6 Ways To Turn Around A Losing Streak In Forex Trading
The forex market is the largest and most liquid financial market in the world, and is full of opportunities to make profitable trades. It’s also one of the most accessible markets, open almost 24/7, and with instant forex funding and high leverage available, even for a small initial investment.
For this reason, it attracts seasoned traders and beginners alike. It can be highly competitive, but it is possible to make good profits with the right approach. That’s not to say that it’s easy, and there are many pitfalls that the unwary and inexperienced trader can fall into.
Sometimes, you might make a run of losses, and start to wonder if it’s worth staying in the game. However, this is a normal phase that most traders go through at some point. Chances are, the professional traders you know considered quitting at some point after hitting a losing streak.
The only difference between them and other people is that they didn’t give up. Instead, they took stock, learnt from their mistakes, and carried on. This is exactly what you can do as well!
The other important thing to realise is that losing money is a normal part of forex trading. It doesn’t mean that you are bad at it. It’s impossible to make 100% profits all the time, and most traders accept a 50% win rate, so long as they are making more than they are losing.
Success in forex trading is about minimising your losses, and maximising your profits. Here are the steps you need to take to set you back on the right path.
Brush up on your knowledge
Live experience on the markets is where you cut your teeth as a trader, but this needs to be backed up with a good background knowledge about how the forex markets work. You should aim to have a good balance of technical analysis skills and fundamental analysis skills, which are integrated into your trading strategy.
Technical analysis involves studying the price movements in the market, to help you predict future trends and understand past ones. This is because price action tends to flow in cycles, which can be used to judge the balance of probabilities for future action. Traders use charts and graphs to help them see data represented in a visual way.
Even if you are not a natural with graphs, it is relatively easy to grasp the concept behind them, without going into an immense amount of fine detail. Start with line charts, which are the simplest form of technical analysis tool.
They plot the difference between the closing price of a currency pair, from the opening of one trading session to the next. Bar charts show the same information, but include more detail about fluctuations within the trading period. At this stage, it is also a good idea to brush up on your understanding of support and resistance levels.
Once you are comfortable with interpreting line and bar charts, there are plenty of more detailed tools and methods to learn about, such as candle stick charts, Bollinger Bands, Fibonacci retracements, Ichimoku charts, Elliot wave theory, harmonic price patterns, and much more.
Fundamental analysis involves studying economic data releases and world geopolitical events to help monitor the direction of price action in the forex markets. Each currency is affected in different ways by the flow of trade between countries, which influences the currency price.
There are some well known economic indicators which affect currency price, such as Gross Domestic Product (GDP), the interest rate, the inflation rate, and the unemployment rate. Keep an eye on the economic data releases which are relevant to the currencies you trade in, and understand how they might influence price action.
Start with a practice account
One of the most common mistakes new forex traders make is to jump straight in with a live account. However, most platforms offer the chance to practice with a demo account, which simulate live trades, but you won’t be using any funds.
Even if you are confident in your strategy and have done your homework on analysis techniques, using a demo account can help you get used to the set-up of the platform, and avoid making basic keying errors on an unfamiliar piece of software. It is also a chance to test your mettle, and see how you perform under pressure.
Start with reasonably small amounts
One of the reasons that people are drawn to forex trading is the access to high amounts of leverage. While this is a huge advantage, and eventually may lead to excellent rewards, it is always best to start small. Most platforms will give you the option of using smaller than standard lot sizes.
The standard lot size in forex trading is 100,000 units of the base currency, but it is usual for brokers to offer mini lots of 10,000 units, or micro lots, which are 1,000 units of the base currency.
In some cases, you may even be able to trade nano lots, which are 100 units. While you will not make huge profits form such small amounts, it will also limit your losses until you are a more confident and experienced trader.
At the beginning, risk no more than 1% of your total funds on each trade. This way, you can build up slowly rather than plunge headlong into unchartered territory.
Know how much you can afford to lose
The foundation stone of your trading strategy should be understanding how much spare capital you have to play with. Always keep on top of your personal finances, and never risk losing money which you need to pay your bills and support yourself and your family in the day-to-day process of living.
This is referred to in forex trading as knowing your ‘risk tolerance.’ Without working this out in advance, you will probably end up losing sleep, and also risk losing a lot more! It is also a good idea to understand how stop-loss orders work, as these can protect you from making dramatic losses.
Make sure you have a trading routine
Even if you are trading part time, or fitting it around your day job, it’s important to have a disciplined approach to your trading. While there are no fixed paths to success, it’s important to remain consistent and patient with your chosen trading strategy.
Successful forex trading is not fuelled by gut instinct and the thrill of the chase; in fact, this is a recipe for disaster! Write down a checklist of the tasks you need to do throughout the day, and tick off each one when you have accomplished it. This will probably involve reviewing your economic calendar for the latest data releases first thing.
Also check the wider news reports for any significant geopolitical events which might affect your trading currencies. These include things such as election announcements, domestic unrest or international conflicts, natural disasters, changes of government, and so on.
You will then need to study the current market conditions to take stock of the overnight trending patterns, using your favoured technical analysis tools. This will help you to identify the best opportunities for trading over the coming hours. The next step is to review your open positions, in light of what you have already learnt.
Only now are you ready to start trading! Never be tempted to skip the previous tasks, no matter how impatient you are to get going with live trading. Which leads us onto the next point…
Learn about trading psychology
It is easy to underestimate the importance of being in the right mindset for trading. While it calls for a sharp mind and quick decisions, this must be balanced with good emotional control. Impulsive moves rarely pay off in the long term, so if you are someone who tends to be headstrong and act on instinct, you need to learn how to keep this in check.
When we are dealing with the prospect of making profits or losing money, two very primal and powerful human emotions come into play: fear and greed. Studies have shown that the fear of losing is more powerful than the pleasure of winning, which can lead us to be subconsciously overcautious when making trading decisions.
This may mean closing positions too early, or hanging on to losing positions for too long, and increasing losses. On the other hand, greed for greater profits can drive us to hang on to a profitable position for too long, and miss the optimum selling point.
So, how do we guard against such emotional biases in forex trading? The first step is to recognise that everyone is prone to them, no matter how cool under pressure we may be. The next step is to learn some techniques to help you view situations in a more detached and objective light.
Some people find that meditation is a good way to help them do this, and practice a routine for 20 minutes at the start of each day. It can help to prepare them for the rigours ahead, improve concentration, resilience, and reduce stress levels.