The number of forex traders that begin trading and then fail is countless. If you want to avoid falling into this trap and come out as one of the success stories, then there are certain virtues which you need to develop.
Successful forex trading requires discipline, patience and a sound attitude towards risk management.
Discipline when trading forex involves firstly developing a trading plan, secondly modifying it accordingly, and thirdly sticking to it.
Creating and sticking to a trading plan is one of the key principles to discipline in forex trading. Only once you have these rules established and you are happy trading them should you move to a live trading account.
Elements of a trading plan
There are many tried and tested ways of creating a trading plan and many more lists covering what a trading plan should include. In short, the crucial elements of a trading plan are as follows:
- A list of trading instruments/ markets on which you will focus on
- The hours during which you will trade
- The signals that you will use to assess whether to enter a position
- The signals that you will use to assess when to exit a position
- The maximum number of trades per day, week or month
- The minimum and maximum duration of a trade
As with most self-imposed rules, if you write these rules down, you are much more likely to stick to them. But also, be aware that as you become a more confident trader you might feel much more comfortable with trading and start paying less attention to your trading plan. Be warned, this will almost always result in losses. If an unplanned trade goes well, it is often down to luck rather than anything else.
As we mentioned above, a sound approach to risk management is essential. Stop losses can be a very useful tool here. But again, there are some easy pit holes to fall into. Stop losses are very useful because they remove the emotion from the trade. You plan the level your trade will get closed at in advance and then don’t need to touch the order. Whilst sometimes traders move their stop loss up in line with a favourable move in the market, a stop should never be adjusted lower during a trade. Accepting failure is part of trading, however, sometimes it is easier said than done.
Make sure you are comfortable with placing stops losses before you open a trade. Vantage FX has short videos showing its clients how to place stops losses and trailing stop losses. Alternatively, if you are placing trades through MT4, you can place the stop loss, use the trailing stop or even use one of the MT4 Expert Advisors to manage trades and lock in profits. Sometimes forex traders need more than the default MT4 stop loss system and there are some excellent EA’s which plug the gap nicely.