Forex trading is an exciting and potentially lucrative world. However, if you jump straight in with nothing but enthusiasm, you may soon become discouraged. To avoid this, the key is to set out some manageable goals before you begin. This will help you to see the bigger picture, and handle any blips along the way.

You may think, well my goal is to make as much money as possible! While ultimately of course, this is why anyone engages with forex trading, you will need to take a strategic approach to give yourself a realistic chance of becoming successful. Simply chasing the dollars will lead to sporadic results at best.

Planning is key

Think of the well-known SMART acronym beloved by line managers up and down the country: it stands for Specific, Measurable, Achievable, Relevant, and Time-Bound.  This framework helps you to pin down exactly what you want to accomplish and why, how you will keep track of your progress, and to set out a timescale.

In short, your goals should be a reality-check that will set you on a successful path.

Avoid setting numerical targets

Novice traders often make the mistake of telling themselves that they must make a certain percentage each week or year. However, experienced traders avoid setting such inflexible goals, as they know it might push them into taking damaging risks. The key is to understand when the opportunity to make a good trade is there, rather than press on regardless.

Instead, focus on defining your risk parameters, decide which markets you will trade, determine your position size, and have a solid plan for your entry points and exit points. Keep up with current affairs, as the foreign exchange markets are strongly influenced by wider geopolitical events, and the level of demand for certain commodities.  

Once you have your strategy in place, avoid the temptation to deviate from it, or make major adjustments as you go along. Having a consistent approach, and not being too swayed by failure or success, is the core philosophy of any successful trader.

Start small

Unless you already have a background in financial dealings, you are unlikely to be able to make a living out of forex trading straight away. The good news is, it is perfectly possible to fit amateur trading in around your day job. In fact, this is how the majority of forex traders operate in 2022!

By being patient and learning the skills of forex trading, many people find that they can handsomely top up their monthly salary. For some, this will eventually lead to a full-time career as a forex trader, but jumping in with both feet is best avoided. Small steps, risking only small amounts per trade at first, is the wisest strategy.

Remember, because the forex markets operate pretty much 24/7, and peak times are between 8am and 9am, trading can be fitted in around another job. Be disciplined in your approach and commit yourself to trading on a regular basis, rather than dipping in and out. You will soon build up your experience and confidence over time.

Work out your risk tolerance

If you do nothing else before you start trading, you MUST determine your risk tolerance! This means deciding what the maximum amount of money is that you are willing and able to lose on each trade. Be honest and realistic: you don’t want to end up compromising your ability to pay for life’s essentials, or end up getting into debt.

Work out what your disposable income is: the amount of cash you have left over each month after paying the bills, mortgage, and all your other regular outgoings. Ask yourself how much of this surplus income you could comfortably afford to lose.

A small amount of capital is no barrier to entry, as many brokers offer instant forex funding with high leverage. This means that you can buy currency lots for a fraction of the represented value. This is why the potential for profit-making is high, but it comes with risk. You should trade with only a 1% or 2% margin at first, to mitigate against loss.

Remember that even experienced forex traders make losses sometimes, and it will happen at some stage in the game. Accepting losses without seeing them as evidence of irrevocable failure is all part and parcel of becoming a successful trader! The trick is to operate within well-defined parameters, so your risk is always managed.

Get to grips with market analysis

High-achieving forex traders learn to read the markets, as this helps them to see when good opportunities are present. As a beginner, it is simplest to stick with the major forex pairs, such as the US dollar and the Euro (EUR) or the British pound (GBP).

Other pairs that are most frequently traded include the USD/JPY (Japanese Yen), USD/CHF (Swiss Franc), USD/CAD (Canadian Dollar), and USD/AUD (Australian Dollar).  Avoid currencies from emerging markets until you have more experience, as they are more volatile and carry a greater level of risk. 

Market analysis can become quite detailed and complex, but you do not need a degree in economics to get to grips with the basics. If you are a complete newbie, at least make sure that you understand the major factors that influence exchange rates.

Differentials in inflation rates are a strong indicator in currency values. Put simply, a lower inflation rate means a rising currency value, because the country can afford to buy more commodities for less than a country with a higher inflation rate. There is a strong correlation between high inflation and the depreciation of a currency.

Strongly linked to inflation are interest rates. If interest rates, which in the UK are set by the Bank of England, are high, then the foreign exchange rate tends to rise, as overseas investment looks more attractive. However, the advantages may be offset by a high rate of inflation.

If a country has heavy public debts, then it is more susceptible to high inflation, and less attractive to foreign investment. A country’s debt rating can be tracked by following a credit rating index provider, such as Moody’s or Standard and Poor’s.

Another factor to keep an eye on is the current level of demand for a country’s products and services. This is sometimes expressed as the terms of trade. If the value of a country’s exports is greater than the price of its imports, then the terms of trade, and therefore the value of the currency, will be favourable.

There are many other variables which can influence exchange rates, and it is nearly impossible to track all of them at any one time as an individual trader. However, being aware of the major ones will help you to make good trading decisions. Even just picking one, such as the relative interest rate between two countries, is enough to base your strategy on.

Keep track of your progress

To check how well your strategy is working, it is best to review your progress after a certain period of time. This will allow you to fine tune your approach, and keep ahead of the fast evolving world of forex trading.

Keep a journal of all your trades, which will allow you to build up a picture of how often you trade, how successful each trade was, which currency pairs perform best for you, and what kind of time frames you are operating in. You can either track your progress in a hand-written log, or use an Excel spreadsheet.

Spend some time at the end of the month reviewing your records, and try and identify what your best results have in common. If you have had a string of unsuccessful trades, can you pinpoint what the reason is for this? This will strengthen your understanding of trading, and put you in a better position going forward.

Know where your limits lie

In forex trading, less can be more. If you continue to increase your positions for the sake of chasing higher returns, you are likely to make decisions that are influenced by your emotions, rather than based on fact and logic. If favourable conditions are not present, learn to curb your impulse to carry on. The wheel will soon turn.

If you have an impatient and impulsive personality, it is strongly advisable to learn about the psychology of forex trading before you begin. This is because it is easy to get caught up in the natural human greed for profit, and let your heart rule your head. This does not lead to good results. Of course, being over-cautious is a barrier to progress as well.

This all ties in with having a sound trading strategy and sticking to it, so that you are not tempted to be over or under-confident. Knowing when to enter a trade is important, but perhaps more important is knowing when to exit a trade. It can be tempting to hang on as long as possible, but this is a high-risk strategy in the fast-moving forex markets.

Do your research into stop-loss techniques, and you will be well on your way to being a successful forex trader!