5-Step Guide to Winning Forex Trading

What Is Forex Trading?

We live in the days of Inflation; Pandemics restricting business activities; and The world going digital at a fast rate resulting in deteriorating living standards, job cuts, and unemployment, among others. So, let's talk about forex trading, shall we?

Forex trading is exchanging one currency for another to capture gains of changes in rates in the short, medium, and long term when the currency being held appreciates (value increases) against the cash that was exchanged.

Traditionally, to exchange a currency for another, one had to have possession of physical money and take it to a bank, a bureau, or an individual for the exchange. However, the advent of the internet has made it possible to exchange currencies online.

While currencies are not the only instruments available for online exchange, this article focuses on the forex market. However, most, if not all, of the concepts outlined may apply to other financial markets such as the stock market, commodity market, crypto market, bond market, etc.

Most online financial markets products are offered in the form of Contracts for difference (CFDs). CFDs are contracts that allow a cash settlement for the change in the price of an underlying asset without any delivery of physical goods or securities.

Most people refer to the online trading of financial instruments as forex trading because the forex market is the largest in the world and because non-specialists easily understand forex because of its societal significance and daily usage.

In this modern world, traders can now sit at home and use the internet to trade currencies via a forex broker. Profits are automatically calculated and can be withdrawn from the broker to the trader's bank account or e-wallet upon proper identity verification.

Generally, to make a profit in the forex market, a trader has to buy a currency when it is cheap/low against another, hold it, and sell it when it appreciates against the other currency it was initially exchanged for.

For example, Edo sells one euro for a dollar to Grace at the rate of 1.2345 and waits until the exchange rate between the two rises to 1.3456 to repurchase it. In this transaction, Edo makes a profit of $0.1111. Now, imagine if the value being assumed was a million dollars.

Thanks to financial leverage, traders can use margins to place trades beyond the capability of their equity. For example, brokers provide the force that allows traders with only $100 in their account to control works of over $100,000, i.e., 1:000 leverage.

The example above describes how profits are made in the forex market without explaining how traders know 'how, why, and when the exchange rate between pairs would change and in what direction.

That, therefore, calls for a deep understanding of the dynamics and mechanics of the foreign exchange market, including the tools, factors, platforms, and strategies for trading currencies for consistent profitability.

How to be a consistently profitable Forex trader

To become a consistently profitable trader, many tables must be turned. Just like any profession, trading is an occupation that demands dedication and determination on the side of the trader. So don't turn trading into gambling. Learn it properly!

Forex trading falls under the umbrella of financial market analysis which is traditionally practiced by trained finance professionals and economists who learn about market analysis in their disciplines coupled with much professional experience.

These professionals have an advantage regarding the:

• Trading resources
• The understanding of the economy
• The policies surrounding the management of money (monetary policy) by the central banks, which affect forex rates

So, to be a professional forex trader, one has to be thoroughly trained (formally or informally) and exposed to the financial world and its dynamics. One also has to dedicate a good amount of years, just like any other occupation around the globe.

On average, it takes 5 years for doctors, 4 years for engineers, 3 years for lawyers, 3 years for economists, and 3 years for accountants to train professionally. It should also take similar, if not more, years to prepare a professional forex trader.

It takes many years to train a consistently profitable trader because forex trading is arguably the most lucrative among all professions. Traders have freedom (time freedom, locational freedom, and financial freedom), not to mention that they are accountable to no one.

The forex market is also the largest in the world, with a daily trading volume of over 5 trillion dollars, of which the profits a single trader can make are only limited by the funds available in their account; so much that making 1 billion dollars in a single day is possible.

Below is a detailed 5 step guide to becoming a consistently profitable trader. This list has been made prior research from several explanations of professional traders worldwide, including George Solos, Mark Douglas, and Paul Tudor Jones. 

Other references have been obtained from famous traders like the Inner Cycle Trader, Raja Banks, Ref Wayne, Day Trading Addict, and Kojo Forex, among others. These are some of the notable traders who have made fortunes trading the financial markets.

