The leading forex brokers make it sound easy to be a successful forex trader. The marketing materials say things such as:
“It doesn’t take a genius to be a successful forex trader”
“You don’t have to be a millionaire to trade currencies.”
“Leverage allows you to control huge sums of money with small deposits.”
“Leverage means that Forex trading has the profit (and loss) potential of tens and even hundreds of percent a day!”
“Forex lists any sort of movement as an opportunity to trade. Whether a currency is crashing or soaring, there is always room for speculation.”
But the truth is that most forex traders lose money. Being a successful forex trader requires enormous amounts of patience, knowledge, technical skills, energy, and discipline.
Like day-trading stocks, it is a high-return, high-risk venture. But overconfidence can lead to over-trading.
The more trades you make, the more pips you’re paying to the broker. Though liquidity, risk-based rebalancing, and taxes can explain some trading activity, it belies common sense that these motivations for trade, even in combination, can explain average annual turnover of more than 250 percent for those households that trade most!
Successful Forex Traders: The Trend is Your Friend
Given that high turnover (over-trading) can cut into profits, it makes sense that one of the best approaches to trading is via trend analysis. The idea is that what has happened in the past gives traders an idea of what will happen in the future. Although this may seem pretty basic, being able to identify when a pair is in a trend and when it isn’t it will help you to increase your chances to profit consistently in the Forex market.
It is the identification of trends which make the difference between successful forex traders and those who aren’t. A simple technique which gives you perspective is to look at the same currency pair, but in 5 timeframes: 5 year chart, 1 year chart, 1 month chart, 1 hour chart, 5 minute chart. In each chart you’ll see trends. It is rare for ALL trends to align.
It goes without saying that the identification of trends assist traders in forecasting future prices. Generally, the longer the trend, the higher the probability that it will continue in it’s direction. However trading long-term trends requires the use of low leverage and patience during the “smaller” trends within the larger trend.
Characteristics of Average Forex Traders:
1 Trade frequently
2 Incur high costs
3 Trade multiple pairs rather than just one or two.
4 Suffer from poorer performance due to the frequency of trading rather than buy/sell decisions.
5 Lose money due to over-leveraging.
Use of Leverage
You’ve probably heard the word “Leverage” being tossed around. But what exactly is Leverage? It plays an important role for successful forex traders. That role is not what you may expect. Generally the lower the leverage, the greater the long-term returns. Successful forex traders know this and know how to size their positions.
Our successful forex traders at The Review know leverage inside and out. This is why you don’t see large drawdowns in the accounts we list. Look at other managers and you’re likely to see drawdowns of 40% or more!
If you’re trading on your own, it’s critical that you know exactly how it works and how to use leverage.
For example if you trade with a leverage of 100:1, the market would have to move 100 pips against you for your position to be wiped out. On the other hand, if you trade with a leverage of 400:1, the market would only have to move 25 points against you for your position to be wiped out.