You must have thought about trading forex for a living but do not know how to.
According to statistics, 65-90% of forex traders will lose money in the market for any given year. Many websites claim that there is a 96% failure rate in the live forex trading space, but industry data shows that the average percentage of losers is much lower at 77%.
Regardless of the finer details, one thing most forex traders will agree on is that for many, the path to living forex trading success is a challenging, sometimes torturous, one.
Mine was no different.
Why is this so? Is it compulsory to suffer like everyone else before living your forex trading dream?
In this article, I will show you all you need to know to avoid becoming a part of the damning statistics.
I was invited to a forex trading seminar many years ago. Throughout the seminar, the instructor spent more than half the time crooning about how much money we can make from the forex market. Of course, we were all impressed and couldn’t wait to jump right in. Interestingly, this seminar was held on a weekend when the markets were closed. Convenient for the organizers!
After the seminar, I was already dreaming of all the things I could buy with my forex trading proceeds so I couldn’t wait to get started. I began demo trading the following week, using the moving average crossover trading technique taught by the instructor. However, I was never quite following the strategy.
I was jumping in and out of trades, risking obscene amounts but making profits. In two weeks, I doubled a $10,000 demo account. At that moment, I felt I had struck gold. I quickly created a $1,000 live account, and as you probably guessed, I blew it in less than a week. I refunded the account with varying sums and bought tons of indicators.
After two years of wasting money, I quit. I stopped trading because I couldn’t find more capital to burn. I spent two years go back to the drawing board, learning about everything I never knew about the markets, but most importantly, resetting my understanding of forex trading as a get-rich-quick scheme.
It’s been five years since my last blown account, and I have gone from a blind trader to an extremely focused one with a robust trading system and a realistic expectation of the forex market.
That poor seminar set me off on a wild goose chase. For other traders, the reasons for the live forex trading struggles can be more than poor forex education.
Zero Understanding of Technical Analysis
Technical analysis is the bedrock of retail forex trading. You should be able to look at a forex live trading chart and predict where the market will go next with some accuracy, using tools like the Japanese Candlesticks, Bollinger Bands, MACD, Fibonacci Ratios, Support and Resistance and more.
You don’t need to know everything. Understand the basics, and then find technical analysis based strategies that are a match for your trading personality.
Your strategy needs to make sense from a technical analysis stand-point; otherwise, you are better off making your decisions based on a coin-toss. With a proper understanding of technical analysis, you can develop a trustworthy trading edge.
When you have developed a trading strategy based on technical analysis, backtest it for at least five years before deploying it in live forex trading. This will give you an idea of the profit expectations (monthly and yearly), possible drawdowns, number of consecutive losing months etc.
Keep in mind that there is no perfect trading strategy. If your strategy delivers winning months 70-80% of the time, it is excellent.
Poor Understanding of Money Management
After you have perfected a technically sound trading strategy, you need to adhere to strict money management principles. Decide on your average risk per trade based on the expected drawdown from the backtest of your trading strategy. If your strategy averages 40% drawdown a year based on risking 4% per trade, you can consider reducing risk to 2%.
40% drawdown may not sound like much for your $500 account, but will you be comfortable with losing up to 40% of a $10,000 account? How about on a $100,000 account?
The larger the drawdown, the more difficult it is for you to recover (see the Image below). For a 40% drawdown, you need to make 67% of your remaining balance just to break even!
Source from Babypips
When you have settled on a comfortable risk profile, stick with it. Don’t change it for any reason. Remember, even a strategy that wins 80% of the time can crash your trading account if you risk your entire capital on one trade that ends in the red. Unfortunately, there is no way to know when a bad trade will happen. This is why your money management skills are more important than your entry and exit skills.
Additionally, you need to factor in the concept of risk to reward ratio into the equation. How many winning trades do you need to recover from a losing trade? If one losing trade is enough to wipe out 2 or more winning trades, you need to rethink your money management and by extension, your trading strategy.
Most of the time, traders come into the forex trading market in hopes that it will put an end to all their financial misery in a short time. Even before placing their first live trades, many people have already calculated how they are going to spend the profits generated.
This is worsened by the promises from many signal providers, account managers and marketers. Some of them claim that they can help traders to make as much as 50-100% in profits daily! If you have this mindset, you are already doomed to fail. Making 100% of your account a day will require putting the entire account at risk on every trade.
The best retail forex traders aim to make between 1-10% a month on average. If this sounds like too little for you, you are undercapitalized. This brings us to the next point.
Small Trading Capital
The average retail trader will most likely open their first trading account with $1,000. If you have an excellent trading strategy that averages 5% a month, that is $50 in profit monthly or $600 a year. This is far more than 77% of traders will make in a year! Unfortunately, this sum is not enough for many traders to make a living. This leads to taking excessive risks in attempts to turn the $1,000 into $10,000 or more.
Higher risks, however, unleashes a wide range of emotions in traders which ultimately leads to a crashed account.
To avoid this, fund your account with the capital that reflects your income needs, but in line with your trading system’s profit expectations.
For example: If you need $25,000 yearly from your live forex trading, and your system averages 200% a year with responsible risk, your trading capital should be $12,500 at least.
Trading with Emotions
If you have an excellent strategy, sound money management principles, and a sizable account, but can’t separate emotions from your trading, you will still struggle in live forex trading. Fear and greed are the two primary emotions that plague many forex traders.
You can have the perfect trading system, but still, be afraid to pull the trigger at the right time. Fear is why you don’t allow winning trades to run to their logical conclusion. Greed is why you will ignore all the lessons you have learnt about money management and risk half your account on one “sure” trade.
If you still find yourself deviating from your trading plan or changing your risk profile, you are allowing emotions to influence you. Unfortunately, this is the hardest part of live forex trading. Not many people can bottle up their feelings and stick to a trading plan. The best traders know how to do this.
Yes, you can. By incorporating the principles we have discussed here, you can become part of the few that go on to become successful forex traders. Remember, making a living in forex trading is subjective. You need to decide what qualifies as a comfortable monthly/yearly income and work towards it.
Live forex trading doesn’t have to be difficult if you create a robust and technically sound trading strategy, sticking to astute money management principles and keeping your emotions in check, you will cement your place among the few that make a living from forex trading. You don’t need to read clichéd advice or follow the trading recommendations. Believe in your strategy and stay disciplined.
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