Step 1- Get knowledge about the forex market

The first and foremost requirement in any profession is knowledge. It takes wisdom to make a doctor or a lawyer, and so does it to make a forex trader. This knowledge ranges from the dynamics to the mechanics of effectively trading the foreign exchange market.

Firstly, a trader has to understand how to open a trading account, which involves choosing a broker that suits their trading style with brokerage costs and the type of trading instruments offered by the broker in mind. 

Some brokers only offer the major currency pairs for trading, while others include the minor and exotic teams. Aside from the types of pairs, traders must know the different spreads brokers offer on the same couple.

Thanks to forexbrokers.com, which has made it easy for traders to choose forex brokers that suit their particular needs. This website also provides the details of most of the top regulated brokers around the globe.

An individual must also understand the trading platforms used for analyzing and placing trades in the market. For example, Metatrader, TradingView, and Ctrader, among others. Some outlets are best suited for professionals, and others for novice traders.

These platforms provide a range of tools and indicators that can be used to analyze and make informed trading decisions. Knowing how to use trading tools and hands gives traders an edge as they help save time and aid risk management.

Knowledge of the different trading platforms involves knowing the following:

• How to place an order
• Set a stop loss
• Close a trade
• Put an indicator
• Modify a work
• Draw lines on the charts
• Change chat settings
• Time frames, etc.

Traders must also understand the different trading sessions available since the forex market is 24/5. In addition, the volatility and liquidity in the forex market differ with the sessions. Traders must therefore understand time zones.

The forex market has a few major sessions:

1. The Sydney session
2. The Tokyo session
3. The London session
4. the New York session

The sessions represent the business times of the cities and continents, i.e., when the banks are open and financial transactions are at their peak.

Many trading activities happen when some of the sessions overlap, bringing more liquidity and volatility to the market. If traders know such, they can have an edge and may frame their strategies based on session underlying market behavior. 

For example, the New York session is characterized as the one that experiences the highest trading volumes and, therefore, more liquidity and volatility. Thanks to software developers who have brought in auto session detectors.

Another factor that traders must understand is the type of currency pairs they are interested in trading. Currencies have different natures. Therefore, a good understanding of such natures may provide an edge.

The most common pairs in the forex market include:

• EURUSD (the most liquid)
• USDJPY
• AUDUSD
• GBPUSD
• USDCAD
• EURGBP
• GBPJPY
• EURJPY

Traders can trade all these pairs or specialize in specific teams.

Getting knowledge is one thing; where to get the ability is another challenge in the forex industry. Unfortunately, many individuals masquerade as professionals on the internet, offering fake forex lessons. Thanks to babypips.com, a free online forex trading school for beginners.

Step 2- Have a good understanding of the world economy

Another vital thing to understand as a trader is the world economy. This is because the forex market and the rates result from the changes in economic policies and the balance of payments between zones, countries, trading blocks, and continents.

Factors affecting individual economies (particularly more significant economies) drastically affect the forex market and its rates. For example, the disruption of trading routes affects the volumes of trade between countries, affecting the demand and supply of the currencies involved.

Another example is a war. If a country is at war, it is most likely that trading activities with other countries will decline, leading to a decrease in demand for such countries' currency and declining value against other currencies.

Traders also need to understand the type of goods and services exchanged between and among countries, zones, continents, blocks, and regions. A good understanding of such will give an insight into the flow of currencies, thus helping determine demand and supply shifts.

For example:

• Japan exports a lot of technology 
• Countries in the Middle East export oil and its products 
• Russia exports wheat, oil, and gas 
• America exports refined petroleum, among others
• China is the world's production Hub for all sorts of goods 

Understanding the import and export routes gives traders an edge in understanding foreign exchange rates. A shift in the volume of trade flows and demand can signal to traders the possible change in forex rate between the countries.

