Do you have dreams of Lambos and a swanky penthouse and have decided that Forex trading is the way to get there?
Penthouses and Lambos are pipe dreams for most, but Forex trading can be your ticket to financial freedom…or financial ruin.
In this post, we’ll talk about how to get started in the forex market and the steps you need to take to join the elite group of successful traders.
Defining Success as a Forex Trader
Before getting into the nitty gritty of Forex trading, it’s important to set expectations. Thinking you will get rich overnight is a recipe for disaster and frustration.
But having the right expectations can put you on your way to financial freedom and breaking away from the 9-5 grind.
So how would you define success as a Forex trader?
There are two facets that you need to master in Forex trading. Once you have these two things in your control, your account size will no longer matter.
- Keeping losses small
- Consistent wins, even if they’re small
That’s about it!
Keeping losses small
Every time you enter a trade, you’re exposing your account to the market, meaning there can be one of three outcomes:
- You lose money
- You break even
- You make money
The first outcome is far more likely than the other two, so it’s very important that you keep losses small.
That’s why practicing good risk management is essential to trading successfully, and we’ll get into more detail about risk management in the next section.
The Forex market and trading world is incredibly unpredictable, and while it’s fun to watch videos about traders who took MASSIVE trades, the truth is that those trades come only every so often.
For most day traders, their bread and butter is comprised of much smaller, consistent trades.
In order to take small and consistent trades, you will have to teach yourself to get over your fear and greed, two emotions that are deadly for any Forex account.
In the long run, it’s far better to take smaller winning trades than to try and hit a home run every single time.
Once you’ve understood the importance of keeping losses small and aiming for consistent wins rather than going for home runs, it’s time to learn about risk management.
Set Realistic Goals
Expecting to buy a Lambo in your first year of trading is a pipe dream.
You need to set realistic goals when learning to trade.
A good way to measure success is consistent account growth over time. So instead of looking at a dollar value, think about the percentage that your account grew.
Percentages vary from trader to trader, but if you can make 5 to 10% per month, that’s EXCELLENT.
5% to 10% may not seem like much, but consider that most real estate investments yield 6-8% per YEAR.
Even if you start with just $500, the goal is to learn to consistently generate 5 to 10% per month.
Once you’re consistent, account size does not matter anymore. You can pass a prop firm challenge, get access to a $200,000 account, and start making $10,000 or more per month!
Practice Money Management
Successful Forex traders are excellent at money management. In fact, money management is a more important skill for successful trader than a trading strategy.
Money management is all about controlling how much you risk per trade. Remember, every time you exposure yourself to the market, you’re potentially losing all the money you’re risking.
That’s why your money management strategy has to work in such a way that it minimizes your exposure to the market and maximizes your potential return on investment.
There’s no fixed trading rules you need to follow, but most traders recommend that you should not risk more than 1% to 2% of your account per trade.
If you’re a very conservative trader and place a handful of trades per week, you can risk 2% per trade, since your overall exposure will still be low over time.
If you’re an aggressive trader and place multiple trades per, then you should risk less per trade: 0.5% or even 0.25%.
For example, if you place 3 trades in a week, then the most you can lose in a single week is 6%.
But if you place 3 trades per day, then the most you can lose in a single day is 6%.
Use Stop Losses and Take Profits
Along with controlling your risk, you need to make sure to use a stop loss. A stop loss is an order that you place along with a trade that closes your trade if it goes against you by a certain amount.
Your risk tolerance and your stop loss will determine the size of your trade.
You can learn more about lot sizes here.
Take profits are orders that close your trade once it reaches a certain level of profit. You should utilize take profits because the markets can move very quickly, and a profitable trade can immediately become a break even trade or worse.
Using a take profit closes your trade in profit even if you are not at the computer to manually close your trade.
Additionally, automating closing your trade helps take emotions out of your decision. Watching a profitable trade can trigger greed, which may tempt you to hold the trade for longer.
In the bigger picture, smaller wins adding up will always result in greater account growth.
Trading Requires Discipline
After risk management and financial planning, the next most important skill to learn before you start Forex trading is discipline.
Discipling means STICKING to your risk management strategy and not breaking your trading rules.
It also means NOT revenge trading.
Revenge trading is when you place a trade right after losing a trade, wanting to get the money you lost back from the market.
It almost never ends well, and you’ll be deeper in the hole than when you started out.
Revenge trading is something that afflicts all Forex traders, but successful traders learn to see the big picture and know that it’s important to survive until the next trading day, week, and month rather than trying to risk more money.
Choose a Good Trading Strategy
Once you’ve understood good money management and have started practicing trading discipline, it’s time to create a trading plan and strategy.
Broadly speaking, there are two types of trading strategies:
- Mechanical or rules-based
Mechanical strategies involve setting up a set of rules and conditions, that if met signal a trade entry.
Similarly, the exits are also rules based and can be triggered by indicator values, price reaching certain levels, or the trade reaching a certain risk:reward.
Discretionary trading strategies involve looking at the market and trading by feel more than very strict rules. Obviously, discretionary traders don’t just enter the market willy-nilly, but there are no fixed rules to determine entries and exits.
Mechanical strategies are easier for beginners as they don’t require as much experience with the markets. You can also use mechanical strategies developed by other experienced traders, or collaborate with other traders to create new ones.
Mechanical strategies are also very easy to backtest, since the rules for entering and exiting are always set. This is similar to being a pattern day trader.
The disadvantage of mechanical trading is that trading signals don’t always come when you’re sitting at the computer±
Discretionary trading strategies are not easy to backtest, though you can certainly simulate a period of market movements and as you would normally to get an idea of how good or bad you are.
With discretionary day trading strategies, you’re more likely to find trading opportunities in the window that you do sit at the charts.
However, the lack of rules can make you trade impulsively.
Mechanical and discretionary strategies both have pros and cons and you have to test each style to determine which is better for you.
Understand the Markets
When you start trading, it will probably take you a few months to really understand how the market moves. Although historical data may make perfect sense, real-time movements can be chaotic.
The more you sit and watch the markets move, the better you’ll understand the nuances of financial market movements. How does a particular currency pair move, what news events cause big movements, and what time do big movements typically happen are things you’ll begin to get a feel for.
What Does a Day Trader Do?
Professional forex traders spend comparatively little time on the charts. Good traders typically take a profitable trade or two and close up shop for the day, choosing to spend the rest of the day doing whatever they want.
Weekends can be spent doing market research, going over your trades for the week, and practicing on simulators to sharpen your skills and practice trading more.
Setting up a demo account
In order to start trading currency pairs, you’ll need to use one of the many online trading platforms. The most popular ones are TradingView, MetaTrader 4/5, and cTrader.
I personally use a mix of TradingView and MetaTrader 5. You will need to set up a demo account to start practicing and familiarizing yourself with the trading platform and the nuances of trading.
I recommend that you trade on a demo account and start being consistently in profitable trades for at least 2-3 months before trading live.
Professional Forex Trader Courses
There are very few good professional Forex trading courses available online.
The one that I am a member of and wholeheartedly recommend is Market Fluidity, which is made by Raja Banks.
Raja also has a YouTube channel where he live streams trading sessions. Just going through the live streams can be a huge help, as he and the other professional traders there share a lot of knowledge nuggets.