How to Become a Successful Forex Trader

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How to Become a Successful Forex Trader
Type of TraderDefinitionGood PointsBad Points
Short-Term (Scalper)A trader who looks to open and close a trade within minutes, often taking advantage of small price movements with a large amount of leverageQuick realization of profits or losses due to the rapid-fire nature of this type of tradingLarge capital and/or risk requirements due to the large amount of leverage needed to profit from such small movements, and spread costs are more significant
Medium-TermA trader typically looking to hold positions for one or more days, often taking advantage of opportunistic technical situationsLowest capital requirements of the three because leverage is necessary only to boost profitsFewer opportunities because these types of trades are more difficult to find and execute
Long-TermA trader looking to hold positions for months or years, often basing decisions on long-term fundamental factorsMore reliable long-run profits because this depends on reliable fundamental factorsLarge capital requirements to cover volatile movements against any open position

You’ll observe that both short-term and long-term traders demand a substantial amount of money; the former requires it to produce adequate leverage, while the latter requires it to cover volatility. These two categories of traders exist in the market, but they are made up of high-net-worth individuals, asset managers, or bigger institutional investors. For these reasons, retail traders with a medium-term plan are more likely to succeed.

The Basic Forex Trading Framework

This article’s structure will center on one core concept: trading with the odds. To do this, we will examine a range of strategies over several periods to assess whether a specific transaction is worthwhile. However, keep in mind that this is not designed to be a mechanical/automatic trading method, but rather a discretionary strategy. You have the option of acting on or dismissing signals that you perceive. The idea is to identify circumstances in which all (or almost all) of the technical indications point in the same direction. These high-probability trade scenarios will, in turn, be successful in the long run.

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Forex Chart Creation and Markup

Selecting a Trading Program

To demonstrate this trading method, we will use a free application called MetaTrader; however, many other comparable programs that provide similar outcomes may also be employed. There are two main needs for a trading program:

Setting up the Indicators

Now we’ll look at how to implement this approach in your preferred trading application. We will also create a set of technical indicators and the rules that go with them. These technical indicators are used to screen transactions.

If you employ more indicators than those presented here, you will construct a more dependable system with fewer trading chances. In contrast, using fewer indicators than those provided here would result in a less dependable system that generates more trading chances. Here are the settings we’ll be using for this article:

  • Candlestick chart updated every minute
  • RSI (15)
  • stochastics (15,3,3)
  • MACD (Default)
  • Hourly candlestick chart
  • EMA (100)
  • EMA (10)
  • EMA (5)
  • MACD (Default)
  • Daily candlestick chart
  • SMA (100)

Adding in Other Studies

You should now integrate some of the more subjective criteria, such as the following:

In the end, your screen should look something like this:

Figure 1: A forex trading program screen.

Image by Sabrina Jiang © Investopedia2021

Finding Forex Trading Entry and Exit Points

The key to identifying entrance points is to search for instances where all of the indications are pointing in the same direction. Each timeframe’s indications should support the trade’s timing and direction. There are many specific bullish and bearish entry points:

Bullish

  • Engulfing bullish candlesticks or other forms
  • Upward trendline/channel breakouts
  • Positive RSI, stochastics, and MACD divergences
  • Crossovers of moving averages (shorter crossing over longer)
  • Strong, nearby support and weak, distant opposition
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Bearish

  • Engulfing bearish candlesticks or other forms
  • Downward breakouts of trendlines/channels
  • Divergences in the RSI, stochastics, and MACD are all negative.
  • Crossovers of moving averages (shorter crossing under longer)
  • Strong, nearby opposition and weak, distant support

It’s also a good idea to set exit points (both stop losses and take gains) before you start trading. These points should be put at important levels and only changed if the premise for your trade changes (oftentimes as a result of fundamentals coming into play).These departure locations may be placed at critical levels such as:

  • Just before to regions of significant support or opposition
  • At critical Fibonacci levels (retracements, fans or arcs)
  • Immediately within significant trendlines or channels

Let’s look at a few instances of individual charts that use a variety of indicators to pinpoint particular entry and exit locations. Again, be certain that any transactions you wish to execute are supported in all three periods.

Figure 2: A screen showing several indicators that point in the same direction.

Image by Sabrina Jiang © Investopedia2021

Figure 2 shows that a slew of indicators are all heading in the same direction. A bearish head-and-shoulders pattern, a MACD, Fibonacci resistance, and a bearish EMA crossing are all present (five- and 10-day).We can also observe that Fibonacci support serves as a good departure point. This transaction is worth 50 pips and is completed in less than two days.

Figure 3: A screen showing indicators pointing in a long direction.

Image by Sabrina Jiang © Investopedia2021

Figure 3 shows a number of signs pointing to a long position. We have a bullish engulfing pattern, Fibonacci support, and a 100-day SMA. Once again, a Fibonacci resistance level presents an ideal exit point. This transaction is worth about 200 pips in only a few weeks. On the hourly chart, we may divide this trade into smaller transactions.

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Money Management and Risk in Forex Markets

Money management is essential for success in any market, but especially in the unpredictable forex market. Fundamental reasons may sometimes send currency rates swinging in one way, only to have the rates whipsaw in the other direction in a matter of minutes. As a result, it is critical to minimize your downside by constantly using stop-loss points and trading only when your indicators indicate a favorable opportunity.

Here are a few specific ways in which you can limit risk:

  • Increase the amount of indicators you employ. As a consequence, your transactions will be filtered via a tougher filter. It should be noted that this will result in fewer chances.
  • Set stop-loss levels at the nearest resistance levels. It should be noted that this may result in lost profits.
  • When your trade proves profitable, use trailing-stop losses to lock in earnings and reduce losses. This may also result in lost profits.

The Bottom Line

Anyone can earn money in the forex market, but it takes time and adherence to a well-defined plan. As a result, it is essential to begin forex trading with a cautious, medium-term plan in order to avoid becoming a victim of this market.

Investopedia does not provide tax, investment, or financial advice. The material is offered without regard for any individual investor’s investing goals, risk tolerance, or financial circumstances, and may not be appropriate for all investors. Past performance does not predict future performance. Investing entails risk, including the possibility of losing money.

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