Every person coming to the foreign exchange market wants to succeed. But what are the best practices a Forex trader to follow?
Is there a guide to success? Or rules to follow for Forex traders to make it?
For sure, there is none. More precisely, none to fit every Forex trader in the world.
As human beings, we have different expectations. A different way of doing things. And, even see or interpret the same thing differently.
Well, that’s good, not bad. Uniqueness is what makes humankind progress.
But would be nice to know the traits or best practices to follow to succeed in the Forex market.
Hence, this article aims at laying the best practices as successful Forex trader follows. Moreover, it aims at explaining the pros and cons of it, the sacrifices, if any, and what it takes to make it.
As you’ll find out, not everyone is prone to be a Forex trader. Furthermore, not everyone can be a successful Forex trader.
However, everyone wants to be one. So, here’s what we’ll cover, among other topics:
- What is success for a Forex trader?
- Forex common mistakes to avoid
- How to pick the right Forex broker
- The importance of trading with a demo Forex account
- minimum Forex techniques to master
- Forex strategies and trading styles to consider
But above all, this article is a journey to the psychological side of trading. After all, all the above topics are familiar already, right?
Therefore, what makes a difference is the approach to known things. Or, the psychology of trading, starting from established principles. Are you ready for learning the best practices to become successful in Forex trading?
Dreams of a Forex Trader
The Personal Computer (PC) and the Internet forever changed our societies. Suddenly, people have access to all kind of information just a click away.
Forex brokers spotted the immense chance given. To offer regular people access to the forbidden fruit: Forex trading.
Currencies existed way before that, make no mistake. But the trading game wasn’t available to the regular people. The average Joe.
And that was for a simple reason. It was too expensive!
However, the PC and the Internet changed that. New technologies appeared. Brokers improved the Forex platform and advertised more.
Just like that, the snowball effect appeared. All of a sudden, more and more people wanted to become a player of the largest financial market in the world: the interbank market.
With a relatively small capital, anyone can move mountains of money on this market. Due to leverage, the effect of buying or selling a currency pair multiplies on the real market.
However, so does the risk of losing. As a rule of thumb, the higher the leverage of a trading account, the exponential the risk is.
So, if you want, this is one of the golden rules of any best practices in Forex trading guide. Control the leverage, and you’ll master the risk.
Financial Independence as a Result of Forex Success
If anyone argues with that, that’s a lie. Everyone’s in for the money.
This is a dog-eat-dog world. Buyers want to screw sellers and the other way around.
And, with no hard feelings. After all, you’re as good as your trading account. Or, as your next trade.
People get fascinated by all these numbers that move up and down 24/5. All they see is money. Or, the potential of making it, on and on and on.
But think of it for a second. If it was easy, or that easy as sometimes appears to be, wouldn’t everybody be rich? Or, financially independent like every Forex trader dreams?
Sadly, reality begs to differ. Most retail traders fail.
Or, at least they fail on the first deposit. Number don’t lie, so here’s the statistic: over ninety percent lose that deposit.
In plain English, almost everyone. How come?
Lack of education is one thing. We work to fix that!
Wrong expectations are another. Is nothing wrong with having great expectations (if you didn’t see the movie starring Robert De Niro, Ethan Hawk, and Gwyneth Paltrow, now’s your chance)?
But great expectations come true mostly in movies. In real life, it is about work, work, work…and some more work.
So, the dream of a Forex trader is to reach financial independence. It kind of sums it all, doesn’t it?
Financial independence to quit that stinking job, to go in that dreamed vacation, to live like a king…oh, sound so lovely. Wake up, and stop dreaming: while possible, it comes at the end of making it in the toughest jobs in the world.
Here’s another tip part of best practices in the industry: Forex trading is a marathon, not a sprint.
Understanding the Game – Starting Point for a Forex Pro Trader
The problem with the typical Forex trader is that he/she doesn’t understand what is Forex after all?
