How to Become a Forex Trader
Content
What is a Forex trader?
Defining success as a profitable forex trader
Top 10 tips how you become a forex trader
The importance of forex education
Three Professional forex trading tips
Start TRading
What Is a Forex Trader?
A trader is someone who places orders on the financial market. This could be on behalf of financial institutions, such as big banks, investment funds and hedge funds, or as an independent trader.
Exchange orders, such as buying or selling stocks, are either in the trader’s own name, or on behalf of clients or for the financial institution or broker that employs them. There can be further categorization, depending on the assets being traded: Forex, equities, bonds, commodities, etc.
Traders who work for financial institutions or brokers buy and sell shares on behalf of their employer’s clients, not with their own money. This means that rather than making a profit or a loss on their actual trading, they earn a salary as a trader.
In this case, the trader takes virtually no risk in the market – it is on their customer buying or selling financial instruments to cover the risk. The trader’s clients may be anything from individuals to companies that do not have a trading room of their own.
Those who trade on their own personal account are using their own money to attempt to earn profit for themselves. These accounts are funded with their personal funds and trades are executed through online trading platforms.
Even though online brokers offer leverage, the amounts traded by home traders are much smaller than those of a professional trader. Since online trading is often done on the OTC (Over the Counter) market, the success of traders in their own accounts are only estimates.
Defining Success as a Profitable Forex Trader
Now that you know what a trader is, how can you become a trader? And then, how do you become successful at it?
When starting to trade, it is important to understand what you want to achieve from it, and how you define success.
This is something professional trader and coach Markus Gabel discusses in detail in our free webinar about becoming a successful trader below.
What are some points to keep at the forefront when learning how to become a Forex trader?
Set yourself a realistic and quantifiable goal. This could be something along the lines of, achieving a 20% annual return on your investment, or reaching a total of 100 pips per month.Your goal should also be easy to measure.Set a goal that can be achieved over a long time frame – it is recommended to set an annual goal to achieve rather than a monthly goal.
Once you have set your main trading goal for the year, it is now time to start learning how to achieve it.
Identify what resources are available to you.
How much money are you able to use as a starting deposit?
Do you want to become a full time Forex trader? Or are you just looking to trade on the weekends?
Top 10 Tips on How to Become a Forex Trader
1) Manage Your Expectations
As a new Forex trader it can be easy to become obsessed with chasing profits and this will almost definitely lead to problems. The anxiety which surrounds chasing profits can cloud your judgement and lead to mistakes which will cause losses.
Therefore, our first piece of advice in your journey to becoming a Forex trader, is to dispense with any unrealistic objectives.
The prospect of becoming rich in just a few sessions of trading Forex is extremely unlikely and, believing any differently, may cause you to operate with greater risk, jeopardising your capital.
2) Define Your Trading Risk Profile
Before making any substantial commitments, get a good understanding of the fundamental aspects of the market.
Assess your capital at hand, read trader testimonials so you have realistic expectations of returns and research the markets and currency pairs you are interested in. If you don’t feel comfortable, don’t invest your money in Forex, even if it might be profitable. This applies to any market.
However, if you think that your investment approach would be suitable for the Forex market, go ahead!
But make sure you keep in mind the following:
- Do not invest more than you can afford to lose
- Diversify your investment, it is recommended that you do not invest more than 20% of your total investment funds in any one market.
- What is your risk profile: Moderate? Aggressive? Conservative?
3) Choose a Trading Strategy
Once you have chosen to become a trader, the next step is to devise a trading strategy. There is no right or wrong way to trade per se, what really matters is that you define the strategy you will use.
Sometimes you will see that a particular strategy works well for a currency pair in a given market, whilst another strategy is more suitable for the same pair in a different market.
In order to become a successful Forex trader, try to focus on creating your trading strategy in line with your individual risk profile. Research trading tool, study techniques and think how they can be implemented in your strategy. Study how the market behaves and learn how the trading industry works.
Once you have a set strategy, don’t forget to do extensive tests by backtesting your favourite markets until you feel secure in your strategy.
4) Control Your Emotions
Emotions can be the worst enemy for people who want to become Forex traders. To become a successful trader, you must understand the mechanics of the Forex market, trust your analysis and follow the rules of your trading strategy.
When trading, make sure you have a clear head and are making informed and rational decisions. Try to manage your stress levels. Of course, this is easier said than done, but it can be the difference between a successful trader and an unsuccessful one.
If you are down on capital, do not trade. The same goes for being excessively confident and excited after a winning streak – refrain from trading or make sure you are knowledgable about your mental state. Overconfidence can lead to great losses.
One of the best ways to prepare yourself for the emotions of trading is by testing your skills on a free demo account.
Instead of heading straight to the live markets and putting your capital at risk, you can avoid the risk altogether and simply practice until you are ready to transition to live trading
5) Use Stop Losses and Take Profits
No matter your trading style or strategy, you should always set a stop loss when trading. Both a stop loss and a take profit allow you to set a pre-determined closing price of your trade. Your trade will close automatically once the price reaches this point, even if you are not present at your trading terminal.
