The 3 mindsets of a successful forex trader
Trading forex has gradually become mainstream and the several brokerages across the world have managed to make it even more accessible to the masses. While some usually disapprove of forex brokers because they supposedly take advantage of investors in developing economies and lure them into gambling their money away – the reality sometimes is that in some economies, having the ability to generate an income without depending on third parties can be life-changing. In fact, we hear multiple success stories from traders in these countries every day because the markets don’t really care about your economic status or education background even if solid education can be an advantage.
If we can find some commonalities between all successful traders, maybe we can incorporate them into our own method of approaching the markets and find success for ourselves. It goes without saying that there are some key points every forex trader needs to know and rules to adhere to in order to make his strategy more efficient and consistent. However, there are some commonly overlooked aspects in trading forex that you should always ensure to include in your trading if you want to succeed.
Focusing around minimizing losses
Reducing losses while improving profitability in forex trading isn’t a novel or ground-breaking idea by any means, but a large percentage of retail forex traders end up failing because of their inability to grasp this simple concept. Instead of making risk management their top priority, they usually focus on maximizing their winners either by overtrading or increasing their position size. Despite suffering a streak of losses, they try to recuperate that loss of capital by ignoring their rules and just open positions without doing the proper analysis required.
Trying to control your losses with a stop loss order is one thing and an important step towards developing good habits but effectively managing your strategy around minimizing losses is another thing entirely. Even if forex trading takes place in an ever-changing market, there is one thing that remains the same and that is that the market is completely unpredictable and no one can expect to trade with perfect accuracy and no losses.
In order to get around this though, you need to include risk-reward rules in your strategy. That’s to say that you should never risk more than a specific amount of your total account size on a single trade. The prospective profit from a single trade should always be greater than what you risk losing. Instead of chasing a 100 pip win, try to focus on how you can minimize the amount you can stand to lose from that trade.
Leverage – less is more
Leverage is an effective and beneficial tool in trading forex, but extensive use of leverage can often lead to a few losses that at the end of the month can outsize your profitable ones. Going overboard with leverage, would completely eradicate any improvements you’ve made to your trading strategy in terms of risk and reward ratios and following tight stop-loss orders. Considering a couple of leveraged trades can blow out your entire account if the market turns against you by just a few pips – it’s a no brainer that in order to survive a losing streak, you shouldn’t apply excessive amounts of leverage on your trades.
When it comes to surviving and succeeding in forex trading – it’s all a battle of attrition and those who manage to sustain through the inevitable losing trades will be the ones that will eventually come out successful. Leverage can be useful as long as it’s used sparingly and with purpose.
Trading forex revolves around one goal: making money consistently. But to be consistent in this aspect we need to achieve consistency in all the other moving parts of the whole. These include:
- Trading plan
- Money management
A well-defined trading plan with specific entry and exit rules is undoubtedly a requirement for every forex trader. The problem, however, stems from the fact that opportunities in the market are limitless and it becomes increasingly hard to follow a set of rules focused on specific instruments and indicators. The more you understand price action, the more difficult it becomes to stick to the plan since the chart will always lure you to open a position.
This is why money management is so important and why psychology plays such a fundamental role in every forex trading strategy. We are wired to take opportunities as they present themselves and we all take pride in the efficient use of our time and money. However, only the ones who have the discipline to follow the rules they set for themselves have managed to succeed in trading forex because only a consistent, accountable and quantifiable approach has proved to work over time.