European online Forex brokers reveal their data every 3 months which shows how many traders are losing the funds.
The information notably shows that more than 50% to 90% of traders lose their funds by investing online.
The data is known for over the years, but is there anything you can do to not lose your funds by investing in Forex and CFD markets?
This column introduces several ways to become a professional and successful trader.
Top 6 Steps to Become a Successful Forex Trader
Even though forex trading might seem simple to you, do not underestimate the effort and the time required to become a successful FX trader.
There is no method or secret to winning with every trade, and you will not become successful immediately.
However, you can follow simple steps that will help you, in time, to be more successful in trading.
Let’s review the most important ones.
1. Know Yourself and Your Financial Objectives
Knowing yourself will help you determine what kind of trader you are going to be.
This will depend on your financial knowledge, goals, available time, trading capital, risk aversion, etc.
When you set your financial goals, be realistic.
Think in terms of risk and reward, which will give you the right frame of mind for forex trading.
Be as specific and honest with yourself as you can. Knowing yourself will also help you better recognise and control your emotions.
2. Learn How to Control Your Emotions
There are many ups and downs in trading, which can be something of an emotional rollercoaster.
Volatility spikes are common in the forex market, especially on the majors.
If you are not mentally prepared to ride the ups and downs of the market, you will surely make costly mistakes, such as impulsive trading, buying/selling out of panic, or even trading out of boredom.
But if you can control your emotions, you will always be in control of what you do.
Discipline and patience are essential character traits for a trader.
3. Work on and Understand Your Trading Plan
You should always enter the market following your trading plan.
This plan should describe your investment strategy: the exact conditions under which you will enter/exit the market, as well as your risk management rules.
Make no mistake, Money management is an essential part of your trading plan.
4. Use a Demo Account First
You need to take demo accounts seriously.
They will help you test your trading strategy in real conditions using paper money.
It’s also a good opportunity to test yourself – with a demo account, you will see how well you can follow your trading plan, manage your entry/exit points, and control your emotions.
5. Choose Your Broker Wisely
Before investing, you need to choose a broker and try their platform to determine if it suits you.
You can then determine if their platform is user-friendly if the charts offer the technical indicators you use in your trading plan.
You should go for a broker that provides a trading environment that best suits your needs.
6. Be Humble and Learn from Your Mistakes
Do not let your ego and overconfidence mislead you.
It’s important to admit when you are wrong so that you can cut your losses early.
You need to take responsibility for what you are doing.
If you are aware of your strengths and weaknesses, you will improve your overall trading performance and achieve your goals faster.
The most difficult part of being successful is to be consistent. Be tenacious!
It’s an ongoing process that requires dedication, commitment, patience and hard work, where the biggest challenge to overcome is yourself.
You need to have “emotional stability”.
If you avoid emotional trading, and if you follow a back-tested and well-researched trading strategy, you are on the path to becoming a successful FX trader.
How successful traders use margin trading responsibly
One of the benefits of forex trading is that you have the ability to trade it on margin.
But what is margin trading and how can you use it as a trader?
In this section, we will discuss margin trading from the Forex trading viewpoint.
However, this is true in the context of stock, CFD or commodity trading as well, with slight differences.
Basics of margin trading
If you register a margin trading account with a Forex broker, it means you are borrowing money to gain a higher return on investment.
What is margin trading?
Basically, trading on margin is about trading by applying a ‘brokerage loan’ to increase the investment potential.
Margin trading and leverage: What’s the difference
How much can you borrow from the broker? Well, this is where we should speak about leverage.
You see, margin trading and leverage are two concepts that go hand in hand.
Leverage is the possibility to manage large amounts of funds with little money of your own, i.e. borrowing the rest of it.
You can see it expressed by a ratio like 50:1, 100:1, and so on.
Let’s look at an example so that you can see how it works.
Suppose you have $500 but you know this isn’t enough to diversify your trading.
In this case, you need to use leverage in order to have the ability to trade positions larger than your $500 in actual capital.
You can opt for leverage provided by your Forex broker.
If you choose 50:1 leverage, your investment potential would turn into $25,000, which means the broker is lending you $24,500 and you may open a position with $25,000.
Leverage magnifies your trading results
Let’s see the result if you use leverage (margin trading).
If the trade turns out to be a winner, is 10% of $500 different from 10% of $25,000? Definitely!
Your net profit in the first case would be $50, while in the second case, when you apply leverage by trading on margin, your net profit is $2500, and it is all yours – you get the net profit while the broker gets back his funds (brokerage and overnight interest charges)
In that example, you have invested $500 of your own money but got control over $25,000 by using 50:1 leverage.
This means you had 2% margin to control the full $25,000 position.
Check the table below to understand the proportions of margin requirements:
|Leverage||Traded Amount||Margin Required||Margin Required As %|
In other words, by trading on margin and using high leverage, you have the opportunity to generate higher profits but also higher losses (we’ll discuss that below).
For instance, if you go long on the GBP/USD at 1.3000 with $1000 and it touches 1.4000, then your profit would be around $76.
However, when you apply 100:1 leverage, you get control over $100,000, and the profit would be $7600 while the borrowed sum of $99,000 would go back to the broker plus any related trading costs.
In this case, you had 1% margin, and if the price would go against you, the position would automatically get closed when $1000 of the total $100,000 would get used.
As a Forex or CFD trader, it will be useful if you know the benefits of margin trading.
Here are some of those benefits:
- It increases the investment potential
- It increases the return on investment
- Some brokers may have a stop out at zero clause. This means they may limit your loss to the amount you have in your trading account.
However, you should also take note of the margin trading downsides:
- You can run out of money much faster than when trading with your funds alone
- The more leverage you use, the greater the chance for larger losses
- Most brokers do not have a stop out at zero clause. Therefore, you can potentially lose more than what you have in your account.
Margin trading, when done properly and managed well, is an efficient way of using your trading capital.
It allows you to access and trade larger positions that you may not have the ability to access using your own capital.
However, the key point is to trade at low levels of leverage and focus on capital preservation.
Remember, leverage is a double-edged sword as it can magnify your wins as well as your losses.
You must trade responsibly when using leverage.