How to Prepare for Forex Trading: 7 Habits that Will Help You
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Trading on the global forex market is becoming increasingly popular with many people now. With over $5 trillion worth of trades made each day, the possibility of seeing a handsome return on any money invested is tempting. The great news for anyone thinking of becoming an FX trader is that you can profit overall with the right mentality. Along with online brokers and mobile trading giving easy global access to the currency market, this makes trading in currency very attractive.
However, it is not wise to just jump right in and start opening trades. In fact, this is the worst thing you could do as a new trader!
First, you need to learn to trade forex - a massive part of this is making sure you develop good forex trading habits from the off. Please do not think this is not important - figures show that 90% of new FX traders fail when they begin on their journey. It is essential to get good habits in place from the start to be in the 10% of traders who succeed.
But what habits are the best for getting ready to trade forex?
How to Prepare for Forex Trading: 7 Habits that Will Help You
Understanding that knowledge is power
When thinking of how to prepare for forex trading, taking on as much knowledge as you can is vital. This is in fact true for any financial investment or venture - you would not buy shares in a company for example with no idea how the stock market works. Even the best and most experienced forex traders will always be taking in new information and market knowledge to help them succeed in the long-term. Without doing this, you will only be setting yourself up for failure.
But what sort of things should you be finding out about in terms of how to learn to trade forex?
Naturally, you should get a good grasp of all the different terminology involved from stop losses to buy orders, sell orders, margin calls and everything in between. You should also find out how to read the currency charts, what the various chart indicators do and how the different timeframes you can look at affects your trading decisions. Every FX trader needs a strategy so you should also prepare by looking at the various strategies around and choose one that you can use effectively.
The great thing for any new FX traders is that there are more places than ever now to get the information you need. Whether you pick up a few books from Amazon to read, sign up for a reputable online trading course to learn what you need or pick up knowledge from the internet, it is all out there waiting for you.
Create a trading plan
Preparing to trade forex is all about planning for long-term success. The only way this will happen is by creating an actual trading plan to follow. Without this in place, you will simply be putting random trades on and become more like a gambler than a real FX trader.
A trading plan is simply a written set of rules and guidelines that you follow every time you sit down to trade currency. It should clearly set out the strategy you will follow, how to spot trading opportunities on the charts, which currency pairs to focus on, how much you will risk on each trade and your profit/loss targets. Once you have your plan written out, make sure you stick to it! Doing this will ensure you trade without emotion to give you a real trading edge.
One other benefit of having a written plan is that you can more easily see if your strategy is working overall or if anything needs tweaking. While you should stick to your plan and give it time to play out, if it is consistently losing you money in the long term then you need to review it.
We have already mentioned risk above in terms of including it in your trading plan. It is a very important concept to get your head around when preparing to trade forex. All financial investments come with risk attached - that is, you could lose the money you have invested. The key to being able to develop good forex trading habits is to manage the risk that comes along effectively.
Managing risk in trading not only makes it more enjoyable and less stressful but also will protect your money to continue trading. But how exactly do you go about it?
The easiest way to approach this for new traders is only to risk 1% or 2% of your entire trading account on any one trade. Let's say for example that you have a $10,000 trading budget overall - if you went ultra-safe, you would risk only 1% on each trade which is $100.
Another useful tip is to manage the size of your trading positions carefully. New traders will commonly open trades that are too big in size or too small. This sees them either risk major losses or not extract enough profit from winning trades. A good formula to calculate what your position size should be for each trade is:
Pips risked x Pip value x Number of lots traded = Amount of money at risk
By using the above formula, you can calculate how much money you are risking on each trade to make sure that fits in with your overall risk management strategy.
Watching the news is also a good idea when trying to mitigate risk. The FX market will often react in a strong way after big stories or press releases. Very common examples are figures released from central banks like The Fed in America or reports on employment rates. For new traders preparing to enter FX trading, it is wise to get into the habit of knowing when big announcements are scheduled and adjusting your market exposure as a result.
Managing your risk effectively like this will protect your account and save you from the mental effects of taking big losses onboard. It also means that you do not wipe out your whole trading account in just a few trades and have to cease trading or find more funds.
