There are two key components for you to become a successful Forex trader.
Do you know what they are?
You may be thinking it’s the trading strategies used, but actually that is only a small piece of the puzzle. There two more important pieces; they are money management and trading psychology.
Have you ever wondered why there are many beginner traders who don’t last long? Why many people consider Forex trading as a gambling?
Forex trading is very profitable. As mentioned, Forex is the largest financial market in the world. It is the most liquid of all.
So why do a lot of people who venture in Forex lose money? The answer is poor money management. They risk more than they can afford. They trade base on emotions.
What is money management? Money management simply means properly handling the risk of losing your money in each trade.
The Golden Rule in Forex Trading
The golden rule in Forex trading that successful traders follow is never lose more than 2% of their capital per trade. The reason is for you to have enough capital to recover in case you experience a drawdown.
However, this doesn’t mean that you will enter as many trades at 2% risk at the same time. You have to set a maximum risk per open trade. For example, your trading criterion is not to risk 10% of your capital at any given time. If you already have 5 open positions at 2% risk, you shouldn’t enter to another trade until one of the earlier 5 positions is closed.
Determine the risk-to-reward ratio of the strategy you will use before entering a trade. If you plan to have a risk-to-reward ratio of 1:2, it means that for every $1 you risk, you expect to have a return of $2.
You need to set a reasonable risk-to-reward ratio. Even though “the higher the risk the return” is true, you have to remember that with higher risk, your chance to blow up is also higher.
Setting a Stop Loss
Another aspect to a successful trading is to have a stop loss in every trade. This is to protect your capital in case your trade goes against your analysis. This is a non-negotiable stop loss. Stick to the price point you have determined to exit when your trade turns to be unprofitable (as determined by the risk to reward ratio you have set for the strategy).
Many beginner traders shift their stop loss or cancel their stop loss in the hope that the trade will go to a profitable position. Once in a while, you may get lucky, but what if you aren’t? You may wipe out your entire account in one trade. Your stop loss must be determined before you enter a trade.
Stick to Your Trading Plan
Lastly, stick to your trading plan.
Do not enter trade just because you feel that you need to. Enter a trade because it matches your trading plan. Entering a trade that is not according to your plan is tantamount to suicide. Why? It is like battling in an unfamiliar field where you are bound to lose.
“We have to always look ahead enough moves to be well prepared, even for victory!”
– Garry Kasparov, Russian Grand Chessmaster