To learn about the best practices in any area, one must start with the basics. In this case, with the ins and outs of Forex trading.
Forex or the foreign exchange market as is known is the place where traders buy and sell currencies. More precisely, currency pairs, as currencies are paired against one another.
A Forex trader takes a long position when suspecting the price of a currency pair (e.g., EURUSD) will rise in the future. Or, goes short, meaning selling, if the price is about to fall.
The difference between the opening and closing prices is profit. Or, loss. If you got it wrong, it’s a loss. If right, it’s a profit. As simple as that.
However, that’s before expenses. Deduct the Forex broker’s commission, the spread (the difference between the bid and ask prices) and the swap (interest rate differential) if any, and you’ll have the actual result of a trade.
But don’t haste into calling it a profit. We’re all due to paying our taxes.
Hence, any profit a Forex trader makes is subject to taxes. Only after paying them, the actual result of a trade reveals itself.
Best practices may lead to success. But before calling the result a profit, one needs to look at the big picture.
So, part of understanding the trading game is understanding when you make a profit. Furthermore, how to define that profit.
Market Participants – A Forex Trader’s Nightmare
Conventional wisdom against Forex traders is that retail traders are at the other end of a trade. However, best practices in the industry don’t come from the retail traders.
And, there’s a reason for that. In fact, retail traders are a very small part of the overall interbank market.
So small, that it doesn’t exceed six percent of the daily Forex trading volume.
Oops, now that’s something! If every retail Forex trader in the world buys or sells the same currency pair at the same time, it won’t make that much of an impact.
Hence, understanding the best practices in the industry is to look at other entities part of the trading game. Next, try to align your Forex practices with the other players’ interest. Finally, you’ll start understanding what the best practices are to make it at the trading game.
It all starts with the Forex broker. The best Forex broker won’t trade against its clients as most do.
Yes, that is correct. Forex brokers organized as market makers have a designated department that trades against their clients.
In other words, brokers use statistics. If almost all retail traders lose their first deposit, why not outsmart them by trading in the opposite direction?
As such, they mirror the market using common software and retail traders won’t even notice. However, there is nothing illegal in doing that, as it is an accepted standard in the industry.
But, is it ethical? For this reason, many Forex brokers try to hide this fact, as clients will move on due to the ethical issues, looking for the right broker.
So, one entity to find best practices against is the market maker. Or, the Forex broker.
Relevant Market Participants That Shape Best Practices in Forex Trading
Think of central banks and monetary policy. Besides setting the interest rate level, they set the monetary policy, and someone needs to implement the decisions.
Through trading departments, they effectively move the Forex market. Hence, part of the best practices of a Forex trader is to understand central banks’ decisions.
If that’s done, then the positioning on the right side of the market becomes a piece of cake.
Commercial banks act as net buyers and sellers in the interbank market. In fact, their trades make a big chunk of the Forex trading market.
Imagine an American company buying a European one. Obviously, it needs to pay in Euro for the acquisition.
What the U.S. company will do, is to hire a banking consortium. Next, it delegates the amount to various banks and set the rules and targets. Finally, the consortium starts buying/selling in the interbank market until they reach the needed amount.
Liquidity providers, high-frequency trading industry, quant firms, investment funds and family offices dedicated to high net-worth individuals, they are all active players in the Forex trading industry.
So, what, you might ask? What does it have to do with best practices for a successful Forex trader?
Because any guide to Forex starts with understanding the playing field and the players, the starting point to best practices is to understand who you’re facing in the arena.
The answer is not pretty. All these entities have more money, more power, and more resources to allocate than all the retail traders combined.
Hence, if anything moves the Forex market, is not the retail Forex trader. Instead, it is the sum or part of the entities mentioned above.
Best Practices in Retail Forex Trading
Suddenly, the narrative focus shifted. It is not the best practices of a retail Forex trader anymore.
Instead, it is about the best practices to do things like the other players in the industry. If retail traders anyways stand few chances to make it, why not learning from best practices in the industry?
