In the world of the stock market, the appeal of currency trading has long been obvious. The volatile nature of the foreign exchange market promises plenty of action and excitement, along with the lure of big profits. In addition, Forex trading is simple to get into but hard to master, making it a technical and economic challenge for traders at all levels.
Traditionally, though, the Forex market has been a place where big financial dreams go to die. Stories are legend of traders who entered the currency markets with plenty of capital and a “can’t lose” system, only to emerge from the trading experience with a string of losses and an empty account.
Why does this happen? Research and follow-up studies show that the technical expertise and strategies of most traders are financially sound; it’s the human factor that trips them up. With that in mind, here are some simple tips on Forex trading to master the psychology of this kind of trading.
Before you choose a strategy, put together a comprehensive self-profile. How much of a risk taker are you? Do you prefer the constant action of day trading, or do you enjoy taking long-haul profits? What limits, if any, will your schedule and responsibilities impose on the time and effort you can put into Forex trades? Moreover, what are you looking for from Forex trading? How much return do you expect? Is your trading ego driven and emotional, or do the technical challenges of the currency market appeal to you? Once you’ve put together the profile, use it to construct your trading rules. These rules should act as a series of checks and balances to curb those parts of your profile where you might be prone to excess.
Learn the Language and Do Your Homework
While their strategies may have been sound, many traders who ultimately fail have knowledge gaps, and they often don’t know what they don’t know until it’s too late. Take the time to master all the language and terminology, from basic terms like stop loss and profit taking to the intricacies of market and resistance averages and pairs trading. Know the difference between range trading and a moving averages system, and master the ins and outs of a Forex chart until you know what the numbers and chart lines mean. Understand the logic and philosophy behind different approaches like guerrilla trading, herd trading, mirror trading, and so on.
Make Sure Your Broker Knows You
Once you’ve got a profile and a knowledge foundation, you’re ready to find a broker. You should be compatible with that person when it comes to approach and financial goals, and you should choose someone with more expertise so you can be constantly learning.
Strategy: Stick to the Basics
Above all, your trading strategy should be simple and easy to explain and understand. It should include rules for profit taking and stopping losses, and those rules should be inviolable. If you’re new, understand that breaking even is an excellent first-year goal and that a 20 to 30 percent annual return is excellent. Set up your system so you have a positive percentage of winning trades and a positive average profit when losing trades are factored in. And remember that there are plenty of good reasons why experienced traders usually only risk 1 to 4 percent of their account balance on each trade.
Be Your Own Expert
The Forex landscape is littered with dozens of quick tips and experts with a “system” that looks great when you check out their blog, video or book. Take these tips and expert advice as information; if a tip looks solid, add it to your rules, and if a system looks intriguing, check it out and borrow whatever parts and pieces of it make sense to you. And don’t succumb to fad market trends and news-driven trends, no matter how temporarily alluring they may be.
Be Flexible, Learn and Adjust
Even for savvy veterans, Forex trading is full of surprises, some of which are not so nice. Take notes on your successes and failures, and learn from both. And don’t be afraid to alter your personal system if the market is steering you in a different direction.