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How to Become a Successful Forex Trader

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Type of Trader Definition Good Points Bad Points
Short-Term (Scalper) A trader who looks to open and close a trade within minutes, often taking advantage of small price movements with a large amount of leverage Quick realization of profits or losses due to the rapid-fire nature of this type of trading Large capital and/or risk requirements due to the large amount of leverage needed to profit from such small movements, and spread costs are more significant
Medium-Term A trader typically looking to hold positions for one or more days, often taking advantage of opportunistic technical situations Lowest capital requirements of the three because leverage is necessary only to boost profits Fewer opportunities because these types of trades are more difficult to find and execute
Long-Term A trader looking to hold positions for months or years, often basing decisions on long-term fundamental factors More reliable long-run profits because this depends on reliable fundamental factors Large capital requirements to cover volatile movements against any open position

You’ll notice that both short-term and long-term traders require a large amount of capital where the first type needs it to generate enough leverage, and the other to cover volatility.

Although these two types of traders exist in the marketplace, they are comprised of high-net-worth individuals (HMWIs), asset managers, or larger institutional investors. This is why retail traders are most likely to succeed using a medium-term strategy.

Daily trading in over-the-counter (OTC) trading in the forex markets reached $7.5 trillion in April 2022. That’s a 14% increase from the $6.6 trillion recorded in 2019.

Forex Chart Creation and Markup

Selecting a Trading Program

We will be using a free program called MetaTrader to illustrate this trading strategy. However, many other similar programs can also be used that will yield the same results. There are two basic trading program requirements:

Setting up the Indicators

Now let’s look at how to set up this strategy in your chosen trading program. We will also define a collection of technical indicators with rules associated with them. These technical indicators are used as a filter for your trades.

If you choose to use more indicators than shown here, you will create a more reliable system that will generate fewer trading opportunities. Conversely, if you select fewer indicators than shown here, you will create a less reliable system that will generate more trading opportunities. Here are the settings that we will use for this article:

  • Minute-by-minute candlestick chart
  • RSI (15)
  • Stochastics (15,3,3)
  • MACD (Default)
  • Hourly candlestick chart
  • EMA (100)
  • EMA (10)
  • EMA (5)
  • MACD (Default)
  • Daily candlestick chart
  • SMA (100)

Adding in Other Studies

Now you will want to incorporate the use of some of the more subjective criteria, such as the following:

In the end, your screen should look something like this:


Figure 1: A forex trading program screen.

Image by Sabrina Jiang © Investopedia 2021


Finding Forex Trading Entry and Exit Points

The key to finding entry points is to look for times all of the indicators points in the same direction. The signals of each timeframe should support the timing and direction of the trade. There are a few particular bullish and bearish entry points:

Bullish

  • Bullish candlestick engulfing or other formations
  • Trendline/channel breakouts upwards
  • Positive divergences in RSI, stochastics, and MACD
  • Moving average crossovers (shorter crossing over longer)
  • Strong, close support and weak, distant resistance

Bearish

  • Bearish candlestick engulfing or other formations
  • Trendline/channel breakouts downwards
  • Negative divergences in RSI, stochastics, and MACD
  • Moving average crossovers (shorter crossing under longer)
  • Strong, close resistance and weak, distant support

Placing the Trade

It is also a good idea to place exit points (both stop losses and take profits) before even placing the trade. These points should be placed at key levels and modified only if there is a change in the premise for your trade (oftentimes as a result of fundamentals coming into play). You can place these exit points at key levels, including:

  • Just before areas of strong support or resistance
  • At key Fibonacci levels (retracements, fans, or arcs)
  • Just inside of key trendlines or channels

Money Management and Risk in Forex Markets

Money management is key to success in any marketplace, but particularly in the volatile forex market. Many times fundamental factors can send currency rates swinging in one direction – only to have the rates whipsaw into another direction in mere minutes. So, it is important to limit your downside by always utilizing stop-loss points and trading only when your indicators point to good opportunities.

Here are a few specific ways in which you can limit risk:

  • Increase the number of indicators that you are using. This will result in a harsher filter through which your trades are screened. Note that this will result in fewer opportunities.
  • Place stop-loss points at the closest resistance levels. Note that this may result in forfeited gains.
  • Use trailing-stop losses to lock in profits and limit losses when your trade turns favorable. This may also result in forfeited gains.

Examples of Forex Trading

Let’s take a look at a couple of examples of individual charts using a combination of indicators to locate specific entry and exit points. Again, make sure any trades that you intend to place are supported in all three timeframes.


Figure 2: A screen showing several indicators that point in the same direction.

Image by Sabrina Jiang © Investopedia 2021


In Figure 2, above, we can see that a multitude of indicators are pointing in the same direction. There is a bearish head-and-shoulders pattern, a MACD, Fibonacci resistance and bearish EMA crossover (five- and 10-day). We also see that Fibonacci support provides a nice exit point. This trade is good for 50 pips and takes place over less than two days.


Figure 3: A screen showing indicators pointing in a long direction.

Image by Sabrina Jiang © Investopedia 2021


In Figure 3, above, we can see many indicators that point to a long position. We have a bullish engulfing, Fibonacci support, and a 100-day SMA support. Again, we see a Fibonacci resistance level that provides an excellent exit point. This trade is good for almost 200 pips in only a few weeks. Note that we could break this trade into smaller trades on the hourly chart.

How Volatile is the Forex Market?

Volatility in the forex market refers to changes in the value of currencies. The forex market tends to be very liquid, which means it is very active. As such, the market is characterized by multiple traders who actively trade large volumes each day. Higher liquidity tends to make the market less volatile. That’s because more active traders in the market lead to smaller increases and decreases in price and volume. The market is also susceptible to different types of risk, which can increase volatility. They include geopolitical risk, exchange rate risk, and interest rate risk.

What Are the Risks Associated with Forex Trading?

The forex market involves trading currencies based on speculation and hedging. If a trader thinks the value of Currency 1 will rise against Currency 2, they will use Currency 2 to buy Currency 1. When the first currency’s value increases, they can sell it to make a profit.

This sounds simple enough, but there are risks involved. One of the main risks in forex trading is the change in exchange rates, which is constantly changing. Other risks include interest rate risk, geopolitical risk, and transaction risk.

How Much Experience Should I Have Before Trading Forex?

Foreign exchange trading can be fairly complicated, so it may not necessarily be a good place for beginners to start. Trading in the forex market involves a lot of speculation, which can lead to substantial losses if things don’t go your way. Exchange rates can also impact the potential for profits because of how quickly they change.

If you want to get your feet wet and try your hand at forex trading without risking capital, consider trying a forex trading simulator. You can practice forex trading and gain valuable experience without losing money.

The Bottom Line

Anyone can make money in the forex market, but it requires patience and following a well-defined strategy. Therefore, it’s important to first approach forex trading through a careful, medium-term strategy so that you can avoid larger players and becoming a casualty of this market.

Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future performance. Investing involves risk, including the possible loss of principal.

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