A stop loss can give you peace of mind that, if the market moves against you, you will not lose more than the limit which you have defined. A take profit, on the other hand, ensures that you exit a trade once you reach your desired profit level.
It is important to note, that stop losses are not a guarantee. There are occasions where the market behaves erratically and presents price gaps.
If this happens, the stop loss will not be executed at the predetermined level but will be activated the next time the price reaches this level. This phenomenon is called slippage.
6) Keep Up With the Markets
Staying up to date with market news is vital! Many market movements are driven by news, central bank announcements, political events or the expectation of any of these. This is what’s called fundamental trading.
Even if you are a technical trader, meaning someone who makes trades based on chart analysis of a market instrument, you should still pay close attention to fundamental news, since such events are a key factor in market movements.
For example, if you have a reliable trading strategy and several technical indicators that indicate a long trade, check the Forex calendar to make sure there are no upcoming events which could negatively impact your trade. Even if your technical trading strategy works perfectly, fundamental news can change everything!
7) Do Not Overtrade
Overtrading is the result of seeing opportunities to make money trading where there are not any.
Some people who want to be traders and become profitable in as short a time as possible, look for as many opportunities as possible to reach their goal and may deceive themselves into putting their money at risk.
There are two common types of overtrading:
Trading too frequently
Trading with too much volume
Trading too frequently, outside of scalping strategies, is a sure way to lose more money than you make.
In this Warren Buffett speech entitled ” How to stay out of debt”, Buffett espouses the need for strict discipline when investing:
“In investments, you have to wait until the opportunity is clear, because the markets are not a game. In baseball, sometimes you have to swing at many balls that you don’t expect to hit, but this is not necessary in the financial markets.
There is no harm in waiting for more than a day for an opportunity to arise. You can simply wait until favourable price action arrives, and this shows that you really know what you are doing, and that is when you enter the game. You just need a couple of trades.”
As a trader, it makes sense to follow this same principle in the Forex and CFD market. The lesson is clear: a trader does not have to make a lot of trades to be successful, they just need to make the correct trades.
When you are trading on a live account, you must have a strategy with specific, pre-established conditions for the entry and exit of trades. Follow your plan and do not trade on impulse.
The other type for overtrading, as stated above, is operating with too much volume. For many people, leverage is the culprit.
But is this true?
As we know, Forex brokers and CFDs offer significant leverage in their trading accounts. In principle, this exists to give traders the opportunity to earn higher profits with smaller investments. This gives more people the possibility to become Forex and CFD traders, and thus use the services offered by these brokers.
However, in practice, abusing high leverage is still very common among beginner traders who are tempted to maximise their profitability in forex. In reality, what they end up doing is maximising their losses.
High leverage does not inherently mean falling into error. Leverage is simply a tool that allows you to operate with larger trading volumes, resulting in the trades having a larger margin. This is a double-edged sword – if the market moves in your favour, your profits are amplified. If it moves against you, the same is true for your losses.
Trading with excessively high volume makes an account more susceptible to margin calls. The important thing is to learn to avoid overtrading and understand leverage.
8) You Are Going to Lose Eventually
Being a successful trader does not mean that you are going to win every trade. Closing each and every trade with a profit is simply not possible.
Some professional traders may be consistently profitable, but there are none who can produce a trading statement which does not show a single losing trade. A successful Forex trader is merely someone who, in the end, wins more money than they lose.
Therefore, if, or more accurately, when, you lose a trade, do not despair! Even the most successful traders with decades of experience have confessed that less than 40% of all their trades are profitable, and some even cite less than 20%.
The trick to being a successful trader is for the winning trades are profitable enough that they produce enough profit to cover their losses and maintain a net positive.
It takes a lot of mental strength to admit ones mistakes in decision making and to close an order with a small early loss. But sometimes this is an absolutely necessary approach. On the other hand, it also takes a lot of strength to trust oneself and not close an operation with benefits too soon.
9) Develop a Trading Plan
You need to have a strict trading plan that covers most of your trading activity. This will help you reduce risk from unforeseen shifts in the market.
Many beginning traders develop negative trading habits. One example is the aforementioned overtrading, in which once a trader starts getting lucky and they continue to trade until they overdraw their account.
On many occasions, some traders have good trades due to chance or luck, which ends up reinforcing the negative habits in trading, resulting in it being nearly impossible to break these bad habits. How can this person become a successful trader if they repeatedly leave the result of their trades to luck?
Many traders believe that luck will not abandon them, but as everyone knows, luck is not infinite and when it runs out, it will create losses. Therefore, it is important to reinforce healthy trading habits, as these will help you achieve your goal of becoming a successful Forex trader.
10) Choose the Right Broker
Choosing the right broker is very important. If you are worried about the financial security or reputation of your Forex broker, it can be difficult to focus your attention on your trading. If, on the other hand, you have confidence in your Forex broker, this will free up mental space for you to devote more time and attention to analysis and developing Forex strategies.
Doing your research prior to committing yourself to a specific broker can go a long way and can help improve your odds of becoming a successful trader.
