7 Tips for Successful Forex Trading

Takeaway: None of these tips are groundbreaking, but traders need to keep reminding themselves of them in order to stay on track.

Currency trading is a competitive business that puts you up against institutions, central banks and other traders. In order to succeed in forex, you need to be organized, disciplined and alert to the market. In this article we’ll look at some tips to help you do just that.

1. Make a Plan, Trade the Plan

You can be a successful trader without a plan – at least for a short period of time. In the long-term, however, a trading plan is essential for consistent success. Having written guidelines for how to approach trades, including your entry point, take-profit, stop-loss and position size, greatly simplifies the mechanics of a trade. This, in turn, frees up some mental resources so you can focus on finding trading opportunities rather than stressing out about what to do with open trades. (Do you have a trading plan or a trading strategy? Find out the difference. Check out What is the Difference Between a Forex Trading Plan and a Trading Strategy?)

2. Choose A Few Currency Pairs

Each currency and each currency pair is moved by national and global factors, some of which are common across the board and some of which are unique to that currency or currency pair. Unless a you are planning to go completely technical in your trading and become a scalper, you will need to be familiar with the factors that move the currency pairs you trade. This requires a certain amount of dedicated study, so it is best to keep your focus narrow rather than trying to trade currency pairs with only a passing knowledge of what moves them.

3. Create a Calendar

Once you’ve selected your currency pairs, you can quickly assemble a calendar of the regularly scheduled events that matter. This includes the economic releases, any key announcements, the meetings for policy decisions, global summits that include the nations and so on. You may also want to include things like national holidays, as these often set the condition for low liquidity days that may affect your trading.

4. Cast a Wide Information Net

Forex doesn’t exist in a bubble. Very often, the price action in a currency pair can be traced to a news event or a situation in another market. The Eurozone crisis from 2010-2011 was an excellent example of this. As the appetite for sovereign debt from certain Eurozone nations dried up, the euro took a direct hit. If a trader was watching swap rates or even just following the headlines, he would have had plenty of time to follow the euro’s decline against other currencies like the yen and USD. Being aware of world events can help a trader move with - or slightly ahead of - the market reaction.

5. Anticipate and Evaluate

With an accurate calendar and a steady stream of potentially market moving news at your fingertips, it makes sense to try to anticipate the market – within reason. Although fighting the trend is a sure way to fail as a trader, anticipating events and creating alternate strategies for different outcomes is the best way for a trader to profit while others are merely reacting. This type of trading should always be kept within defined limits (ideally outlined in the trading plan) and evaluated after every attempt to solidify any useful lessons.

6. Don’t Skimp on Technical Analysis

Even if you are not a technical trader, you need to be aware of the technical signals and trends in the time frames you are trading. This is simply due to the fact that there are so many technical traders, institutional and individual, out there. Just as these traders must be aware of economic and news events, less technical traders should understand what the “technical news” is on a given position. What are the recent highs and lows in the timeframe you hope to trade (monthly, weekly, daily)? What is the primary trend? Where are the key support and resistance levels? Following the key technical levels will deepen your understanding of the trade.

7. Always Protect Your Profits and Limit Your Losses

This phrase should be tattooed on the back of trader’s hands so they see it whenever they enter a trade. Your goal as a forex trader is not to get rich on one super trade. It is to make money regularly and lose money rarely, adding up to more profit over time. Take profits according to your plan and admit losses while they are still small. If you allow emotions to come into your trading, your trading days (at least the profitable ones) will be numbered.

The Takeaway

None of these are groundbreaking tips. In fact, most traders have heard them hundreds of times and will hear them many more times yet. That said, it is easy to forget these tips during slumps or in the heat of a volatile market or just with passage of time. Frequently revisiting your plan and reminding yourself of what it takes to be successful is perhaps the best tip any trader can receive. (Find out what you shouldn't be doing in Top 10 Mistakes That First Time Forex Traders Make.)