Here’s a guide to best practices that follow industry influencers and key players. We’ll start with, naturally, money management.
The Risk in Forex Trading
From the moment the broker approves the account opening, your money is at risk. If any retail trader has any doubt about it, please read the terms and conditions you’ve agreed already too.
Or, just go on your Forex broker’s website and read the disclosure. Everyone warns about the risks involved. So why not believe it’s true?
If there’s a risk involved in trading currencies, then it must apply to all entities. Hence, we can learn something from the big guys. Learn from their best practices and apply the outcome to the retail trading account.
Never put all your eggs in the same basket. You must have heard this in your life so far.
Well, it is very much true in trading or investing. Avoiding that simple rule makes the life of a Forex trader easier.
Moreover, never risk more than one percent of your trading account. Or, maximum two.
That is, on any given trade. Why?
If, for whatever the reason, you have a staggering losing streak of seventy-two trades risking one percent per trade, you’ll lose only half of the trading account. But then, if that’s the case, you need to improve your trading anyways, so take a break, learn, and give it another shot later.
A Forex trader has a great deal accepting a stop loss. When the market comes to hit it, the tendency is to remove it.
Wrong! The aim of a stop loss is just that: to stop the loss.
Hence, if the original trade idea was to place it at that level, leave it. It fulfills its destiny!
Reward in Forex Trading
Even if the market turns and you feel stupid, it is still the right decision. Because you see, in trading, we talk about a marathon and not a sprint.
Therefore, in the long run, that decision will balance in the trading account, giving it more chances to survive in the long term.
But no trading setup is good enough if the reward doesn’t exceed the risk. Look for setting the bar high. The higher, the better!
The standard in the industry calls for 1:2 or 1:3 risk-reward ratio. Effectively, it means risking fifty pips for making a hundred.
Or, risking a hundred bucks to make three hundred. And so on.
But why settle with the standard? Look for new ways to improve the ratio, struggle, fight, and stick to the plan.
Raise the stop loss to break-even by the time the price moves into 1:1 ratio. More precisely, if you risk fifty pips and the price travels in your favor fifty pips, move the stop loss to break-even.
Why? Well, at least for two reasons.
One would be to protect against a loss. Cut your losses short, they say. But how about being proactive with the losses?
If using proper or more significant risk-reward ratios give the account room to grow, why not give a helping hand?
Another reason is that if the market turns and stops you at break-even, chances are the trade was a loser anyways.
I mean, to target 1:3 or more means to look for a sudden break. Regardless the timeframe, the price must break.
On a break, rarely it looks back. However, if it does, the stop loss sits at break-even and a calculated Forex trader smiles and moves on.
Forex trading and trading financial markets is competitive. In fact, to be successful as a Forex trader requires great sacrifices.
Moreover, tremendous pressure. You know, trading for a living may sound like everyone’s dream, but it can quickly turn into a nightmare.
Traders have a family too. Bills come in every month, even when the market doesn’t move.
Summer trading, so they say, is a lull. The market doesn’t move.
If you’re a swing trader (keep positions from a few hours to a few weeks or months), you’ll make no money. Worse, you’ll lose due to swaps, commissions, and other associated costs that come with handling a trading account.
So, the secret is to find best practices to suit every day’s needs. And, every trading style’s needs.
What strikes the most is the lack of financial education in the retail trading side of the business. Not that everyone needs to be an economist, quant or math genius. No!
But things like Forex broker’s practices, Forex trading styles, market players, statistics around the industry, etc., should be there before the account opening.
To sum up, the best practices for a Forex trader to make in this industry aren’t written for all traders. Instead, their sum may fit some traders more than others.
And, the resources, ambition, and dedication of a Forex trader differ than others. Hence, the results or Forex success varies too.
If Forex traders don’t understand that the psychology part in the trading game matters more than they think, they’ll keep learning until, eventually, will give up. Isn’t it a pity for not understanding best practices in the industry in the first place?
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