Whilst success in Forex can’t be promised, if a traders actually takes the time to read and implement some tips and techniques, they should be able to see some improvement in their trading results. Some of these tips include
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Focus on trading and not just on making money
One of the main reasons, believe it or not, why traders are not making money on a constant basis in the financial markets are because they are overly focused on money. Most people come into the markets chasing financial freedom or a quick road to riches. However, they don’t know what they will be up against in the Forex market. If a trader wants to make consistent money in the markets, they will need to let go of all their get rich quick fantasies first. The more focused a trader is on making money quickly, the more the money will elude them. This is because focusing one’s mind on the money creates emotional tension, and the more emotional tension they are under, the more likely they are to make the mistake of over-trading and over-leveraging. If a trader wants to increase their odds of consistently profiting in Forex, they should first focus on mastering one Forex trading strategy at a time and forgo the thought about making a lot of money. Obviously, traders get into the markets to make money, but they need to understand that the more they feel the need to make money the more they will experience difficulty in actually making it. By effectively managing risk on every trade, users can begin to forget about the money. For traders, this means setting their risk tolerance at an amount that they are comfortable with losing on any trade.
Not trading is also part of the game
This may seem counter-intuitive, but not trading is one of the easiest things a trader can do to help them make money consistently in the markets. Of course, in order to know when not to trade, traders need to know exactly when to trade and this involves mastering an effective trading strategy. Traders should remember that by not trading they will also not lose money. If their goal is to profit consistently, then by not losing money they are obviously closer to their end goal than if they would have entered an obscene trade and incurred a major loss. Traders should be absolutely sure they have no doubts about entering every trade they take. If a particular trade setup does not meet a traders pre-defined trading plan rules, it means that their edge is not present, and trading when an edge is not present is the same thing as gambling.
Be organized and disciplined
Becoming an organized and disciplined trader is extremely important. Unfortunately, most traders are anything but organized or disciplined, nor do they make any attempt to be.
Here are some tips to get started:
- Traders will obviously need to know what they are looking for in the markets and build an organized and disciplined trading approach around it. Traders must make sure they know what their trading edge is and master it.
- Create a trading plan. Traders need a forex trading plan built around the trading strategy mastered. It should include what the traders trading edge is, how and when they will trade it, and risk management plans. Basically, it needs to cover everything they will do in the markets as briefly as possible, yet still be all-inclusive.
- Create a Forex trading journal. Tracking trades is a crucial part of developing and maintaining both organization and discipline in trading. If a trader doesn’t know where they’ve been, they can’t know where they are going. A trading journal will allow traders to track their progress over time in a real and tangible format.
- Traders should develop a long-term view of what “success” means. Traders need to stop and ask themselves what success in the markets really means. Would they rather make 100% in one month and then lose it all by the next month, or would they be happy with a solid gain over the course of a year?
A traders chances of Forex trading success will be greatly improved if they learn to slow down the process and take a part-time view to their trading, rather than wanting to be a full-time trader right of the bat. By learning to trade on the daily charts first will result in a better understanding of why taking a longer-view is important to a traders overall success. Traders will get a much clearer and more accurate view of the markets by focusing on the daily charts. Traders tend to confuse themselves and induce over-trading by constantly obsessing over the lower-time frames. Lower time frames induce over-analysis and inconsistency. If your goal is long-term consistent profitability, it is suggested that traders focus on analysis and trading the daily charts in forex.
Develop a strict daily trading routine to develop positive trading habits
Traders who want to become a consistently profitable trader will have to develop a consistent trading routine. By becoming organized and disciplined as discussed above, traders can develop a trading routine which will work to reinforce positive trading habits instead of negative ones.
A traders success is really dependent on developing the proper trading habits and continually reinforcing them.