Understanding trading psychology
With all the valuable focus on the technical and academic side of trading, the mental aspects can be forgotten about. However, this is a mistake and something to be avoided when developing habits for good forex trading. When you learn to trade forex, you must take the time to understand the psychology of investing in currency.
The key to this is going into trading with a certain mindset. Becoming a successful FX trader requires hard work and is something to be done long-term with commitment. If you begin trading in currency with the aim of getting rich quick or making thousands in your first week, you will only be disappointed. It is much better to get into the mindset of taking small steps to become a better trader slowly. Over time, this will see you gaining the experience needed to make larger gains.
It is often said that emotion is the enemy of trading FX and this is true. The problem is that, as a human, it is hard to get away from your emotions when investing your own money. To master the psychology of trading though, it is important to control your emotions.
Doing this will not only avoid you making rash, costly trading calls but also make trading less stressful overall. In a nutshell, you should try not to get too down when losing or too high when winning. Try instead to simply stick to your trading plan and keep your emotions in check.
Consistency is key
Think of a successful footballer or a world-famous businessman - what do they have in common?
One of the main characteristics that you will find is a consistent approach to what they do. Day in, day out, they work hard in their chosen field to achieve stable results. The magic is not what happens at the end but the consistent, hard work that they do leading up to it.
This is a great habit to develop when trading FX. Make sure that you are consistent in what you do and how you approach trading. Get into a routine of when you will trade each day and always follow your trading plan. Many pro traders will set up a home office somewhere quiet where they can focus and think in peace. Once you have your trading routine then do it every day and do not give up.
It is only through a consistent approach like this that you will profit in the long-term. Trading one day and then leaving it a few weeks before doing so again will not see you achieve your goals. Neither will changing your strategy, routine or trading plan every week. Give yourself the time and opportunity to win by being consistent each time you trade.
This does not mean you should feel the need to open or close trades each day though! Being consistent simply means following your trading routine and plan each day to gain the experience and market knowledge to succeed. If there are no new trades to open and any current ones are doing fine, then you can simply walk away when done.
Understanding that loses will happen
Have you ever met an FX trader that has never lost a trade? The simple answer is 'No' - because they do not exist!
Every forex trader has and will continue to lose trades - from new ones like yourself to the most experienced and successful pro's. Losses are part of the process when trading - learning to accept this and understand it will happen is the key.
Why is this so essential? In simple terms, it will help you avoid getting too down when a losing trade occurs. This is not only good for your own mental health but will also give you the belief to carry on trading. Many FX traders who might have gone on to greater things have left the sector too early after a few bad trades. Do not be one of them!
Understanding that losses will happen also helps to keep your emotions in check when placing future trades. It is a great way to avoid rushing back into the market and opening up another trade, based purely on the desire to make your money back. Keeping losses in perspective will also stop you chopping and changing trading strategies every five minutes which is a recipe for disaster.
One key thing to bear in mind is that losses may come along in bunches. You may get a run of losses for a period, rather than one at a time spaced out. Keep in mind that this happens to everyone and you simply need to stick to your plan and ride them out until you get back to winning ways.
See also: Is Forex Trading Worth the Risk?
Good things take time
The modern world we live in is a fast-moving place. The problem for new FX traders is that they can also expect to see positive results from their trading just as quickly. This is a mistake though as FX trading is a marathon, not a sprint. Gaining the knowledge and experience needed to build up your profits takes time. It is important to not be too eager to rush your journey as a trader in a bid to achieve your end goals.
The problem with rushing ahead is that you will then make mistakes. These could be very costly and end your FX trading journey before it has even begun. From not picking up the right basic knowledge to opening trades up without following your plan, making hasty decisions and getting too eager will come back to bite you in the long-term.
If you need a handy general guide on how to prepare for forex trading, then the above should help. While it will not make you a successful FX trader overnight or guarantee profits, the points made will assist you greatly along the way.
For more tips on how you can learn to trade forex, check out the Trading Education website. We have a huge archive of informative FX articles to help you start off on the right foot.