The best Forex trading style for any trader is dictated by their goals. It's imperative that you have clear and well laid-out goals before you get started. It's also important to take into consideration your emotional disposition. Each trading style comes with a unique set of characteristics that demand a different trading approach. If your personality is not properly matched with your trading style, you are likely to find yourself unduly stressed which could affect you capacity to make the right decisions. For instance, some traders are unable to stomach the idea of sleeping with open positions in the market. If you are such a trader, then day trading would be a better fit for you than, say, swing or positional trading. On the other hand, you might have a hunch that certain developments might lead to one currency making solid gains over another in a few months' time. In such a scenario, a positional trade would be ideal.
Choosing the right broker is paramount to succeeding in Forex trading. It's well worth the effort to spend enough time researching the right broker with a good reputation and one who offers an ideal platform that will allow you to perform the analysis you require. You must understand which policies the brokerage works with and how it goes about making the market. Trading over-the-counter or on spot markets is quite different from trading in exchange-driven markets. Ask the broker about its policies. You should also check whether the trading platform has all the analytical tools that you plan to use. For instance, if you prefer trading off Fibonacci numbers, make sure the platform is capable of drawing Fibonacci lines.
Before you enter the Forex market, you need to have clear parameters that you will use to determine when to enter and exit trades. Some traders might choose to look at the underlying fundamentals of a company then use charts to determine the best time to execute trades. Other traders prefer relying exclusively on technical analysis and consequently only use charts to trade. It's important to remember that fundamentals drive long-term trends while chart patterns are useful for identifying short-term trading opportunities. Whichever methodology you use, remember to be consistent in its application. It's equally important that you ensure that your methodology is adaptive enough to keep up with the market's changing dynamics.
Many traders tend to get confused by conflicting information coming from charts with different time frames. A buy pattern might show up on the intraday signal whereas a sell signal appears on the weekly chart. If you use a daily chart to time your entry and a weekly chart to give you a basic trading direction, be sure to synchronize the two. If your weekly chart gives you a buy signal, wait until the daily chart also gives a buy signal before opening a new position.
Expectancy can be defined as measure of how reliable your trading system is. To calculate your expectancy, go back in time and measure the profitability of your winning trades and compare it with the magnitude of the losses for your losing trades.
For instance, you can look at your last 10 trades. If you are just getting started and have not made any actual trades, go back on your chart and check the points where it would have signaled to enter or exit a trade. Determine whether each trade would have been profitable or lost money, and write the results down. The formula for expectancy is defined as:
E= [1+ (W/L)] x P – 1
W = Average Winning Trade
P = Percentage Win Ratio
L = Average Losing Trade
Supposing you had made 10 trades and six were profitable while four were losing trades. This means your percentage win ratio is 6/10 = 60%. If you made $2,400 from your six winning trades, then your average win is $2,400/6 = $400. If your four losing trades lost $1,200, then your average loss is $1,200/4 = $300.
Applying the formula above, we can calculate your expectancy as:
E= [1+ (400/300)] x 0.6 - 1 = 0.40 or 40%
This in effect means that your system will return 40 cents for every dollar invested over the long-term which is fair enough. If your expectancy is too low or even in negative territory, change your trading system.
Having the right mental attitude and being psychologically prepared is paramount for any trader if you hope to succeed in Forex trading. It's important to bear in mind that your money is at risk the moment you fund your account. Your trading money should not be needed for basics such as paying your bills and living expenses. Be prepared to accept small losses and learn how to manage your risk.
Leverage your trades to no more than 2% of your trading capital. In other words, if your margin account has $10,000, never allow trades that can potentially lose more than $200. If your stops are placed farther away from 2% of your account, compensate by trading shorter time frames or lower your leverage.
The world of currency trading is a complex one that is controlled by many diverse factors. It's hard to master the underlying fundamentals that drive price movements for different currency pairs. For this reason, it's best to start with a single currency pair then expand to other pairs as you grow your skills set and knowledge pool. For instance, you can start by trading the currency of your own country since you are likely to understand its prevailing economic climate better than you probably would for a foreign country.
You build positive feedback loops by executing your trades in accordance with your plans. Success tends to breed more success and helps to build your confidence. Even your small losses can turn out to be great learning lessons so long as the trade was executed according to your laid out plan.
Many markets are closed over the weekend. You can perform a weekend analysis of your weekly charts to see how your trades are unfolding. Perhaps a double top has just appeared and the experts are predicting a trend reversal. Or maybe the experts are predicting a market explosion. Take whatever the pundits are telling you with a grain of salt, and instead use cool objectivity to formulate your plans for the coming week.
Keeping printed records of your trading activity can serve as an invaluable learning tool. Print out your charts and list down your reasons for making each trade. Mark your charts with both entry and exit points and make relevant comments off the chart. File your records so that you can refer to them in future. Take stock of your emotions behind each trade. Were you in a panicked state or did you allow greed to get the better of you? Objectifying your trades helps you develop the necessary mental discipline that will ensure long-term success.