How to become a successful Forex Trader?

January 17, 2015

What are the traits of a successful forex trader?   According to experts, it is not so much about what the traders do, but what they do not do. Based on statistics. traders are correct more than half of the time, but a lot of them lose more money from their losing positions than they gain from successful trades. Chasing after losses is a common pitfall. To maintain at least a 1:1 risk to rewards ratio, stops and limits must be enforced.

So, how do you maximize profits while minimizing losses?

Let profits run, but cut losses early

Most forex trading books strongly advise this.  When a trade is not going in your favor, get out as soon as possible. Live with the small loss as there will always be an opportunity to try again in the future. Holding your position may only lead to even bigger losses. On the other hand, when you are on the winning side, you may stay on the position a little longer as this may bring you even more profits.

For some, quitting early on losing trades may be difficult to do since it runs counter to human nature to desire to be proven right. In trading, being profitable is more crucial than being proven correct. There is also a tendency to exit early on winning positions for fear of losing whatever profits are already made.

Follow one basic rule

When trading, it is important to follow one basic rule: go for trades that offer bigger rewards than risks. A good risk to reward ratio depends on your type of trading. A lower ratio of 1:1 or 1:2 is ideal for trading strategies with high profitability.

A ratio of 1:2 means targeting a profit that is twice as much as the risk involved.  For example, your target is 80 pips while risking 40 pips. Following this simple rule can lead you to overall profits even if only half your trades make money simply because you earn more on winning trades than the money you lose on bad trades.

Stick to your stops and limits

Once you have set up a trading plan using the right risk-reward ratio, the only thing that you need to do is to stick to your plan. Following your emotions may only lead to bad trading. To avoid staying too long on losing positions and quitting too early on winning trades, have a stop-loss and limit established from the start. Do not touch them once they are set up except when you are sure that the market is going favorably in your direction.

Written by John, a Forex analyst from MTrading India