If you make the decision to start trading forex to earn extra income it is vital that you set yourself up to succeed. To do so you need to be aware of the 7 things you need to become a successful forex trader.
The desire to succeed
Firstly, it is elementary that you commit fully to the process of becoming a forex trader. That means that you are willing to put the time in to learn all important aspects of currency trading and the global currency market. You will only have the motivation to put the time in to learn, if you truly have the desire to succeed and make money trading currencies.
A genuine interest in forex, economics and the financial markets
Secondly, and this ties in with the first point, if you want to succeed as a currency trader it is vital that you have a genuine interest in the financial markets. If you are doing it just to make a quick buck, without actually putting in the regular work of reading financial news, analyzing charts and reading daily currency market updates, then you will most likely not succeed. Furthermore, you will need to learn about macroeconomics, as economic data and central bank policies are key drivers of the foreign exchange market. Hence, having a genuine interest in what moves the financial markets is a key component to becoming a successful currency trader.
The right online broker
There is a vast choice of online brokers that charge different spreads and commissions and have different product ranges. Hence, it is important to choose an online broker that is right for you. To do so, you need to choose a broker that covers the asset classes and currency pairs you wish to trade, charges you comparatively low fees, offers tight spreads, has a good reputation and is regulated by your country’s financial regulatory body.
It is also important that the online broker you choose offers easy-to-use chart analysis tools, timely market news updates and possesses good customer service. The best way to choose a broker is to check independent broker reviews and comparisons online.
Trading capital (but less than you might think)
To start trading forex you need a certain amount of capital. However, it is must less than you might think if you choose to trade with leverage. Leverage in the foreign exchange market refers to the ability to move, for example, USD 100 dollars worth of a currency using only USD 1. This would be leverage of 100:1, which is a popular leverage amount in the currency market. Other common leverage amounts are 50:1 and 20:1. Using leverage you can move large amounts of a security by only putting down a small initial amount per trade. This small amount is referred to as the initial margin.
The best way to use leverage is by trading so-called CFDs (contracts for difference) as they allow you to set your leverage, as you require it. By adopting a CFDs trading strategy you are able to profit off small moves in the currency pairs you are trading without putting down a large amount of capital on each trade. Hence, this is the best way to trade currencies if you only have a small amount of available trading capital.
The right trading strategy
Once you feel comfortable with the currency market’s terminology and mechanics and you have deposited your trading capital into your online brokerage account, it’s time for you to apply the right trading strategy.
When it comes to trading currencies there are many approaches you can take. For example, you can apply more of a momentum trading strategy and put on trades just after market moving news, such as economic data announcements, or you can use a technical indicators-based trading strategy and follow a set of indicators that give you buy and sell signals for the currency pairs you follow. Of course, there are many more approaches you can take. It is important for you to find a strategy that suits your style of trading and is in line with your risk-return profile.
The discipline to stick to your strategy
Once you have found a trading strategy that works for you, it is important that you have the discipline to stick to your trading strategy. A great way to ensure you don’t let emotions get in the way of you following your strategy is to set target prices and stop-losses, where your broker automatically buys or sells the currency you hold against another, once these trading levels have been hit.
The emotional stability to handle losses
Finally, if you truly want to succeed as a forex trader you need to develop the emotional stability to handle losses. No matter how good your trading strategy is you will have days where you will generate losses. It is important to accept down days and not let your losses affect you emotionally, as this could impair you when you put on further trades.