Forex trading is not at all like playing Poker, Blackjack or any other casino game.
Forex trading is an activity best done by people who are educated about it, who have a plan, and who follow the plan.
If you are relying on any element of luck in your Forex trading, then you will not be a successful trader. While no Forex trader is profitable 100% of the time, traders who are educated about how the market works, who create a Forex trading plan and trade that plan, who do not allow themselves to become emotionally involved in any trade, are the traders who are consistently successful.
The education you received in the last 30 posts will contribute greatly to your success as a Forex trader, providing that you practice what you have learned. In addition, it is important to be psychologically prepared as a Forex trader in order that your emotions do not overrun your intellect and begin making trading decisions for you.
6 Steps to Building a Winning Forex Trading Plan
There are several Forex trading strategies, in addition to Forex education, that will help you succeed as a Forex trader:
- Decide to be a day trader or a position Forex trader.
- Manage your risk – You may or may not be able to quantify how much you could potentially profit in a trade, but you can quantify how much you could potentially lose, and from that decide how much you are willing to risk.
- Risk no more than 5% of the value of your Forex account on any single trade – If you risk more than 5% of the value of your Forex account on any one trade you will be over trading your account, a practice that successful traders do not engage in.
- Once you have identified the risk in a given trade, decide if that amount of potential loss fits within your equity management plans. If it does not, pass on the trade. There will be other trades that do meet your equity management requirements.
- Use proper Risk/Reward Ratio– The amount of money that you could potentially lose on any given forex trade should be proportional to the amount of money that you could potentially win – this is called your risk/reward ratio. That ratio should be, at least, 1:1.5 on every trade you make. For example, if the distance between your entry and your stop loss covers 40 pips, you are risking about $400 on that trade, so you want to make sure that you can set a profit limit order at least 60 pips away from entry such that your potential profit is about $600, 1.5 times your potential loss.
- Learn how to take a loss – You will lose – no trader profits 100% of the time. Know, however, that percentages mean nothing. If you practice sound equity management, set your stop orders and limit orders according to a risk/reward ratio of at least 1:1.5, and only enter trades where potential loss is relatively small, then you will likely profit (make money) overall. For example, consider a Forex trader who wins 30% of the time and loses 70% of the time. If that trader goes for rewards of $2000 on each trade and minimizes his potential losses on each trade to $300, then he will still net $3900 in profit, even though he lost 70% of his trades.The number of wins is 3 out of 10 (30%) * $2000 profit limit for each trade = $6000 gross profit and the number of losses is 7 out of 10 (70%) * $300 stop loss for each trade = $2100 gross loss = $3900 net profit
Following these six steps for having a solid plan for your Forex trading will help you become a Forex winner trader (nobody wants to be a Forex loser trader). These are fundamental concepts, if you ever start losing money as a Forex trader you should re-review this blog post.
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