Successful Forex traders can make great use of prop funding, taking the initial capital and using it to make a range of different trades to produce profits, which will benefit both them and the prop firm.
However, prop firms will not give money to anyone; traders need to show they are good at what they do and a safe operator to whom they can provide funds.
For an experienced trader, this should be no problem as they will have a track record that shows what they can do, while those learning the trade can use demo accounts to show in simulations what they are capable of and hone their craft.
There are some very specific skills that a trader needs to be able to make a success of Forex trading, which learners using demo accounts can work on, but which require some basic core skills of good judgment, a commitment to a clear strategy and a willingness to make adjustments when needed.
1 – Understanding The Basics
Learning the basic skills is the first requirement of Forex traders. You need to understand how the markets work, what kinds of trades can be made, what kind of situations constitute risks or offer opportunities, as well as how to use modern trading software and respond to the data it provides.
This learning process can be aided by using demo accounts, with these also offering the opportunity for you to demonstrate that you have mastered the basics.
2 – Establishing And Maintaining A Clear Strategy
Having a clear strategy is the next thing you must do. To begin with, you may be looking at a short, medium or long-term approach. A short-term strategy can involve ‘scalping’, in which you make a myriad of very short-term trades, using small fluctuations in value to buy or sell at tiny profits, but doing this on such a scale that they all gradually add up.
A medium-term strategy will aim to hold a position for days to take advantage of a situation, before cashing in ahead of any situation that could change.
This can often be driven by relatively short-term situations, such as the impact of uncertainty on a country’s currency during a close general election campaign, a situation that may change once the votes are counted.
A longer-term strategy may be about holding a position for months or even years based on how you expect two currencies to perform relative to each other over a longer period, linked to assumptions about the effects of economic fortunes and policy.
3 – Understanding The Significance Of Events And Responding Accordingly
Whatever your approach, you need to stay on top of events that can be significant game-changers. The values of currencies can be altered by economic data (especially unexpected statistics that markets had not ‘priced in’), monetary policy decisions by central banks, political developments (particularly unexpected ones), as well as wars and natural disasters.
These events can all pose threats but also create opportunities, so you need to know how to respond swiftly and decisively to ensure you can make the best of situations.
4 – Knowing When To Change Strategy
This brings us to the next essential skill – knowing when to change strategy. This is not about making minor tweaks here and there, which is a crucial part of everyday transactions, but when you might change a strategy completely, either by abandoning it because it is not working so you can avoid a loss, or switching focus to exploit a new opportunity.
5 – Managing Risk
Finally, the biggest issue is about managing risk. All the situations above are dynamic and subject to change, be they economic situations, unexpected political, military, or (in the case of disasters) natural events.
In other cases, you may take a chance on a government changing policy under pressure, a move that famously earned George Soros £1 billion in 1992 by betting against the pound on the assumption that the UK would be unable to sustain its membership of the Exchange Rate Mechanism, which pegged currencies against the German Mark.
There are various ways of managing risk. This may be done, for instance, by having a spread of positions on which some are low-risk and unlikely to incur a loss, creating a safety buffer while you pursue other positions that are riskier but also potentially more rewarding.
Your capacity to know how much risk to take is not just about judgment calls, but also how adept you are at taking steps to protect against losses, for example knowing when to stop a trade by applying devices like a stop-loss exit order.
This combination of skills will take you a long way as a Forex trader, making you a great partner for any prop firm.