Where to Begin Trading And Investing
In many cases, those employed to trade at an investment firm are only responsible for placing trades under specific conditions that the company clearly defines. Other sources may consider a professional trader as someone highly skilled and consistently profitable; others will define a professional as someone whose full-time job and primary source of income will come from trading the forex market.
A profession is a paid occupation that involves specific skills and knowledge that can take years to be acquired. Being professional is associated with knowledge and skills required to undertake the profession. Anyone can become a successful trader without necessarily being a professional.
Like any skilled profession, becoming a full-time or part-time forex trader will require you to master the financial markets. In the sections that follow, we shall explore what becoming a successful forex trader entails.
Risk management is a cornerstone principle of investing. Many inexperienced traders focus exclusively on making a profit, whereas an experienced trader will see two critical objectives; achieve profits and limit losses.
If you cannot control your losses carefully, it really doesn’t matter how much money you make, because eventually, you will lose it. Successful traders pay a lot of attention towards their risk to reward ratios and position sizes.
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How To Analyse Markets
Before you can place a forex trade, you need to have a prediction and experienced traders but a lot of emphasis towards this part of trading. Without a specific plan of attack, you are simply gambling on whether you will make money, or not. Luck should never be a component of your decision-making criteria.
When placing a forex trade, you need to predict more than just whether the market will go up or down. Traders use different types of analysis to design what is known as trade setups. A trade setup predicts which direction the market will head, at what price the order should be opened, and the target to exit the position. When opening a trade, you need to decide where to place a take-profit, which is where the trade has succeeded, and the position should be closed profitably. You also need to decide at which point the trade has failed and should be closed to prevent any additional losses.
Traders use a variety of techniques to define precisely when to open and close positions. The categories of market analysis used by most forex traders are technical, fundamental and sentiment analysis. Each type of analysis can be combined to draw actionable conclusions about a specific financial market or security.
The size of your position is directly correlated with the risk it presents. A larger position means a greater amount of exposure to the market, and small price movements can significantly impact profitability. See below an example of two positions, both are for the same instrument and have the same entry price, but the first is losing $1 while the second is losing $100.
Larger position sizes do not just affect profit and loss, but also margin consumption. If your positions are too big, you run the risk of missing other trading opportunities since all your available trading capital is allocated to maintaining just one position. Another even more critical reason is that larger positions in drawdown pose the risk of triggering margin-call or stop-out. Let’s consider a more advanced example that considers account balance margin too.
A forex trading strategy is a plan of attack for approaching the markets. A trading strategy encompasses all variables involved in making trading decisions. A robust strategy should define which forms of analysis should be used and how to interpret information. A strategy will also determine what instruments will be traded and when, how big orders should be and the risk-to-reward ratio that should be followed.
A trading strategy is crucial for maintaining consistency. Without consistency, there is no way to retrospectively analyse the performance and pinpoint areas which could be improved.
Successful traders maintain journals of their trades and try to understand why some trades failed and how others succeeded. Making changes to a strategy requires delicacy because one minor modification could throw everything off balance.
Trading forex and CFDs is a rollercoaster. The one thing that keeps the trading analysis, risk management, trading portfolio and overall strategy tied together is the ability to stick to follow a plan and not listen to your emotions.
Losing goes hand in hand with trading forex, and that is a feeling many traders struggle to overcome. Even when trading with minimal position sizes and losing a few dollars may be inconsequential to your finances, but the feeling of failure can be consuming. As opposed to having a robust and long term strategy, some traders fall victim to the disposition effect. The phenomenon leads traders to close profitable trades early, do they feel like they won, or rather didn’t lose. Meanwhile, they let losing trades run for too long because they do not accept they were wrong, and this results in a larger loss.
Without a comprehensive trading strategy and the commitment to follow it, your decisions will be governed by the hundreds of biases that pollute the human mind, all of which are prepared to sabotage us.
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