Global disasters such as the COVID-19 pandemic also affect the international markets. Curfews caused a decline in global trading activities, hugely impacting the foreign exchange market. On the other hand, people always stayed indoors, which led to a surge in online trading activities.

In summary, a good understanding of the global economy provides an edge in trading foreign exchange instruments instead of not knowing the world economy. Traders must therefore keep up with business news and current affairs.

Step 3- Learn the four analysis approaches

They must have analyzed and concluded that they were right about their anticipated rate to place a trade in the market. So, how do traders know that rates will go up or down? This brings us to the most crucial concept of market analysis.

There are four major types of analyses in the forex market:

1. Technical analysis
2. Fundamental analysis
3. Sentimental analysis
4. Mental analysis

Of course, different traders argue about the correct kind of analysis, but a lot of traders adopt all.

Adopting all trading techniques means not leaning towards one analysis but incorporating all the factors in the different analysis techniques. To most professional traders, blending all three techniques gives an edge in the market.

Technical analysis

Technical analysis uses historical data, i.e., forex rates and prices, to predict the future movements in the rates and fees of different currencies. In addition, technical analysis uses mathematical calculations and trend analysis to provide signals to traders.

Technical analysts use indicators such as oscillators, momentum indicators, volume indicators, moving averages, trend lines, and pivot points to predict where the rates and prices are most likely to go, turn or stop depending on the signal provided by the indicator.

Technical indicators are based upon regression analysis to predict future behavior based on previous behavior. In addition, mathematical models help to form a linear pattern that indicates future values. These are then programmed into digital indicators like the ones mentioned above.

The market is a physical thing that follows a road map. Therefore, to place a trade, you must see where the price is "technical," whether you are a technical analyst or not. This is why everyone must have some technical knowledge, if not most of it.

Technical analysts also use price action to predict future price movements. For example, most traders use Japanese candlesticks. This has been known to provide massive profits to different traders, including the inventor of the candlesticks, a man known as Munehisa Homa.

Fundamental and sentimental analysis

Fundamental analysis is understanding the intrinsic value of currencies and the factors that cause their rates and prices to change. Although the elements are plenty, some have a notable and significant impact on the forex market.

The most notable factors that traders look at are interest rates, unemployment rates, GDP, wars, natural disasters, central bank monetary policy, the commitment of traders' reports, and inflation rates, among others.

Since these fundamental factors primarily drive the market, traders must pay attention to changes in these factors to make sound trading decisions. A trader with good knowledge of these factors will likely have an edge in trading forex.

To follow up with the release of relevant economic data, traders can sign up with investing.com and the Bloomberg terminal. These platforms provide real-time updates on all the changes in financial data. This helps traders know and be well prepared for sudden volatility in the market.

On the other hand, sentimental analysis involves looking at a depth of the market (DOP) to see where most traders are speculating on prices. Again, this helps to align with numerous traders and at least enough knowledge to aid decision-making.

Brokerage houses like IG provide this report in real-time to show traders that are net long, net short, and neutral in the market. Looking at the market sentiments may also give traders an edge in trading.

Mental analysis

Analysis approaches found in most trading handbooks focus on how the market should be analyzed technically and fundamentally. However, little emphasis is placed on this approach which focuses on individual traders.

I can comfortably vote for mental analysis as the most critical form of research because what differentiates winning traders from losing traders is their attitude toward trading which deals with their trading psychology.

You may wonder why many individuals make money on the demo account but fail to make money on the real version. One reason is that demo traders are almost emotionless when trading instead of changing the natural history.

Most of the time, new traders make money from trading in their first days. One reason is that these traders do not know the pain the market can cause due to losing and therefore approach trading from an emotionless point of view in the early days.

As days go by and new traders experience losing, they start building emotions and enter into a natural defensive mode against the market. This brings fear and emotions, which greatly affects their trading results.

Trading is an activity that demands ultimate levels of rationality. With emotions, traders can barely make a living out of the market. Unfortunately, it is hard to eliminate feelings when money is involved. As a result, traders have no choice but to be as rational as possible.

