10 Habits Of Effective Forex Traders
Successfully navigating the forex market is never a matter of luck or chance. Experienced forex traders have a relentlessly disciplined approach, which helps them avoid the pitfalls and maximises their chances of doing well. Here we have a look at the most effective habits you can adopt to make that move from novice to a professional funded trader!
- Have a watertight risk management strategy
Forex trading is not as simple as emulating a formula, and expecting profits to drop into your pocket. Even highly experienced traders sometimes experience losses; they accept this as part of the game plan. The key is to minimise the risk with a clear strategy, which you stick to no matter how your luck is turning.
Knowing your risk tolerance means being honest about the amount of capital you have to play with, and how much you can afford to lose. It is essential to work this out in advance, and remain consistent in your approach. Make an assessment of your income, outgoings, and savings, and work out what percentage you can comfortably risk losing.
- Learn to manage your emotions
Professional forex traders are experts and looking at a situation objectively, and not making subjective decisions which are based on a gut reaction. Amateur traders are often led by fear of making a loss, or a greed for greater profits. These are two primitive and powerful human emotions, which we are all prone to at times.
The key is to learn to put these emotions to one side, and take a more analytical approach. Always refer to your risk strategy before making a decision, and consider whether it is within your safe parameters. Remember that the markets can be volatile, and profits can very quickly turn to losses.
If you are an impulsive person by nature, it can help to learn some mindfulness techniques, which ground you in the present moment, and reduce the tendency to speculate about the future. Even Olympic athletes employ mindfulness methods to help them thrive in the highly competitive sporting arena, so they are worth taking seriously.
- Be prepared to learn
Even old hands at playing the forex market make sure their knowledge and techniques are kept up to date. Learn as much as you can before you begin, from the wide range of books, seminars, courses, and online material that is available. Read trade journals and economic publications such as the Financial Times, and get to grips with the technical stuff.
The more you know, the better you will become at predicting which way the markets will move, and this will give you a competitive edge. Good traders have a strong grasp of the current market conditions and are comfortable with carrying out performance analysis.
- Know your exit strategy
Of course, you should put a lot of thought into your entry strategy, but having a plan for your exit strategy is absolutely crucial. This will prevent you from making hasty decisions under pressure, which you will regret in hindsight.
How you determine your exit plan will depend on your level of forex experience, what your risk tolerance is, and whether you are looking for a long-term or a short-term trade. There is no need to develop a complex strategy if you are a novice trader; in fact, a simple strategy can be just as effective.
One of the most common methods employed by traders of all levels is the stop-loss order. This is an order placed before the entry point, which automatically triggers an instruction to sell, once a predetermined market price has been achieved.
This avoids the temptation to chase a higher profit and risk it turning into a steep loss, and provides a safety net against serious and damaging losses should the markets experience volatility. Stop-loss orders are flexible, in that they can be moved to a higher or lower position after being placed.
- Track your performance
Use a journal or a spreadsheet to keep track of your daily profits or losses, so you can analyse your performance over a period of time. This will help you to see if your strategies are working, or if they need tweaking or rethinking. Look out for which currency pairs are performing best, and what your most successful time zones are.
Review your records on a regular basis. If your results are disappointing, see if you can identify the reasons for this. If you are on a successful run, pinpoint what you are doing right and build on that. This is a technique that all successful forex traders employ, to help them keep on top of their game.
- Keep up with economic news
Top forex traders know how to read the forex markets, to give them a head start and spot opportunities at exactly the right moment. There is no need to be put off if you don’t have an extensive knowledge of economics; even an understanding of the underlying economic forces that drive the forex markets will be beneficial.
For example, because the US dollar is the most popular and frequently traded currency, any news relating to this will have the most impact on the markets. Look out for data relating to inflation rate changes, interest rate rises, Gross Domestic Product (GDP) data, the Consumer Price Index (CPI), and the unemployment rates.
Another factor to keep an eye on is the balance of trade between nations. In other words, if a certain commodity, such as oil, is in high demand, then countries which are major producers will be likely to have favourable exchange rates at that moment in time.
Most professional traders use the economic calendar to keep track of the latest data releases which influence the forex markets. This is a great habit to get into, whatever your level of experience. All major economies produce their own versions, which can usually be downloaded free of charge.
- Be proactive and flexible
Take a proactive approach and check up on your positions every day. If you have losing positions, always refer to your risk management strategy rather than crossing your fingers and hoping for the best. On the other hand, just because you are on a successful run, it is not always the best strategy to keep the position open, or increase the size.
Sometimes, the markets can experience a period a volatility that few people predicted. In this scenario, be ready to pivot your strategies to protect yourself from damaging losses. While a consistent approach works best in stable conditions, at times you need to move quickly to adapt to the market.
- Develop a niche
Some of the best traders thrive because they have honed their expertise in one specific area, which allows them to keep ahead of the game, and gain a competitive advantage. This makes sense, because it is impossible for any one individual to be an expert in all the diverse factors that move the forex markets!
For example, some traders specialise in scalping, which is the practice of making a series of short-term trades, usually with a few hours or even minutes. Although only small profits are to be made with each trade, the volume of trades placed throughout the day can mean the profits add up to a more substantial amount.
For those who cannot devote themselves full time to forex trading, swing trading may be a more suitable area of proficiency. The trader will typically hold a position for days or even weeks, so they do not require the same level of concentration and vigilance as day or scalp trading.
However, swing traders still keep a careful eye on market conditions, especially if there has been a new political announcement, or turbulence in the general economic situation of the major currencies. It’s all about having an understanding of the big picture, and keeping up to date with the financial press.
- Use technical analysis tools
Experienced forex traders study charts to help them spot the right opportunities. The most commonly used charts are line charts, which allow the trader to see at glance the closing trade price for each currency, and to see the wider pattern of rising and falling prices within each currency.
Bar charts provide more specific information, with a focus on smaller time scales than line charts. They can be useful to identify if it is a good time to sell or buy. The bars are colour coded to make them easier to read, so the viewer can see at a glance the opening price, the closing price, and the highest and lowest price achieved for each currency.
- Have a good work-life balance
Finally, if you find yourself waking up at 2am to check your positions, it might be time to question your work life balance. It is impossible to trade effectively if you are tired and burnt out, so make sure you keep on top of your sleep and exercise routine, and eat healthily.
The forex markets trade more or less 24/4, so it can be easy to get drawn into a vortex. However, stepping back and having regular breaks will make sure you are bringing your best game to the table when you do trade.