Trading financial markets has become more and more popular as financial markets have become easier to access, trading technology has progressively become very user-friendly, and trading the markets has gradually become less cost-prohibitive. Becoming a successful trader means engaging in a profession that offers unlimited earning potential for those willing to do what it takes to achieve success. Unfortunately, not all traders will succeed. Much like professionals such as Actors, Athletes, Authors, Musicians, and Entrepreneurs (and many others), Traders have chosen a vocation in which only an exceedingly small percentage achieves the level of ultra-success that such choices beckon. Though many traders have attempted the path of trading success, many more have and will be left asking themselves “how do I become successful at trading,” and will never be able to answer the question, and consequently be successful.

What is a Trader?

The dictionary definition of the word “trader” is a person that buys and sells assets for the purpose of making a profit. While this is definition is accurate, it can apply to both traders and investors. There is however a very discernible difference in the mindsets that must be embraced by the two. For all aspiring traders, understanding these different mindsets is an important step in learning how to become successful forex traders.

Trading vs. Investing

Many people in the financial industry, and especially novice traders, use the two terms “trading” and “investing” interchangeably. In learning how to become successful at trading the financial market, it is imperative for traders to understand that although they are closely related, these are two different concepts. An example using a stock clearly illustrates this.

An INVESTOR interested in investing in stock will analyse the strength of the underlying corporation’s FUNDAMENTAL data (earnings, revenues, financial ratios, etc.) in order to identify stocks that are currently trading at a price that is less than a price that would represent the true value of the corporation based on its book value. An investor will then acquire stock in the corporation (long position) and hold the position for the long-term until the price of the stock reaches a level that better represents the net worth of the corporation. At this point, an investor may choose to liquidate the position and realize the profit or continue to hold the stock and let the value grow along with the growth of a corporation.

By contrast, a TRADER analyses a stock’s historical PRICE DATA using technical analysis to forecast price movements (up or down) that result from disparities in the stock’s supply and demand of the moment. The strength of the corporation is of no concern, so long as there exists sufficient daily price movements(volatility) in either direction and volume on which the trader can trade in and out of in both up and down directions in order to capture profits from short term price movements. Understanding this mindset is the key to learning how to become a successful trader.

To the Investor, a “trade” is a necessary means to initiate the acquisition of, and to liquidate, the investment. To the trader, “trading” is more appropriately identified as an “activity.” The reason this distinction is so important is because traders must approach their analysis of the markets differently from that of the Investor. This is the first step in how to become successful at trading all financial markets.

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Types of Trading for the Forex Market

Many people wonder how to become a successful trader. One step toward that end is for a novice trader to adopt a style of trading that is well suited for the individual trader. After distinguishing a trader from an Investor, different types of trading styles can be delineated based on the methods used to trade. Once novice traders learn the basic knowledge needed to get started, each will begin to develop their own unique style and method that works for them.

Short Term vs. Long Term Trading

The duration of trades and profit targets in a trading strategy used by a forex trader are perhaps the most important factors considered when determining the type of trading to use. Scalp traders seek to take advantage of very short-term price movements to capture small profits of up to about 10 pips per trade. Their approach is to closely monitor a very short term time or tick chart (1 to 5 minute, or 5 to 10-ticks) for specific price action patterns, or monitor the depth of the market on a montage quote screen to try to spot order imbalances in trade order books that result in quick price movements.

Next are the intraday traders, also referred to as day-traders. This is the most popular style of trading in which traders seek to minimize risk while attempting to make profits in the range of 20 to 100 pips per trade. Positions are usually held for no more than 1 to 2 days, and losses are cut quickly. Trade exits are usually based on targets. The type of analysis used for this type of trading is typically some form of technical analysis and varies widely from trader to trader.

The swing traders and momentum traders seek larger profits from larger mid-term price movements based on forecasting short-term market trends. Profit targets range from 50 to 200 pips and exits are a combination of targets and conditions. Trades may be held for several days to a few weeks. Technical analysis is typically used to find momentum shifts in the markets and trade accordingly.

Position traders take a longer-term view and attempt to capture profits from long-term trends. These traders may use a combination of fundamental data, chart price patterns, and technical analysis using charts with larger time frames (i.e. daily, weekly, monthly). Trade exits are usually conditional and scaling in and out of trades is common.

Quantitative Trading and Back-Testing

Quantitative traders utilize all the aforementioned trading methods in conjunction with computerized statistical modelling techniques to automate the decision-making process. This allows traders simultaneously analyse and trade more assets without experiencing information overload which may lead to less than optimal decision making. It also helps traders remove emotion from the decision-making process.

