3 Key Components Of Forex Trading Success
The lucrative nature of the forex market is a well-known fact that attracts many people to the volatile space and they plan to pursue trading to attain financial freedom. The global currency market presents the same amount of opportunities to everyone without any bias. However, only a few of us can take advantage of these profitable trading opportunities as a vast majority of traders are unaware of the key components of success. Lacking this essential piece of knowledge limits your potential as you remain stuck without any significant improvement in your trading performance.
The only way to eliminate such obstacles is by educating yourself and expanding your knowledge to get the same level of edge that experienced traders with market expertise have. In this write-up, I will be sharing some useful information about forex trading and 3 key components of forex trading success which can help you to get the desired results as a forex trader.
How to start trading forex wisely?
Before talking about the components of forex trading success, one needs to fully understand the very essence of forex trading. The basis of forex trading is the exchange rate differences of various currencies and you will be going long a currency pair (buy position) when you expect the base currency to rise in value and will think of shorting the pair (sell position) when you anticipate a fall in the currency pair price. The price movements of any currency pair will be measured and stated in pips and pip calculations are the foundation for all trading activities in the currency market.
You need to learn about the concept of pips and you can depend on a pip calculator to apply the theory in calculations in an automated way. You will get to know the pip value by simply entering the currency pair chosen, trade size in lots and number of pips along with the base currency used for funding your trading account. The pip calculator applies the real-time conversion rate to provide comprehensive results in the base currency of your account. The profit you have earned in the end can be easily converted into the currency of your choice so that you have an idea about the money you have made in trading. For that, you can use a currency calculator, which quickly converts one currency into another.
Now to talk about actual trading, you will have to start by finding an ideal broker and signing up for a trading account on their platform. Brokers are going to provide real-time price data and the trades we place will be executed by the broker itself by connecting to the interbank network or acting as a counterparty which depends on the trade execution mode. You should also consider the trading conditions offered by different brokers to find the most comfortable trading environment for yourself based on your strategy and trading style.
- Gaining Momentum
The first component that you will need to run a forex trading system successfully is stability or momentum. For this, you need to start by trading currency pairs that are considered to be a safe haven in the forex market due to their stable and predictable nature along with sufficient liquidity. A perfect example of this type of pair is EUR/USD which is the most popular pair with the highest trading volume and liquidity. All new traders are advised to kickstart their trading journey with just one major pair and take time to master this one pair before moving to other pairs.
When you are able to choose a pair that perfectly suits your risk tolerance and strategy, the performance of your trading system will be optimised naturally. You will easily find ideal trade setups once you gather enough knowledge and skills to carry out technical analysis using price charts. Choosing the right time frame is just as important as choosing a viable strategy and trading instrument. The duration for which you plan to keep the trades open is directly related to the timeframe for technical analysis using price charts.
Those who keep the trades open for the shortest duration have to spend more time analysing the charts even though the time frame is short. Scalpers and day traders have to monitor and manage their positions throughout the day. On the other hand, swing and positional traders have more time to relax even though their time frames are longer and they hold on to the positions for an extended period of time.
You must be able to strike a balance between your own time schedule, trading sessions and suitable timeframes based on your trading goals and preferred trading style. All of these aspects are relevant for building a clearly defined strategy and a well-balanced trading system. Such stability or momentum is a must for becoming consistently profitable as a forex trader.
- Managing the risk
The amount of profits you earn from a trade is the reward for the risk that you are taking for that trade. Because you will surely lose some money if you don’t win a trade as the market can often move unexpectedly or unpredictably. Dealing with losses is a part and parcel of the trading process but these losses should not go beyond the set limits and for that, we have to talk about the 2nd key component of trading success which is the risk management system itself.
Many traders see risk management as a separate discipline but when you get into forex trading, you will learn that it cannot be separated from your trading system as the risk element needs to be considered before executing each and every trade based on your strategy. In fact, the profit potential and potential losses need to be managed by testing your strategy in different market situations and adjusting the entry and exit prices based on the results you get.
You can take the help of a profit calculator to calculate the expected profits in real time prior to placing the trade. Based on this, you can minimise your exposure to risk by deciding the optimal position size for reaching your profit targets while not losing much of your account balance if the trade does not go well. For this, you will need a favourable risk/reward ratio along with a good understanding of how position sizing works to limit the risk per trade.
You should never risk more than 2% of your total account balance (trading capital) in a single trade. This is a golden rule of trading to protect your account from a higher drawdown, reducing your trading capital to an undesired or risky level which can even lead to a margin call while using leverage. We will talk more about this in the next section. But one point to mention here for risk management is planning your exits in advance by placing stop loss and take profit orders for all the trades you enter.
- Making optimum use of leverage
The last component of forex trading success is making optimum use of leverage. The forex market offers more leverage than any other financial market which is both a blessing and curse depending on how you use it. It is a blessing for those who are knowledgeable and skilled enough to make profits as they get to multiply their gains by trading with leverage. You get to open bigger trades for a smaller amount of margin requirement as collateral and have a chance to grow your trading account even with less amount of funds in hand.
But it can be a curse if you fail to execute successful trades as the potential losses will be equally bigger when you lose the trades that are leveraged. Hence, you need to limit the use of leverage to a level which empowers you but not to the point where you are at risk of losing more than what you can afford to lose as a trader. There is only a thin line between the two and a successful trader will never cross the line landing in a risky position.
The risk is not just about excess losses but also a margin call as I mentioned earlier. Margin call happens when your account balance falls below the needed margin level which can lead to your trades being closed early on without reaching the target as the broker won’t allow you to run the trades without sufficient funds as collateral. Hence, when you lose a bigger amount due to higher leverage that can result in a margin call and you will be asked to deposit more funds if you don’t want to exit the positions. So, you need to be careful while using leverage and maintain the margin levels.
Final Remarks
To sum it up, a sound trading system with momentum, risk management and optimum use of leverage are the 3 key components for forex trading success. However, obtaining these 3 components requires more than just knowledge and skills. It takes time and patience to build a successful trading career as one must be willing to learn trading from scratch. However, once you are able to move past the beginner phase, gathering both expertise and experience, you will be able to reach your true profit potential as an independent forex trader.