Forex Strategies for Achieving Consistent Profits
Every trader stands to earn a decent pay out at times, but traders who aim to have a regular income from trading will need a consistent profit Forex strategy. Unfortunately, this is no easy task. According to experienced traders approximately 33% of traders are able to profit over a 3-month period whereas the percentage of those market participants who trade consistently, on a yearly basis stands at 7.7%. This suggests that more than 92% of traders cannot achieve this goal. Fortunately, there are several ways in which a trader can improve their chances of achieving consistent profitable trading in Forex. This includes:
Firstly, traders need to choose their trading style and strategy and build confidence and experience back testing this method for the past market performance. Another way to achieve this goal is by setting a proper risk/reward ratio coupled with realistic profit targets. Traders need to avoid over-leveraging their positions or investing more than 5% of their trading capital.
Keeping a trade journal may also be handy since it makes it much easier for traders to track past performance and learn upon the previous mistakes. And finally, doing regular research on fundamental indicators and the latest economic announcements will give traders a better idea, which currency is more likely to be undervalued and then use this insight in their trading decisions.
How to Make Consistent Profits in Forex Trading
There are multiple strategies a trader can follow in order to consistently make profit in Forex, however, including the following seven which we have started to cover above:
- Choosing and testing a consistent trading strategy
- Setting a risk/reward ratio to 1:2 or higher
- Setting realistic profit targets
- Avoiding the use of high leverages
- Not investing more than 5% of trading capital on each trade
- Keeping a trade journal
- Doing regular fundamental research
Choose and test a consistent trading strategy
The first logical step is to choose a trading style. There are several options, which mostly fall into one of those categories:
- Day trading
- Swing trading
- Long term trading
The most important difference between these categories is the timeframe:
- Scalping: The positions are opened and closed within a 1 to 15-minute window.
- Day trading: Typically involves the closing of all active trades before the end of the business day.
- Swing trading: Traders usually keep their positions open from several days to a number of weeks.
- Long term trading: Typically involves trades that last for several months.
The next logical step after this decision is to choose one or several trading strategies. Some people might prefer Bollinger bands, moving averages, or other technical indicators, while some other traders might focus more on economic news and other fundamentals. The most important thing here is to test those strategies. One of the essential methods to do this is by backtesting.
So here traders can imagine that they are trading from the beginning of this chart and ask themselves the following questions: How well would that strategy perform during the Euro uptrend? Was this method effective in identifying reversals, before EUR/GBP entered the downtrend? Was the strategy able to withstand the unexpected Euro appreciation in February, without suffering serious losses? How did prediction models based on fundamental news perform during this period?
Clearly traders can examine dozens of other questions, but the most important point is to select useful methods and disregard those tactics which failed in the past. Finally, traders can move on to real-time testing with demo trading accounts.
As a result, a trader will have one or several well-tested strategies that he or she can use on a consistent basis.
Set a risk/reward ratio to 1:2 or higher
Traders are not necessarily guaranteed that they will always achieve more than 50% of winning trades. However, the one way to address this concern might be to set a risk/reward ratio to 1:2 or higher. For example, if a trader aims to gain 100 pips from a given position, he or she might consider setting the stop-loss order below 50 pips of the current market price. This can be very helpful in the sense that this enables market participants to earn decent payouts even with 40% winning trades.
This can considerably improve the odds of success in favor of a trader and can be a valuable insurance policy.
Set realistic profit targets
Unfortunately, coming up with the right risk/reward ratios might not be enough for forming consistent profits Forex strategy. Another important aspect of this entire process can be to set realistic profit targets.
Every currency pair has a different average daily volatility. For example, on average during the EUR/CHF might move by 50 to 55 pips. Consequently, it might not be realistic to set a daily profit target with this pair at 100 pips. For such ambitious goals, there are other currency pairs such as GBP/AUD or GBP/NZD, where their daily fluctuations might range between 190 to 210 pips.
Avoid the use of high leverage
It is not a simple coincidence that many financial commentators describe the leverage as a double-edged sword. The problem is that overleveraged trading can easily lead to severe losses, from which it will be very difficult to recover.
For example, in the case of 400:1 leverage, if the market goes against the opened position by 0.25%, it might be enough to wipe out the entire trade, so a trader will lose his or her entire investment.
