5 Essential Forex Strategies for Achieving Profitability
The forex trading world is vast andcomplex. Although forex trading isn’t anything new, it has become more popular since the advent of the internet. For an extended period, forex trading wasn’t accessible to most people. Instead, only governments, banks, and other large financial institutions could trade foreign currencies.
The 1990s were a turning point for forex trading, opening it up to the general populace. Many economies transitioned to capitalism. Likewise, technological advancements allowed the internet and information exchange to become widespread. These developments eliminated the barriers for the general populace, enabling them to try their hand at trading foreign currencies.
Today, the foreign exchange market is known as the world’s most valuable and liquid financial market. According to BIS, daily trading volumes in forex markets is over $6.6 trillion. Moreover, experts estimate the foreign exchange market to be worth approximately $2.4 quadrillion. As a result, the foreign exchange market dwarfs all other financial markets globally.
Many people expect the foreign exchange market to have reached its peak. However, that doesn’t appear likely. According to forecasts from the IMARC Group, the foreign exchange market will continue to grow at an annual compound growth rate of 6 percent in the next five years.
The foreign exchange market’s popularity has led to more people trying forex trading. However, while many will try forex trading, few will succeed. Most people view forex as a quick way to make money, but that’s inaccurate. Making profits as a forex trader is easier said than done. Let’s assess some strategies forex traders can employ for increased profitability.
Various currency notes
Selecting and Testing a Forex Trading Strategy
Before proceeding with forex trading, you’ll want to select and test a trading strategy suitable for you. Various strategies exist, including scalping, day trading, swing trading, and long-term trading. Although all these strategies have a shared goal – to make profits – their timeframe varies.
For instance, scalping focuses on opening and closing positions as quickly as possible. Typically, forex scalpers will try to do this within fifteen-minute intervals. Their goal is to make small profits with every trade. However, the caveat is they’re making dozens, if not hundreds, of trades daily.
Likewise, day traders avoid overnight risk at all costs. Therefore, they’ll close their positions before the day ends. On the other hand, swing traders have more leeway. They typically hold positions for a few days or even a few weeks. They aim to benefit from market shifts. Long-term traders focus on longevity. Their trades will often span for several months, or in some rare cases, years.
Selecting and sticking to a trading strategy is crucial because you’ll devise your trading approach accordingly. You can try out different strategies by backtesting. Use demo accounts to your advantage to get a feel of what works for you.
Different currency notes
Strategies for Enhancing Profitability
After selecting your trading approach, it’s time to rely on well-tested strategies. These include:
Setting a Risk-Reward Ratio of 1:2 or Higher
Many traders incorrectly assume they’ll only make winning trades. Unfortunately, trading financial instruments don’t work like that, nor does forex. Most traders struggle to achieve more than 50 percent winning trades. As a result, they set a risk-reward ratio to ensure they remain profitable even if they make fewer winning trades than intended. To illustrate, let’s assume you want to gain 100 pips from your next trade. Setting a stop-loss order 50 pips under the current market price could help you improve your odds of success.
Tempering Profit Expectations
Traders want to make the most profit possible. However, setting realistic profit expectations is crucial. For instance, you might set goals for trading profit from the GBP and AUD currency pair at 250 pips. However, this currency pair generally fluctuates between 190 to 210 pips on a daily basis. As a result, your expectations are unrealistic. Tempering them to be more realistic will help you determine ways to increase your profitability from other currency pairs.
Avoiding High Leverage
Leverage can be beneficial for forex trading. However, problems start to arise when you’re overly leveraged. Regulatory pronouncements from major financial jurisdictions across the globe limits leverage to between 1:20 to 1:30 for major and minor currency pairs. In some instances, even this leverage can threaten your trading capital. At 1:30 leverage, a 3 percent unanticipated movement can erode your trading capital.
As a result, refrain from overly leveraging yourself. Most beginner traders should begin with a 10:1 leverage or lower until they become accustomed to the markets.
Stick to the 1 or 2 Percent Golden Rule
You’ll often hear many traders swear by the one-percent or two-percent trading rule, and for a good reason. Following this rule enables traders to manage their risk effectively. In addition, it reduces the possibility of traders losing most, if not all, of their trading capital on a single trade.
Let’s use an example to illustrate the point. You start with $1,000 in trading capital. You spot a profitable trading opportunity that you believe will generate substantial returns. Following the one-percent or two-percent golden rule, you’ll only commit $10 or $20 into the trade. Let’s assume the trade doesn’t work out how you anticipated. You incur losses instead. Since you only put a small portion of your trading capital into the trade, you’re still able to continue forex trading. If you invested more money, you would incur more significant losses. Many traders often become overwhelmed or emotional when they bear heavy losses. As a result, they try to recoup their losses by trading more. However, that rarely works out well.
Keep a Trade Journal
Journaling your trades might seem like a pointless endeavor. However, it can prove beneficial. You’ll want to track your profitable and unprofitable trades. At the end of the month or during weekends, you can use your journal to measure your performance. Moreover, you can use your journal to find commonalities between your profitable trades. Likewise, you can see if there was something similar between your losses. Not only do trade journals motivate you, but they also help you learn from your wins and losses.
Euro and Dollar currency pairing
Get Started in Forex Trading with Crystal Ball Markets
Would you like to start trading currencies? You’ll need an online forex broker to get started. Although many online trading platforms exist, not all are equal. Crystal Ball Markets is one of the best foreign exchange trading platforms. We’re a web-based forex trading platform that makes it easier for beginners to get started. Visit our website today for more information. Alternatively, you can register with us today to get started.