It is very important to learn the fundamental and technical approaches to trading in the forex market. However, this knowledge is not enough. In the past, we have seen many good traders fail because of simple mistakes. A good example is Bill Ackman, the prominent Wall Street investor, who lost more than $4 billion in 2017. While his investment in Valeant Pharmaceuticals was profitable initially, he continued to add into his position when the stock continued to fall. You can avoid such an outcome by planning your trades carefully.
How to Plan Your Trade
You should spend the early days of your trading career coming up with a trading strategy. We recommend that you do this using a demo account that is provided by your broker.
Fortunately, there are many trading strategies you can use in forex. If you are very impatient, you can use the scalping strategy. This is a strategy where you open and close your positions within a few minutes. You can also be a swing trader and leave your trades open for a few days. You can also be a long-term trader, where you open a trade and leave it open for a few weeks or months.
You can also use the arbitrage strategy or pairs trading strategy. This is a strategy where you open two trades of correlated or uncorrelated currency pairs. The goal is to make a profit from one trade and a loss from the other trade. Your profit will be this spread between the loss and profit.
Timing is another thing you need to know when planning your trades. The forex market is usually open 24 hours every day, five days a week. The Asian session is known for being calm while much action happens during the European and American sessions. You should plan on the best session that suits your trading strategy.
A Trading Journal
A trading journal is an essential document that can help you be an organized trader. You can write the journal on a book or in a digital platform like Google Keep, Evernote, or Google Docs. In the journal, you should write down the trades that you have entered, the price you entered at, your target price, and the reason why you initiated the trade.
There are several benefits of having a good trading journal. First, it helps you manage your expectations when you trade. Second, a journal helps you to be an organized trader. Third, it helps you to avoid closing premature trades.
Leverage and Trade Size
Leverage is an important concept in forex trading. It allows you to trade with more money than you have. For example, if you have a $1,000 account and are using a 20:1 leverage, it means that you can open a trade worth $20,000. When used well, leverage can be a good thing. It can help you make more money.
However, leverage can also be a dangerous thing because you are using borrowed money to trade. As a result, you will lose more money if the trade goes against you. In fact, because of leverage, it is possible to lose more money than you have in your account. Therefore, we recommend that you use leverage sparingly.
Leverage goes hand in hand with the size of the trade. In general, a bigger lot size or volume will lead to a bigger profit if the trade goes your way. However, you will make a bigger loss if you have used a bigger lot size. A good example is to look at the stock market. If the stock of company A is trading at $10, it means that a person who owns 1,000 shares will lose more money than one who owns 100 shares if the stock drops.
All the points we have looked above are essential before you open a trade. There are other things you can do to manage your positions.
Using a Stop Loss
A stop loss is a tool that is found in MT4 and other trading platforms. A stop-loss helps you plan your trade well. It stops your trade automatically if a preset level is reached. For example, if you have $1,000 in your account, you can plan to risk a maximum of $20 per trade. This is 2% of the entire account. You can set the stop loss to stop your trade when the $20 loss is reached.
The benefit of having a stop loss is that it helps you manage risk. It also gives you peace of mind when you are not looking directly at your trades.
There are several ways to add a stop loss on your trade. First, you can add the stop loss directly when you are initiating a trade. A good example of this is shown below.
You can also add a stop loss by first opening a trade and clicking and dragging the trade line.
Trailing Stop Loss
A stop loss is a great way of managing your trade. However, it also has its risks. For example, assume that you have opened a buy trade on the EUR/USD pair that is trading at 1.1200. Your target price is 1.1250. You also put a stop loss at 1.1150.
In some cases, the trade can move your way and fail to reach your target price. It can reach 1.1245 and then fall to 1.1145. If this happens, your profit will be wiped away.
A better option is to use a trailing stop loss. This is a stop loss that moves with the chart. In the example above, the trailing stop loss will ensure that you get the initial profit. You can add a trailing stop by right-clicking on the initial stop loss as shown below.
Having technical and fundamental analysis skills is not enough. The secret to understanding these skills and then knowing how to manage your money. Having a trading journal, good leverage, having a stop loss, take profit, and a trailing stop loss will help you become a successful trader.