There are two type of investors in the forex market. Those who learn all there is to learn about the market, and those who approach forex trading as if it was a gamble. They do not take their time to learn. To them, investing in forex is not so much unlike spinning the roulette. They click blindly on the charts and wait for Lady Luck to bless them with profits.
Wrong approach. Traders who do not learn end up making massive losses.
If you want to separate yourself from this sad group of ‘trader’s, you should take your time to learn how the forex market operates.
Here are 12 most important things that you should take time to learn:
1. Develop Your Trading Plan
By failing to plan, you are planning to fail- Benjamin Franklin
I’ll illustrate the importance of having a trading plan with situations that I encounter almost on a daily basis.
When new traders discover an uptrend in the market, they usually ask something like, “ The EUR/USD is on an uptrend, where should I enter the market?” My reply is usually, “What amount of risk/reward ratio are you willing to place on a trade?”
This reply catches them by surprise. Most forex traders in Kenya concentrate so much on being right and forget that they could be wrong. The market could go against you or it could hit a top and turn right back.
Without a trading plan, it means that you do not know what to do not only if a trade goes against you, but also when a trade goes your way. Big profits on paper could turn into massive loses when you do not have a trading plan.
Here are a few important points that I use when developing a trading plan. Feel free to borrow from the list when you are developing your own trading plan:
- I always make sure that I know where and how to enter the market.
- I always know what amount of money I can put to risk on any particular trade
- I know when to leave if the market does not go my way
- I know how much profit I am expecting from every trade if I am right
- I always protect my profits by placing a trailing stop loss on my orders
These are just but a few of the things that go into developing a trading plan.
2. Have an Aggressive Money Management Strategy
Money management is one of the most important aspects of online forex trading. It is the one thing that will make or break your career as a forex trader. Unfortunately, a lot of traders enter into trades without taking money management into consideration.
If you are serious about trading, you have to learn how to manage your money.
Good money management starts way before you open a live trading account. It should start even before you are trading on a demo account. Good money management should start when you decide that you want to invest in online forex trading.
How, you ask?
Suppose that you had $20,000 that you have decided is a good starting capital for your online forex portfolio, would you put all the money on your forex trading account? You’d be putting yourself at an aggravated risk by doing so. What happens next if you lose all the money in the account for whichever reason? What if your forex broker goes broke bankrupt, closes the company and never pays back your money?
Or what happens if you accidentally take a 20 lots position and forget to set a stop loss?
If $20,000 is all you have to start trading, you should consider opening an account with a maximum of $1000. You can always inject more money into the account as you see necessary or when you have gained substantial trading experience.
The second most important factor to consider when managing your money is leverage. While it is possible to get accounts with leverage as high as 1:500, a huge leverage is a double-edge sword and usually a reserve of seasoned and aggressive forex traders in Kenya.
As a general rule of thumb, you should never risk more than 2% of your account in any one single trade.
Learning the art and science of money management will determine how you prosper in forex.
3. Make use of stop loss orders
With so much activity going in the forex market and so many a facets of setting up a trade, it is sometimes possible to forget the small things like setting protective stop loss orders on your trades. Apart from mitigating your losses, a stop loss order also lifts the burden of monitoring your trades from you. With proper stop loss orders, you can set up your trades and move on to other things, leaving your trade to play.
What is a stop loss order?
Trading online forex with your real hard earned cash is a serious business, and it should be taken seriously. As such, you should take time to familiarize yourself with the different trade management tools that you have at your disposal.
A stop loss order is an order that you place on your active trades to prevent further losses. The stop loss closes your position in case the market moves against you and reaches your specified level of acceptable loss.
As an example, if you decide to go long on the USD/JPY at 109.58, you could set a stop loss at 106.58. If the market goes against you and reaches this level, your trade would automatically be closed, preventing further losses.
Most importantly, a stop loss order eliminates one of the hugest barriers to trading: emotions. Many traders tend to fall in love with their trades, believing that the trades will turn around. They hold on losing positions for far too long, and pay dearly for it.
To become a successful forex trader, you have to learn not only how to place stop loss orders on your open positions, but also where to place the stop loss orders. To tight of a stop loss means that your stop loss will be hit by the slightest drawdowns or noise in the market, while spaced out stop loss orders could lead to insufferable losses on your account. The art of the stop loss is one of the main lessons we teach traders during our paid training sessions.
4. Close your profit-making trades at the right time
Closely related to the art of putting stop losses on your trades is the art of taking your profits at the right time. One of the biggest blunders among new forex traders is that they take tiny profits too soon but allow their losing trades run.
When is the right time to take your profits?
The right time to take your profits will be dictated by your trading plan. Before you enter your trade, you should have a predetermined entry and exit points. This reduces the impact of emotions on your trades.
Your trading style also determines when you should take your profits. For scalpers, taking profits as soon as possible is an excellent strategy, but if you are a swing trader, you might want to let your trades run for longer.
5. Exercise Proper Trading Discipline
A lot of forex traders in Kenya end up burning their accounts not because they were not trained properly in the forex course, but because they lack the proper trading discipline. It is hard to become a successful forex trader unless you learn how to be disciplined, how to stick you your trading plan and how to substract emotions from trading.
One of the best exercises to help you develop stellar discipline is to watch the markets the whole day without taking a trade, even when you have an excellent entry set up. Repeat this several times every month and you should be on your way to becoming the next successful forex trader in Kenya.