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5 Things You'll Learn After 5 Years in Forex Trading

   

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When you’re just starting out in forex trading, there are a variety of moving parts to consider and even more potential pitfalls to navigate. Here are five things you’ll learn on the road to greater trading success:

1. The Importance of Developing a Consistent Strategy and Focus

As you begin to formulate a trading strategy and learn how to use different indicators, it can be tempting to try out a handful of tools and abandon your methods the moment you suffer a loss. Although it’s important to learn from your mistakes, it can be difficult to determine how to hone your approach if your strategy is all over the map.

For example, many traders use price breakouts (instances when price moves outside of a consolidated range and forms a new high or low extreme) as a signal to enter into a trade because breakouts precede changes in trend direction. But not all breakouts result in the formation of a new trend, and many novice traders make the mistake of entering into a trade without waiting for confirmation. This increases their vulnerability to false signals and often results in greater losses.

Trend-following strategies typically favor a long-term outlook and resilience to small market fluctuations. In other words, they require traders to wait for the right opportunity, be consistent in their position, and be willing to take small losses on the road to greater rewards. But resilience is a luxury, and one that requires steady capital, confidence, and consistency—all things that are difficult to cultivate if you’re not committed to one strategy.

2. The Benefit of Trading with the Trend

It’s exciting to think that if you read every indicator and signal correctly, you’ll be able to predict the future and make a killing in one magical instant. The truth is, trading with the trend is more lucrative and less risky than trying to predict it. Trend-following strategies typically rely on lagging indicators like simple moving averages to lend context to buy and sell signals and help traders evaluate risk within the context of trend strength, direction, and momentum. Although some lagging indicators like the RSI and stochastic oscillator can be used to anticipate trend reversals, they’re not designed to function as crystal balls and should not be acted upon without further confirmation.

3. How to Accurately Assess Risk

Weighing risk and reward becomes easier the more you learn about different technical indicators and markets. Most successful forex strategies use a combination of trend-following tools (e.g., simple moving averages, moving average crossover), trend-confirming tools (e.g., MACD), and overbought/oversold tools (e.g., RSI, stochastic oscillator). As you learn the nuances of different technical indicators, you’ll gain a better sense of the ways that each indicator can contribute to your trading strategy and what checks and balances they can provide. Although there is no all-knowing indicator that can be applied to every trade, some indicators are more suited to specific contexts and market conditions than others. For example, the stochastic oscillator and RSI are both banded momentum oscillators, but the stochastic oscillator has greater accuracy in volatile markets. Before acting on buy and sell signals, look for confirmation using other technical indicators. In addition, use variables like trend strength, direction, and market momentum to help inform your position and timing.

Risk should also be evaluated on an overarching level. In other words, what risk can you safely assume in each trade without jeopardizing your long-term profit potential? To understand the impact of your trading decisions, it’s important to track your individual wins and losses.

4. The Value of Objectively Tracking Your Wins and Losses

When you’re starting out, it’s easy to focus on the ever-changing sum in your bank account and lose sight of the individual decisions that affected that number. In order to know when to cut your losses, you need to have an accurate understanding of your performance over time. For example, if you win more trades than you lose, you may instinctively feel that your strategy is effective, but if your net losses significantly outweigh your profits, your strategy isn’t likely to remain profitable long-term.

Because forex uses pips (points per percentage) to measure price fluctuations, it can be dangerously easy to misinterpret the financial implications of your trades. Pip value changes based on the spread (ratio of one currency to another) and the volume of currency purchased, so a 12-pip profit may not necessarily make up for a 12-pip loss. Tracking the value and frequency of your wins and losses over time will give you greater insight into the viability of your strategy as a whole. It will also help you determine how much of a loss you can sustain before exiting a trade and how to place trailing stops to reduce risk moving forward.

5. How to Hone Your Timing

You may know what market changes are on the horizon, but if you don’t know when they’re going to occur, all the foresight in the world won’t improve your profit potential. The first rule of timing that many traders learn is the power of restraint. Rather than acting on a buy or sell signal the moment it manifests, a prudent trader will wait for confirmation of a trend shift before entering into a position.

The second rule of timing that forex traders learn is how to effectively place trailing stops. As opposed to a regular stop order, a trailing stop allows you to lock in profit without exiting a trade that’s in your favor. Similar to regular stop orders, the first stop is placed just below your point of entry. As the trade moves in your favor, the stop should also move in the same direction by a set increment, thereby locking in profit without exiting you from the trade. In forex, trailing stops can be used as safeguards for averaging up—such as when a trader adds to their existing position as price moves in their favor. Placing a trailing stop can also help mitigate the risk associated with increasing your position and remaining in a trade for an extended period of time.

The Takeaway

You’re bound to make mistakes when you’re starting out. Keeping your position relatively low will give you some flexibility to learn the ins and outs of forex trading without fretting too much over the stakes. Although earning large profits in one trade is always exciting, building a consistent strategy and honing your knowledge of different technical indicators will help you understand risk and allow you to trade with more confidence and accuracy down the line. Without a consistent strategy or knowledge base, early wins can’t be replicated or improved upon. Instead of swinging for the fences, celebrate small wins, examine the outcome of each trade, and focus your attention on taking steady strides in the right direction.

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Disclaimer:

The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

This post was written by Graeme Watkins

CEO Valutrades Limited, Graeme Watkins is an FX and CFD market veteran with more than 10 years experience. Key roles include management, senior systems and controls, sales, project management and operations. Graeme has help significant roles for both brokerages and technology platforms.

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