6 Ways To Become A Better Trader
As we approach the year’s end, it is an ideal time to reflect on your forex trading performance of the past 12 months, and start planning your approach to 2023. This may be just to refine a strategy that is already working well for you, or to make a completely fresh start. Whatever your objectives, here are some tips to boost your prospects of success.
It’s never been easier to access the foreign exchange markets, with instant forex funding available. However, to make the most of the opportunity, it is important to learn as much as you can about the complexities of forex trading.
One of the most straightforward and effective ways to become a better trader is to be a lifelong forex student. Even if you consider yourself relatively well informed, there’s always more to learn, and it’s important to keep up with the latest changes and developments in the field.
There are so many ways to learn, such as listening to forex podcasts from professional traders, taking online classes, or even reading good old-fashioned books! Following professional traders on social media can be a good way to pick up tips and keep up with the latest developments.
It’s also important to keep up with the latest economic news, so that you are on top of all the latest market trends. Follow online financial news sites, and read more in-depth print news such as the Financial Times at least once a week. It is also good practice to establish contacts with other traders, who can offer you useful inside information.
As you learn more about technical analysis techniques, you will probably find yourself conducting your own market research to better understand the movements of the financial markets. This will mean you are in a much stronger position to make accurate and profitable trading decisions.
Learn to let go of losing trades
A common mistake new forex traders make is to hang on to a losing trade, in the hope that the markets will turn your way again. However, this is an easy way to start making damaging losses, and you could even end up wiping out your account completely. If this has happened to you in the past year, start using stop-loss orders for every trade that you make.
A stop loss is an order to buy or sell a currency pair when the market reaches a specified price. This removes the temptation to make emotion-led trading decisions, which rarely result in a profitable trade. They are a safety net that should always be used as part of your risk management strategy.
If you have a well-defined loss limit, i.e. you have worked out exactly how much loss you can stand on each trade without compromising your personal financial situation too seriously, then mistakes, which happen to even the best traders, will be easier to absorb.
Add more diversity to your trading portfolio
New traders often overlook the power of a diverse trading portfolio as a means to sustaining profitable long-term trades, and mitigating against risk. The theory is simple: it is a case of not putting all your eggs in one basket. Therefore, your trades will be less vulnerable to any unexpected volatility in the market.
There are different ways to diversify your forex portfolio. The most obvious is to start using a bigger mix of currency pairs. New traders usually start off with the safer options of the major currency pairs, such as the US dollar (USD), paired with the Euro (EUR) or the British Pound (GBP) and the Japanese Yen (JPY).
If this applies to you, then you could diversify into more specialised economies, such as the Australian, New Zealand, and Canadian dollars. These are still regarded as major currency pairs from strong and stable economies, but they are commodity-based, as these countries are rich in natural resources, such as coal, timber, minerals, precious metals, oil, and gas.
While the currencies of these countries are less liquid than those with larger or less specialised economies, they offer some good trading opportunities for those who follow the commodity prices carefully. If the larger currencies are going through a period of market turbulence, then the commodity currencies can offer a safe alternative.
Trading minors and exotic currencies can also be well worth the effort, especially if you are already skilled at close market analysis and have a reasonably flexible risk tolerance. It is important to note that minors and exotics are much less liquid than major currency pairs, and often require more capital to trade.
However, they have the advantage of being in a much less crowded and competitive trading arena, which is in general less sensitive to the market conditions which can make trading the majors so intense and time-consuming.
Overall, the more currency pairs you have from different regions, which are influenced by different forces, the stronger your forex trading portfolio will be.
Experiment with different trading strategies
Even if you consider your trading to be backed up by a solid plan, it is still easy to get stuck in a rut and operate on autopilot. It can pay off to make tweaks and take different approaches now and then, even if these do not become a permanent part of your strategy.
For example, if you are in the habit of always making your trades at certain times of day, experiment with different windows if your daily routine allows for it. This is not always possible if you are fitting trading around a full-time job, but you could switch up a few trades from the morning to market closing time at around 6pm.
Know your psychological strengths and weaknesses
Forex traders can sometimes be dismissive about the more abstract sides of trading, such as emotional control and trading psychology. They may even regard themselves as immune to it all, and see investigating techniques such as meditation as a sign of personal weakness.
However, whether you like the idea or not, trading draws on powerful and primal emotions, and not acknowledging this can lead you down a dangerous path. All professional forex traders work on containing their emotions, reining in impulsive behaviour, and honing their mental discipline and concentration.
This helps them to make quick decisions which are based on logic and market knowledge, rather than gut reactions, which will usually be incorrect. Furthermore, they will be aware of how their personality might influence their decision-making process, and learn how to work this to their advantage.
Forex markets are not just moved by facts and figures: sentiment also plays a major part. The two primary emotions which drive trader’s moves are fear and greed, which are hardwired into the human psyche of almost everyone.
Indeed, it would be a dangerous thing to stifle these emotions entirely, as they can be useful, but they need to be well managed. In forex terms, that means understanding the fear of losing, but also fear of missing out on gains. Greed is another basic instinct, which drives us on to gain more, which in forex can soon lead to damaging losses.
The most straightforward way to avoid emotion-led mistakes is to build a solid strategy, and always stick to you plan, no matter what your heart is telling you. This means knowing your risk-reward tolerance, setting stop losses, and closing trades when you hit your profit target.
Some forex traders also practice meditation techniques, to help them learn how to detach themselves from their emotions at will, and look at situations objectively rather than subjectively.
Meditation can also help to develop the discipline to control a wandering mind, and really focus on the present moment. This has obvious benefits in the world of forex trading, where you will need to make quick decisions, and be nimble-minded and mentally sharp for sustained time periods.
Keep a trading journal
If you have traded your way through the past year without keeping consistent and accurate records of all your trading activity, then you are depriving yourself of a vital way of revising and improving your strategy. It might seem like an unnecessary chore when you can view a record of your trades on your broker’s account.
However, there are several benefits to keeping your own separate journal, either on paper or on a digital spreadsheet. It is a method of reviewing your performance in one glance, so that you can easily identify any patterns, whether positive or negative.
Keep a note of which currency pairs are performing best for you, and which time zones are yielding the highest profits, and so on. Also note down the reasons you entered the trade, where your entry point was, and why you closed it when you did (or what your stop loss level was, if more relevant.)
Over time, you will find that your trading journal can help you learn from mistakes, and make more objective trading decisions in the future. If you experience a losing streak, instead of revenge trading (entering a spiral of losing trades to try and offset your losses), sit down and try to identify the causes of your losses from your journal.
By following some of the simple rules above, you will be well on your way to becoming a more successful and profitable forex trader!