The Forex market is enormous. With $6.6 trillion traded on the currency exchange market worldwide every day, you'd think it would be easy to grab a piece of those profits, wouldn't you?
With a 95% failure rate for new Forex traders, are the odds stacked against you? How do you become one of the elusive 5% of retail traders who consistently make a profit from Forex every day?
The majority of new traders approach Forex with a gambling mindset. They win or lose by a throw of the dice. They figure they have a 50% chance of being right, and they approach their trading with a cavalier attitude and little to no education.
So, let's tackle the reasons for the appalling failure rate. Why are traders burning out from trading Forex, losing their accounts and failing to make a profit? Is Forex so challenging?
Why are 95% of Forex Traders Failing?
To start trading like a professional Forex trader, you need to know what you are doing well and what habits prevent your progress.
95% of traders are failing because they don't know what they are doing wrong, and they have little knowledge of how to do it right. They flounder on, expecting their luck to change. What they fail to understand is that Forex is not about luck. It's a learned skill, an art if you like.
All new traders must do their apprenticeship and learn to trade like a professional Forex trader, which has nothing to do with luck.
Firstly, professional traders have been where you are right now. It's unlikely they opened a broker account, started placing trades and winning straight out of the gate.
Talk to any long-standing, consistently profitable trader, and they will tell you about all the mistakes they made as a rookie Forex trader. They may have busted several trading accounts in their past and wondered if they would ever make it as a Forex trader.
Forex traders making consistent profit from the market have withstood the trials and tribulations of Forex. They have committed to learning from their mistakes.
How Do Successful Forex Traders Make Consistent Profits?
The short answer is they do what most traders don't do. We'll detail the long answer right now because we are sure you want to know, right?
Successful Forex traders have a plan. You must prepare. Without a plan, the Forex market will suck you in and spit you out so fast you won't know what hit you. In this article, we will outline the steps needed to turn you into a profitable Forex trader.
Prepare Before You Begin Trading Forex
There's an old saying relevant to succeeding with Forex, Prepare to plan and plan to fail.
Put aside all thoughts of gambling. We understand the temptation because the Forex market is highly leveraged. You can leverage your account as much as 50 to 1, though most brokers now cap at 30 to 1, which means you are playing with money you don't have, and it can feel like buying a lottery ticket. But, in truth, the odds are heavily against you.
Learn Forex from an Expert
Committing to a Forex education may be the best move you can take. You don't yet know what you don't know. Trading Forex without education is like walking blindfolded across a narrow plank with a pool of sharks swimming underneath. You will lose.
Buy a Forex course and read as many books as possible on Forex. You cannot learn enough in the beginning. Take your time to learn and absorb as a way of preparing you for long-term Forex success. The better equipped you are at steering your way around a Forex chart, the more chance you will make profits daily from trading Forex.
When you have gained sufficient knowledge, the next step is to open a demo account to practice.
Open a Demo Account
Find a regulated broker and download their trading platform software. Set your desired currency for trading, keeping it the same as for your intended live Forex account.
Choose the lowest leverage and the smallest account balance. This scenario prepares you for the realities of live Forex trading. Having a demo account with a massive capital trading bank fails to shape you as a trader and does not teach you to develop a trading mindset of patience and discipline.
Get used to the nuts and bolts of the demo trading platform. Learn how to place an order, set profit and loss areas for your trade and decide which currency pairs you want to trade.
Explore the timeframes. You can learn to scalp the market on short timeframes like the one minute, five minute or fifteen-minute. It can be challenging trading lower time frames as the price moves so fast. But, with practice, this timeframe may secure your Forex profits.
Or you may prefer the mid timeframes for day trading, like the thirty-minute or one-hour charts. Ultimately, if you are time-strapped or prefer to wait for more significant moves in the market, you may trade the four-hour, daily or weekly charts. If you catch a shifting trend at the higher timeframes, you can ride the profit waves for considerable periods.
Diversify and Limit Your Risks
Diversifying your trades is a great way to minimise your risks. It's never a good idea to put a hefty amount of money on a single trade. It's far better to do the following:
- Spread your risk across different markets – Look for low correlation between currency pairs. For instance, don't take trades where one of the pair is the same currency, i.e. trading GBPUSD and GPBJPY, because if there were unexpected news from the UK, both of these pairs would react in the same way and you have double the risk.
- Set a plan to take profits – when your trade is in profit, and the price action is gaining momentum, the first step is to move your stop loss to breakeven. Or, to maximise profits, set up a trailing stop loss. Doing this means that if the price comes back, you still exit the trade with a profit and can then reassess a potential entry point for another trade.
A common novice mistake is to focus on the winning side of the trade. But all professional Forex traders will tell you to do the opposite. Be clear on how much you could lose and take the necessary steps to limit your losses.
In the end, your success will not be dependent on your win. It will be subject to how well you limit your losses.
Practice Patience and Discipline
Forex is likely to be one of the most challenging things you ever do.
Forex traders can get frustrated when a trade doesn't immediately move in the right direction. Once a trade goes into profit, sometimes novice traders take the early gains, leaving the market with a sigh of relief. Then they watch as the price moves to hit their original target. Leaving profit on the table is a classic novice mistake by Forex traders.
Accept that it may be rare for the price to do as you expect. You may have identified a support or resistance zone, marked it up on your chart and waited for the price to reach it. But what happens then?
Sometimes price bounces off support or resistance. But, more often, it moves away then comes back to retest the zone. Or, the price may crash through support or resistance. At this point, novice traders jump into a trade believing that the price has broken through the price barrier.
