Trading can be daunting. In the forex world, information stretches across the globe and figuring out a usable strategy can leave a lot of traders scratching their heads. Add to that, a couple bad trades could wipe out any trader's account. So, how do you develop a strategy to give you the best chances in the market?
1. KNOW THYSELF
Sure, it's a simple adage, but setting goals is your first priority as a trader, and to do that, you need to understand your own trading personality.
- Will you be glued to the computer all day? Or do you prefer to set it and forget it?
- Day trading? Scalping? Automated trading?
- How risky are you?
Before you dive in, see if your goals align with your personality.
2. GET EDUCATED
Information is everywhere. This is especially true when dealing in forex, because the implications are global. How do the interest rates in the United States affect EUR/USD? Can you turn economic growth in Europe into a promising trade?
Education is essential, and many forex brokers offer free education, whether on demand or in live trading rooms. You can find a world of traders publishing market insights and up-to-date economic data on Twitter and Facebook.
The best defense against simple mistakes is education. Turn to your broker to find the resources you need.
3. CUT LOSSES, LET PROFITS RUN
Nobody likes to lose. In the midst of losing, it's easy to imagine the desire for a turnaround being somewhat overwhelming. This becomes problematic when trading.
Human psychology suggests that people hang on to losses longer than they should. Likewise, in the face of profit, people seem to jump out of a trade to secure their winnings—we want those pips secured.
One way to do this is with stops and limits. You can predetermine the amount you want to risk and the amount you want to profit. This has the benefit of eliminating human emotion from your trading.
Once you set stops and limits, don't touch them!
4. USE LEVERAGE EFFECTIVELY
Many traders come to the forex market for the wide availability of leverage—the ability to control a trading position larger than your available capital.
However, while using high leverage has the potential to increase your gains, it can just as quickly, and perhaps more importantly, magnify your losses.
It's been found that traders can be more successful when they limit the amount of leverage used, typically 10:1 or less. This means they never traded more than 10% of their account balance, which gives trades time to fluctuate in the market without being stopped out by a margin call.
5. TRADE THE RIGHT TIME OF DAY
As the world turns, the opening and closing of markets can affect the volatility of some major currency pairs, like EUR/USD and GBP/USD. Through research, analysts suggest that traders are generally more profitable when markets are less active.
It appears to us that traders are generally more successful range trading European currency pairs between 2:00 pm and 6:00 am New York time. Asia-Pacific currencies seem difficult to range trade at any time of day as they tend to remain fairly active during Western off hours.
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