While everyone who trades currency wants to achieve a viable profit, various studies have shown that approximately 70% of forex investors record losses over time.
Although this highlights the difficulty associated with mastering forex trades, it also shows that an estimated 30% of currency traders bank a profit and maintain a successful career in investment.
There are no guarantees, of course, while you’ll definitely have to overcome the odds to become a successful forex trader. Fortunately, there are steps that you can take to create a successful forex trading plan, with a view to managing risk and developing the right strategy for you.
1. Understand Both the Market and Your Risk Profile
Knowledge represents power in the forex market, as you’ll need to develop a keen understanding of currency trading and the underlying rules that govern change within the space.
Make no mistake; this can translate into a keen sense of determinism over time, enabling you to make informed and analytical decisions rather than being led by emotive reactions.
In addition to learning the market’s fundamentals, there are a couple of other factors to keep in mind as a knowledge-hungry beginner.
Firstly, you’ll need to manage your expectations as a new trader, as you look to focus on the precise amount of capital that you can afford to lose and avoid the temptation to recklessly chase profits (keeping in mind that forex is a highly leveraged product which can trigger disproportionate losses as well as gains).
Secondly, you’ll need to define your innate risk profile as an investor, so that you can identify the most suitable trading strategy and make the most of the trading capital that you have at your disposal.
2. Bridge the Gap Between Theoretical Knowledge and Practical Experience
While building theoretical knowledge is central to any successful forex trading strategy, it means little unless you’re able to apply this practice in the corporal marketplace.
So, it’s crucial that you bridge the occasionally cavernous gap between theory and practice in the forex market, with the utilisation of a so-called “demo account” , one of the best methods of achieving this objective.
Most reputable online brokerages offer demo accounts through their platforms, which can typically be used for a period of between three and six months. In simple terms, this type of account offers you access to a simulated, real-time marketplace, in which you can experiment with different strategies and hone your skills without risking your hard-earned cash.
Most importantly, you can use a demo account to experiment with different amounts of leverage.
Even reputable brokers can offer leverage (which refers to the process of taking on debt in order to control a disproportionately large trading position) of up to 100:1, but you’ll need to determine a viable amount in line with your risk appetite, the nature of your trades and the capital that you can afford to lose through a single order.
3. Remember the Importance of Risk Management
Last, but not least, we come to risk management, which can play a pivotal role in curbing losses and minimising your market exposure at any given time.
In this respect, utilising sound risk management strategies also enable you to optimise your leverage, creating a favourable balance between risk and reward over time.
Once again, online trading platforms offer access to a broad range of risk management tools.
Take stop losses, for example, which can be deployed to automatically close positions once they’ve incurred a predetermined level of loss.
This is particularly important when automating trades or engaging in strategies such as scalping, where you’re required to execute a high volume of orders during a 24-hour period.