Forex trading, when done right, can be a sustainable way to make money in the financial markets. Besides operating round the clock, currencies are also among the most liquid tradable assets in the world. For instance, if you master how to trade EUR/USD, you would be trading an extremely liquid currency pair, thanks to the economic might of the U.S and the European Union.
When learning how to trade EURUSD or any other currency pair, most people focus on chart patterns. However, over and above these patterns, there are several other factors to consider to become a successful forex trader. Here are some of them.
This may feel like an overused disclaimer if you are constantly in touch with financial news. However, failure to follow it is part of why some traders fail in forex. Investing what you can afford to lose matters because trading is psychological. When you over-expose yourself to the market, fear becomes a part of your trading equation. You are prone to making wrong decisions, such as closing out an otherwise good trade at the slightest market drawdown.
A person who does not rely on the money invested in forex for daily sustenance has the mental fortitude to ignore market fluctuations. They are likely to be more confident that the strategies they used before opening the trade; are sound.
When trading forex, your success or failure has a lot to do with the forex broker you choose. The first thing to look for in a broker is whether they are market makers or ECN (Electronic Communication Network), which sends your order direct-to-market. The best brokers are those that send your order direct-to-market. These brokers give you the best spreads on your trades, which means you get the best prices and a higher chance of success in your trades.
Part of the reason why some people find trading challenging is because they use undercapitalized accounts. Forex is a business like any other, and the level of capital used has a direct bearing on the success or failure of the business. The big challenge when using a small account is that you do not have much room to navigate in case of a prolonged drawdown. You are also more likely to overborrow and get closed out of a trade in the process.
When investing in stocks or real estate, people tend to take a more long-term view of the market. In forex, the quick short-term speculative investing tends to crip in. This is driven by the urge to borrow and make as much money in a short time. This ultimately leads to overborrowing and losses. The best approach to forex is to have the same long-term mindset as applies to any other investment. By having a long-term perspective, it becomes easy to focus not only on the charts but also on the core market fundamentals.
When investing in the forex market, it is easy to fall into the trap of overtrading to maximize gains. However, this is a recipe for losses as you increase your exposure to the market and, by extension, the potential to get margin called.
There is more to forex trading than understanding chart patterns. To increase your odds of success, you need to understand the external factors that affect the market. You also need strong risk management skills and a reasonably funded account. This cuts the risk of being closed out of trade due to short-term market fluctuations.