Forex Tips and Tricks

  • Nov 30 2022
  • by
  • Analyst AZA
Forex Tips and Tricks

Forex Tips and Tricks

I have been a forex trader for over ten years. Over the years, I have learned what works and pitfalls a trader should avoid; in this post, I will address some of the dos and don'ts of forex trading. First, let me clarify that there is no single loss-proof technique. If you find one, keep it close and dear to your heart. After trying so many forex trading techniques, you learn that the forex is a probabilities affair. The whole system is based on a speculative system where once you do due diligence, you predict whether the price will go up or down from the current level.

If it goes your way, you earn per pip, and if it goes against your prediction, you lose x-amount per pip in a contract for a different agreement. Note that a 100%-win rate is very rare when working with probabilities. The other thing that is very crucial in forex trading is risk management. Poor risk management causes one to end up with undesirable trading results. Another highly impactful skill in forex trading is psychology—your mindset when trading is crucial and can greatly affect your trading. Having the wrong mindset allows you to see things clearly and avoid mistakes. These are a few things that you need to learn and manage to your advantage. With experience, you quickly pick up what works better and under what market conditions. It is important to note that each trading strategy forex technique gives optimal results in specific market conditions.

Risk Management

When you begin forex trading, you should know that risk management is a very important factor in trading. Profitability relies heavily on one's ability to avoid or minimize unnecessary losses. As a trader, you can manage risk by taking several precautions. These include setting a stop-loss, proper lot-sizing, avoiding overtrading, using a licensed broker, being consistent in trading, and sticking to three currencies, commodities, or indices. Understand what type of trader you happen to be.

  1. Setting a stop-loss
  2. Setting a stop loss involves using a feature that allows you to automate your trading and automatically exit a trade at a predetermined level. For example, the price of brent crude oil is 180.52 dollars a barrel. Then you place a buy order on your forex trader app, after which you should decide how much loss you will accept from the one trade. You could, for instance, set a stop loss level at 176.52, which is 400 points and 40 pips away from the opening price. If the price drops to the stop loss, you lose a balance equal to 40*lot size. The advantage of a stop loss is that it limits the amount you can lose such that if a trade were to go against your prediction, you will; not lose your entire balance when the price keeps dropping, and you are in a buy position. Also, you need to use proper stop-loss setting practices. If you place your stop loss order too close to the entry, your order will be frequently taken out by market noise. It would help if you placed the stop loss below or above significant zones and away from market noise. If you sell, place it above the current or immediate resistance zone and leave an allowance or breathing room for your trades. If you are buying, you should place your stop loss below the immediate support zone and leave a small gap to allow for fake-outs (to be discussed in another post).
  3. Proper lot-sizing
  4. It does not matter whether you have the best trading platforms if you have poor lot sizing. The lot size refers to the compensation per pip. If you pick a lot size of 0.01, you earn or lose $0.01 per pip. If you are in a bitcoins trade and the price moves 1000 pips, then with a lot size of 0.01, you stand to gain or lose 10usd. With the same move, you gain $1000 if you use a lot size of 1.00. In another scenario, if you use a lot size of 3, then for the same move, you earn 3000 USD. When beginner-day retail traders learn this, they are tempted to use larger lot sizes to maximize gains. At a distance, it seems like a prudent idea. The problem is that the market moves up and down, and as a result, one could see a drawdown of 200 pips before the price moves in your favour. If you have a lot size of $3, the floating P/L (profit/loss) would be 600 USD. If you had a $500 balance, the account balance would have been wiped out. Taking on huge lots/ volumes with a small account that may not withhold the drawdowns that come with huge lot sizes is called over-leveraging, resulting in a margin call (liquidation of open positions at a loss). The best way to avoid over-leveraging would be to take trades using lot sizes proportionate to our account size. In my case, I do not let the used margin go beyond 50% of the account balance. When you take a trade, if you have one of those «best brokers online» accounts, you should see how much margin has been used by open trades. If I have a balance of $2000 in my account, ensure that open positions do not take up more than $1000. Once I take a trade, I first use a small volume/lot size and gradually add to the position if my analysis holds to a maximum of 50% used margin. That way, my accounts can withstand drawdowns. Over-leveraging causes loss due to a margin call. Avoiding margin calls puts you one step closer to becoming a profitable trader.
  5. Avoid overtrading
  6. When do you know that you are overtrading? When trading with currencies, it is very easy to have multiple trades on multiple pairs running simultaneously. Also, when you close one trade, you look to open another trade immediately. I used to open a trade after analyzing a pair and then close after getting a small profit. I would then look for a new setup and usually lose on the next setup. Had I let my trades play out, I would have had big winners and small losses. The takeaway from this part is that you should choose a handful of instruments you understand well and focus on those alone. By so doing, you will avoid the temptation of overtrading and test your trading strategies on those few instruments to see which one works best. If you use the same setup when the market conditions align with your trading strategy, you will be better positioned as a trader who makes a few trades a week and a bigger profit per winning trade.
  7. Trading Psychology
  8. In courses that offer courses in trading forex for beginners, most fail to mention the importance of psychology in trading. Trading can be stressful, especially when caught up in a losing streak. You have to understand that loss is a part of trading. Admitting to yourself that your analysis was wrong is a hard thing to do. Most people who cannot come to terms with their mistakes usually hold losing trades longer than they should. You find someone has opened a trade against the trend, hoping the position will recover so they can exit the trade at break even. Some people adjust their stop loss, which results in bigger losses.
  9. On the other hand, some people analyze trades properly and immediately see the price increase by 5% of their target profit, closing the trade to lock in the gains. They miss an opportunity to make a bigger profit by holding the winning trade to the initial profit target. With such a psychological mindset, the trader will never become successful, mostly because they will take small profits and incur comparably huge losses. Their account balance will continue to shrink until they have nothing left in the account.
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When you begin forex trading, you should know that risk management is a very important factor in trading

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