Emotions clog the way of rational thinking. Fear naturally causes individuals to focus on the object of their fear, which is losing or being wrong. Therefore, traders must practice refraining from the market whenever they are emotionally charged.

Consecutive wins bring emotions and cause recklessness, and so does straight losing bring feelings and cause revenge trading. Traders must exercise caution and monitor their mental status to control what they should or should not do in the market in different mental states.

To understand more about mental analysis, which is vital to trading success, refer to Mark Douglas in his book "trading in the zone." This is one masterpiece of trading psychology to which most professional traders testify.

Step 4- Develop a solid trading strategy

After a trader is well conversant with the different types of market analyses, what follows is to have a solid trading strategy that has an edge. Without a trading strategy, traders lack direction and experience randomity of trading results.

A trading strategy involves a detailed plan telling a trader when, why, how, and how much to enter, when to exit, and how to manage running trades. In addition, a strategy helps to remove or reduce emotions in trading.

Trading strategies differ according to the personalities of the traders. Some use technical patterns only, others combine technical designs with fundamentals and sentiments, while some use robots needing no human hand.

Long story short, a trading strategy helps a trader to be organized in their approach to trading rather than just trading on emotions which tends to bring bad results. Following a plan brings consistent profits and solid gains instead of not following any.

Think about it, how can one produce consistent profitability without following consistent behavior and planning? Disorganized behavior will likely lead to messy outcomes, and well-organized and consistent behavior leads to consistent and organized results.

Some of the technical setups that traders base their strategies on in the forex market include but are not limited to breakouts, pullbacks, trends, and ranges. Therefore, traders must watch the market, identify such setups, and wait for confirmations to place their positions in the market.

In a nutshell, a good strategy must include the type of instrument to be traded, the session and timeframe to be sold, the type of indicators to be used, the type of confirmations, the targets for profits, and the areas for stop losses.

Step 5- Practice sound risk management

Professional traders hinge on risk management when achieving consistent results in the forex market. The forex market is dynamic, and no one can fully digest the factors surrounding it and eliminate losing trades.

If any person or institution knew how to trade without losses, they would ideally be the richest because the forex market has a whopping 5 trillion dollars traded daily, of which getting a quarter in a day would make you the wealthiest human or institution alive.

A critical factor in risk management is the risk-to-reward ratio (RRR). This ratio of the funds risked to the gains anticipated, i.e., an RRR of 1:3 means that a trader should risk $1 if they expect to win $3.

In that way, the inevitable losses that every trader is susceptible to are covered by the principle of risk-to-reward ratio. This is because losses are small and winners are big, which gives an advantage over several trades in a period.

Risk management also involves the amounts traders must risk relative to their capital per trade. Most professionals advocate risking 1% (big institutions risk lesser) of the entire equity in a trader's account. This gives a trader possibly 100 trades of continuous losses.

Overtrading happens to be one of the reasons why most traders lose money. Professionals advocate for placing at most three trades in a day. Overtrading exposes traders to too much risk and the possibility of emotional trading.

Risk management also involves aspects of portfolio diversification. For example, professional traders do not put "all eggs in one basket" by not focusing on only one brokerage house or trading only one instrument. This is because one failure leads to a complete failure.

Traders must therefore diversify by having their funds in several brokers, protecting against the possibility of a brokerage house going bankrupt. Traders must also hedge their positions and stay alert to changes in the market.  

Conclusion

Forex trading offers individuals the opportunity to engage in a dynamic and potentially lucrative market, characterized by the exchange of currencies to capitalize on fluctuations in exchange rates.

By leveraging online platforms and employing various analysis approaches, traders can navigate the complexities of the forex market and strive for consistent profitability.

Traders must develop a solid trading plan tailored to their individual preferences and risk tolerance, while also remaining adaptable to changing market conditions.

As with any profession, achieving proficiency in forex trading demands time and commitment, emphasizing the importance of ongoing education and disciplined practice to navigate the complexities of the market and strive for long-term success.

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