies and comparing them to each other might not look very useful, but if you take a closer look at their previous interest rates and how they stand against each other will give you a better look at the way they move. The history of currency movement is a great tool any trader can use for determining and predicting the future of a currency on the foreign exchange market. Therefore, you have to choose wisely, be patient, and do your research of the currency pair you want to focus on.
Know the risks and know your exits
Not every investor who makes a decision to start trading on the foreign exchange market is successful. It is not because they lack motivation or drive to reach the top – the reason is being unprepared for the world of trading. Prosperity and favorable results might seem easy in the beginning, but once they actually start investing actual funds, those notions are quickly crushed. It is most usually because new investors do not acknowledge the possible risks that come with the market. It doesn’t matter where you start, how much money you have on your account, or if you are using leverage or not – the outcome is the same. Being realistic with your abilities and the risk you are willing to take when trading on the foreign exchange market plays a key role in staying afloat in this ever-changing environment.
The best way to assess the risk is to do so before every single trade. If you start thinking about it in the middle of an outgoing trade, your emotions will very likely get in the way, clouding your judgment and leading you to an eventual failure. Therefore, preparing yourself properly and sticking to your plan until the very end of the trade is the correct way to avoid getting emotional and losing your investment along the way.
Make sure you understand that not every trading strategy is foolproof at all times – there is always rooms for mistakes no matter how great your plans look before you enter the market. However, it is not the end of your trading career if you fail and lose instead of making profit right away. Keep a cool head and retrace your steps in order to find the reason why you failed in the first place. Once you identify your mistakes, you have the ability to modify your trading strategy and not make the same slip again in the future. Trading plans change with the market and you should think about them a lot. They are not set in stone and modifying a strategy is not unheard of – every trader does it every once and a while.
Do not be greedy and overtrade
Perhaps you have assembled a perfect strategy and you have been making profit from a couple of trades in a row. You are probably feeling great and you think that the approach you are applying at the moment will last forever – think again. Your plan is obviously going well but you simply cannot be winning every single time you enter a trade. The chances are the tables will turn, maybe sooner than you think, and you will experience a downward spiral. Most inexperienced traders continue to trade even when it is obvious that they will not make a profit and cover the losses, but they go in a same manner anyway. Again, it all comes down to the emotions.
A trader should protect their profits at all times, whether it is by abiding their previously determined stops or by trading with their risk capital without burning through the money they can’t afford to lose. You need to possess a high level of self-control in order not to start overtrading when your wins turn into losses. It probably looks fairly easy right now when we are simply talking about it, but once you actually experience the downfall, you will realize it is not so effortless to pull a plug and stop trading.
It all comes down to this – if you want to be a successful trader on the foreign exchange market, your profits should be greater than your losses. Always keep that in mind and you should remember it every time you feel an urge to overtrade.
These rules should serve you as a guide on what to do and what to avoid when trading on the foreign exchange market. Maybe some of them do not apply to you at the moment but go through them anyway because you never know where trading will lead you eventually. Maybe you have never overtraded, or you are great at keeping your emotions at bay, but knowing that there is a possibility of that happening in the future can help you out with your trading strategies and the way you want to approach the market.