Let's say we have an area of support. The price has come down and broken through by fifty pips. It looks like there is momentum. The price even goes back to the zone for a retest. Now, the novice trader jumps into a short trade.
This Forex price action can be a trap.
Your trade is now open and starts moving down. The price doesn't go as far as the first move, and then it reverses again. You stay calm, telling yourself this is how price action works. But then the price goes back up to support, squeezes through it, moves up a little bit, comes down to test support and then shoots up, taking out your stop loss.
Now, you're scratching your head, wondering what happened.
Below is an example:
The above image is the GBPJPY 1-hour chart. The pair had been on an uptrend for a long time.
As you see, the price broke through the support levels, then retouched the top of the zone. Novice traders would have entered here. But, it then moves below support and back to the previous high. It heads down again. Notice the big red candle before it stalls, then inches its way back up.
Finally, price breaks the trendline AND support and increases upward momentum.
How long did this take? 63 hours.
Impatient and impulsive traders would have had several losses during this time. But this scenario plays out many times on the charts. The professional Forex trader waits for almost three days, checking in, patient, plotting, watching for the perfect signal to take a trade.
What was the signal? A break of the trendline & support, followed by a big green candle. The potential profit for this trade is at least 300 pips.
Wait, wait and wait some more. FOMO is a sure way to multiple losses.
Isn't it worth waiting three days to grab this high probability trade? If you genuinely want to be successful as a Forex trader, develop patience and discipline.
Though Forex looks chaotic and random, it isn't once you learn to spot these traps on the chart. The pleasure of knowing you are trading like a pro will make the wait worthwhile.
Create a Traders Mindset
We have a brain focused on survival. When we encounter risk, our limbic system kicks in, triggering the amygdala. The response by-passes the prefrontal cortex and sends us into a fight, flight or freeze mode.
How is this relevant to Forex?
Well, when faced with a Forex chart and the prospect of losing money, your brain reads your physiological responses as if a sabre-toothed tiger is creeping up behind you.
Typically, your breathing will be shallow, your body tense, and you'll have an elevated heart rate. To the brain, this is the code for danger.
When the amygdala is triggered, you lose all sense of reason. You will take trades you shouldn't take, increase risk when a trade is losing, exit a trade in profit and generally do things against what you know you should do.
Once the trade is over, you are baffled at what happened. You are confused and frustrated with your behaviour.
Hey, the good news is this happens to all of us in Forex. It's a big part of why 95% of traders fail. They can't handle these situations and end up blowing their account. They don't understand that they have to overcome the survival brain.
That is what is meant by a traders mindset. You have to learn to by-pass the emotional responses of the amygdala. Master this, and you pretty much have a golden ticket to success.
Here are some helpful tips from professional Forex traders
- Learn to meditate – no matter what your belief system, meditation isn't a religious process. It is a way of calming the brain down, especially before you trade for the day.
Sit in a quiet place for 10-15 minutes, close your eyes and let thoughts come and go. You don't need to try and control them.
There are many short meditation tracks on YouTube, and there are trader specific meditations. That's not important. The main thing is to commit to daily meditation practice. It's as vital as checking the charts, if not more so.
- Keep a daily journal – write down everything about your Forex experience. Document the trades you take and why you took them. What signals did you read on the charts? Write your emotions down, particularly when you are feeling frustrated, confused or demoralised. Getting it down on the page helps to diffuse the feelings.
Keeping a daily journal is also helpful for reading back to monitor your progress.
- Learn to walk away – a classic mistake by novices is to watch their trades continually. It can be a real challenge to let go of the trade once you have placed it. But, seriously, is watching it going to make the price move in the way you want. No, of course not. Watching your trades will cause a lot of stress and frustration and trigger the amygdala response.
Place your trade and close your platform. At first, it may be challenging, but you strengthen the discipline muscle each time you do it. In time, it becomes easier, and the rewards are worth it once you let go of the attachment to the trade.
- Do not be attached to being right – Forex trading has nothing to do with being right or wrong. The trade either wins or loses. You cannot influence the result once you have placed the trade. When a trade loses, you may tell yourself you knew it was going to lose. So why didn't you take the opposing trade or close the trade? You don't have to wait for your stop loss to be triggered.
When a trade wins, you feel smug and happy. You got it right. Hooray, look at you, you successful Forex trader. Let it go. Professional Forex traders are calm and unattached to winning or losing. They focus on committing to the process, continually improving as a trader by following their trading plan.
- Ignore the opinions of other Forex traders – Imagine you have taken a long trade on EURUSD. You're feeling pretty pleased with yourself. The price is moving in the right direction.
Then you hop onto a Forex forum and see a post about EURUSD with a dozen comments, all stating that EURUSD will drop like a stone. Disappointed and doubting yourself, you go back to your chart. Now, you see the potential of the pair going short. You feel like an idiot and close your trade for a small profit. Phew, the relief is enormous.
Later, you check the charts to see EURUSD has shot up. It has enormous momentum, and, look, you would have hit your target.
Never be swayed by the opinions of others, not even professional Forex traders. They get it wrong too, sometimes, you know.
If you want to start making profits with Forex, these guidelines will help you to do that. Forex is a journey. To succeed, you must grow as a person and as a trader.
Work on patience and discipline and commit to being a better trader than yesterday, last week, last month or last year. Every day, you have a chance to learn and improve.
The secret is to do what the successful 5% of Forex traders are doing.
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