As a result of US regulatory reforms, there is a 50:1 limit on the maximum amount of leverage used with major currency pairs and 30:1 on minor ones. Still, even 50:1 leverage can represent a serious risk to one’s trading capital, since here it might take 2% adverse change for a trader to lose his or her investment.
Consequently, some traders, especially beginners might consider using 1:10 or lower amount of leverage, in order to guard against those risks.
Don’t invest more than 5% of trading capital on each trade
Another essential element of a proper risk management strategy can be not to use more than 5% of one’s trading capital on a single trade. There are some professionals who recommend a much lower limit, at 1 or 2%, however, the general consensus seems to be a maximum of 5 percent.
The reason behind this is quite simple, even most experienced traders can have several losing trades in a short period of time. So for example, let us suppose that traders risk 50% of their account on one position and the market moves in the opposite direction. They closed their positions and lost half of their investment. In this case, this one loss alone will wipe out one-quarter of their entire trading capital.
As we can see from this example, the absence of proper money management can easily lead to irreparable losses to one’s trading account. Therefore, many traders avoid risking more than 1/20 of funds on a single trade.
Keep a trade journal
There is no point in trying to pursue consistently profitable trading and at the same time being unable to track the progress. This is where the trade journal comes into play. This lets traders measure their average monthly earnings or losses. Also, there is also an opportunity to calculate the ratio of winning and losing trades, which might be very handy when formulating the proper trading strategy.
Interestingly, the trade journal can not only provide valuable insight into the results, but it can also have a great motivational value for traders. If a market participant sees that despite all of his or her mistakes and setbacks, the average monthly earnings are getting better, then this can be a very encouraging piece of news.
Doing regular fundamental research
The final step towards possibly achieving a consistently successful trading experience is to stay on top of the latest economic trends. Clearly, it might be very difficult to keep track of dozens of currencies, however, a trader can start by studying 8 major currencies, which compose Forex Majors, paying attention to the latest Gross Domestic Product (GDP), Consumer Price Index (CPI), Unemployment rate and other important releases, as well as interest rate decisions.
As we can see from this diagram, the USD/CAD was moving sideways for several months, one can even argue that the US dollar was in a slow downtrend. However, the situation changed dramatically from January 2020, when the pair has gained more than 1,000 pips and even nowadays trade well above the 1.40 mark.
Those developments make very little sense if we confine our analysis strictly to technical indicators. However, if a trader regularly monitored the latest economic trends, then he or she might have anticipated some of those moves.
At the beginning of 2020, the price of oil began its massive fall, from $61 collapsing below 0 and nowadays trading near $25. Clearly, this downtrend is hurting the Canadian economy, which is one of the largest producers of this commodity. Another catalyst of CAD decline was the fact that during this period the Bank of Canada cut the rates repeatedly, reducing it from 1.75% to 0.25%, making the currency much less attractive to depositors and carry traders.
When it comes to fundamentals some long term factors, such as the Purchasing Power Parity (PPP) also can play an important role in the exchange rate movements. To illustrate this, let us take a look at this daily EUR/JPY chart:
It is very easy to notice that the Euro is engaged in the long term downtrend against the Japanese yen for more than 15 months. Obviously, the European Central Bank is pursuing a very accommodative policy by keeping its key interest rate at 0%, however, the Bank of Japan went further and has set rates -0.1%.
The explanation for this downtrend might lie in the Purchasing Power Parity (PPP) indicator, according to which currencies in the long term tend to gravitate towards PPP level, which represents an exchange rate at which the average price of goods and services will be equalized between the two countries.
According to the Economist, in January 2019 the Euro was 29% overvalued against the Japanese Yen on PPP basis. So instead of being a response to one particular announcement, the decline of EUR/JPY represents the long term adjustments to address the undervaluation of the Japanese yen.
Consequently, traders who are well-informed about the latest interest rate decisions, economic indicators, and other fundamental indicators might be well positioned to succeed with their consistently profitable Forex strategies.