How to Make Consistent Profits in Forex Trading
There can be many strategies to consistently profit in Forex. However, in this article we will discuss 7 important ways of achieving progress:
- Choosing and testing a consistent trading strategy
- Setting a risk/reward ratio to 1:2 or higher or have a good success rate
- Setting realistic profit targets
- Avoiding the use of high leverages
- Not investing more than 5% of trading capital on each trade
- Keeping a trade journal
- Doing regular fundamental research
Choosing and testing a consistent trading strategy
When discussing how to make a consistent profit in Forex, it has to be mentioned that the first logical step is to choose a trading style. There are several options, but they mostly fall into one of those categories:
- Scalping
- High frequency trading
- Copy trading
- News trading
- Day trading
- Swing trading
- Long term trading
There are many ways to make money in the market. However, not all strategies can be beneficial to a given trader. One strategy can work for one trader and fail to produce any positive results for the other. Every trader is different. Consistency in Forex trading comes when you are using a trading strategy that suits your personality. Scalpers take advantage of local price swings. High frequency traders place numerous trades per day. Copy traders copy other successful traders by the help of trading algorithms. Day traders open and close orders within a trading day to avoid swaps. Swing traders take longer than 24 hours to finalize their open positions. Swing traders mainly use fundamental analysis and trades take from a couple of days to a couple of weeks to finalize. Long-term traders and investors Usually invest in physical assets and avoid trading CFDs.
How to be a consistent Forex trader, when there are so many trading styles to choose from? Well, you need to work hard to find out which style is best for you. Demo trading and backtesting can help greatly. Demo trading enables traders to experience a live trading environment using a fake account balance. A vast majority of brokers offer free Demo accounts to their clients. Backtesting takes time out of the conversation, as when backtesting, you are comparing trading strategies with historic chart data.
What's more, market conditions often change. In order to learn how to trade Forex profitably, first you must learn the power of refining and developing trading strategies.
Set a risk/reward ratio to 1:2 or higher or have a good success rate
If you're wondering how to make a profit in Forex, there are two general ways to do that. If you follow the first way, you can make profits even if your predictions come true only 50% of the time. Usually traders pick 1:2 risk/reward ratio or higher. For example, if a trader aims to gain 100 pips from a given position, he or she might consider placing the stop-loss order below 50 pips of the current market price. However, keep in mind that the setup should dictate Stop Loss and Take Profit targets and not your trading agenda. If the setup doesn't give you an opportunity, you shouldn't force a trade.
The second way to make consistent profits from trading is to have a higher than 50% success rate on your predictions. That way, even if the risk to reward ratio is 1:1, the system will produce account balance growth over a certain number of trades.
Setting realistic profit targets
To learn how to be profitable in Forex, we must first learn how to have realistic expectations. If your expectation is to double your deposit every month, you will use risky strategies and endanger your account balance. What's more, you need to learn more about the instruments you are going to trade.
Every currency pair has a different average daily volatility. For example, EUR/CHF moves by 50 to 55 pips on average, as the two currencies are highly correlated. Consequently, it might not be realistic to set a daily profit target with this pair at 100 pips. For such ambitious goals, there are other currency pairs such as GBP/AUD or GBP/NZD, where their daily fluctuations might range between 190 and 210 pips.
Regularly rewarding progress
One key aspect of consistently profitable trading involves taking the time to recalibrate your trading strategy and reviewing your performance results. Positive reinforcement of successful trades and a regular assessment of the strengths and weaknesses of your strategy can go a long way in setting up a healthy trading routine for you.
For instance, when you execute a highly profitable trade, take a moment to evaluate why the trade panned out the way it did and what correct steps you took to achieve this profit. Doing so can help you get a clear view of your trading rationale, which makes you a more conscious and self-aware trader.
Having a clear understanding of what your strengths and weaknesses are serves as a safety net of clear expectations and well-defined trading objectives, which in turn helps you avoid making irrational, emotionally driven trades that can end in major losses.
It is true that a bulk of your success depends on your mental fortitude and a realistic assessment of the market, which can be done by setting up a consistent routine that you can follow on a daily basis.
Conversely, when things are not going according to plan, it does not hurt to take a moment away from the computer screen to rest and reassess your approach for the day. This allows you to gain clarity and avoid unwarranted risk-taking.
While a consistent strategy involves regular trading, this does not mean that the routine is the cornerstone of success. An appropriate mindset and a healthy approach to trading decisions can help you stay on top of things.
Another factor to consider is the mental strain regular trading can put on you if you are not taking the effort to maintain a healthy balance between financial success and mental clarity, you run the risk of losing both in the long run.
In order to be a consistently profitable trader, you should strike a good balance between rewarding yourself for your successes, while also striving to make incremental improvements in your strategy over time.
Trading psychology is an integral part of success and should not be ignored, as a balanced perspective can reduce stress levels and shield you from rash decisions in the heat of the moment.
Avoiding the use of high leverage
The best Forex strategy for consistent profits should include risk management. High leverage increases trading risks. Many highly regulated brokers offer maximum leverage of 30:1, 50:1. And that simply means that you can get up to 50 times the purchasing power on your deposit. However, it is not a simple coincidence that many financial commentators describe leverage as a double-edged sword. The problem is that over-leveraged trading can easily lead to severe losses, from which it will be very difficult to recover. Leverage can increase your profits, but it can just as easily wipe out your account balance. You can find some brokers that offer up to 300:1, 500:1 or even 2,000:1 leverage
Not investing more than 5% of trading capital on each trade
To answer the question on how to profit from Forex trading, you need to learn how not to lose your trading capital. Professional traders grow their trading balance gradually and steadily. They manage drawdown periods well and do not take wild risks. Most professional traders only risk 1-5% of their trading balance per trade. Profitable and consistent trading is all about probability. When you break that balance and take larger risks, results get dependent on single, particular trades that can either skyrocket or destroy trading balance.
Keeping a trade journal
Trading journals help traders learn from their own mistakes, discover strengths and weaknesses in their trading strategies, and improve results. Most professional traders use some form of trading journals. They keep traders accountable and prompt them to take more reasonable trades. They also help avoid opening unnecessary trades. Understandably, when you are documenting your trades, it's more likely to be more selective in your trading setups and avoid mistakes.
Interestingly, the trade journal can not only provide valuable insight into the results, but it can also have a great motivational value for traders. If a market participant sees that despite all of his or her mistakes and setbacks, the average monthly earnings are getting better, then this can be highly encouraging
Doing regular fundamental research
The final step towards possibly achieving a consistently successful trading experience is to stay on top of the latest economic trends. Clearly, it might be very difficult to keep track of dozens of currencies, however, a trader can start by studying 8 major currencies, which compose Forex Majors, paying attention to the latest Gross Domestic Product (GDP), Consumer Price Index (CPI), unemployment rate and other important releases, as well as interest rate decisions.
Even when you decide to day-trade and avoid fundamental trades, reading economic news can safeguard your technical trades from high volatility and uncertainty. Upcoming economic announcements and political unrest causes currency pairs to sharply fluctuate. Many technical traders avoid placing orders during or prior to such events.
Investors, swing traders and position traders generally analyze fundamental data.