Another advantage that quantitative trading allows for is the back-testing of trading strategies for validity before risking any capital. Back-testing allows a trader to use historical data to simulate the trading of a strategy over an appropriate period of time and analyse the results for profitability and risk. A trader can then decide if a trading strategy meets their minimum risk profile.

Markets Available to Trade

In the forex market, there are as many currency pairs as there are currencies in the world, and all pairs can be exchanged so long as they are quoted by a broker. However, not all pairs are suitable for “trading for profit” based on trading strategies that seek to profit from price movements.

Currency pairs that are categorized as “major currencies” include the EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, USD/CAD, and the NZDUSD. These currency pairs are the most liquid and trade the highest volume on a daily basis. They also have the tightest spreads, although the spreads may vary from broker to broker and the type and size of the account. These pairs are very well suited to trading. All successful forex traders trade these markets.

Currency pairs that are not associated with the US Dollar are referred to as “minor currencies,” or “crosses.” These pairs have slightly wider spreads, are not as liquid as the majors, but they are sufficiently liquid markets nonetheless. The crosses that trade the most volume are amongst currency pairs in which the individual currencies are also majors. Some examples of crosses include the EUR/GBP, GBP/JPY, and EUR/CHF to name a few. Most of these pairs are also well suited for trading.

The third category is referred to as the “exotic currencies.” These currency pairs include currencies of emerging markets, are not as liquid, and the spreads are much wider. An example of an exotic currency pair is the USD/SGD (US Dollar/Singapore Dollar).

Currency Pair Attributes to Consider

When trading the forex market, the trading strategy that is employed will determine what currency pairs can be successfully utilized to generate profit. As a general rule, all strategies require that the currency pairs have high liquidity, reasonable spreads, and decent execution by the broker. A short-term intraday strategy that seeks small profits will require the tightest spreads and fastest executions in order to avoid excess slippage. Too much slippage on a short-term strategy may result in losses, even if the strategy shows promise in backrests. By contrast, a strategy that is longer-term in nature in which slippage is not as critical, currency pairs that have wider spread may be suitable.
Another important element to consider is the amount of profit (or loss) resulting from a one pip price movement. For example, the US dollar (USD) per pip for the GBPUSD and the EURUSD is fixed at $10. This means that for every single pip movement in price will result in $10 of profit (or loss) per contract. Currency pairs in which the USD is the base currency (listed first in the pair: i.e. USDJPY and USDCHF) will vary in US dollar per pip depending on the price. The currency pairs with higher profit per pip movement will yield more profit/loss and are better suited for trading. That is not to say that currency pairs with lower profit per pip movement should not be used, however, profit expectations should be adjusted accordingly. Some trading strategies are not flexible enough to use currency pairs with a lower-yielding US dollar per pip metric.

Watch this video: How to be a successful trader (15mins 17secs)

How to Become a Trader?

A Trader’s Education

Learning how to become successful forex traders is not common knowledge. It is a process that successful forex traders must persevere through. The first and foremost requirement for all successful forex traders is the acquisition of trading and market knowledge. There are many avenues for accomplishing this requirement ranging from watching YouTube videos to completing a full-fledged university degree with a major in the subject, and everything in between. The level at which an aspiring trader begins the education process varies depending on circumstances, but certain elements should exist for every trader’s educational journey. Some sort of training program, whether formal or informal should be completed. At minimal, a course should include topics in basic market and trading principles, trading technology, and risk/money management. More advanced subjects should follow, but these should be enough to get started trading on a demo account. Lastly, a trader’s education should be never-ending.

Demo Account

Most forex brokers offer demo accounts (short for demonstration accounts) to entice potential customers to eventually open a real account. Demo accounts simulate real accounts, but the balances do not represent real money. A very important part of learning how to become successful forex traders includes practicing on a demo account. Novice traders should apply all the knowledge they learn on a demo account to refine and practice their trading skills and develop a trading style and strategy that they’re most comfortable with. A novice trader should not transition to a real account until such time that they make consistent profits for at least several months. If a trader cannot generate profits on a demo account, they surely will not do so on a real account.

Live Trading

A novice trader can acquire vast amounts of knowledge and hone their trading skills to perfection on a demo account, but there is still one very important element that must be overcome. All the knowledge and practice in the world cannot teach, simulate, or prepare a novice trader for the effects that the emotional distress of trading is going to have on them. When the novice trader transitions to a real account, experiencing greed and fear, two extreme human emotions, will be introduced into the trading process. If not recognized and checked, rational decision-making ceases, and critical errors usually follow. This emotional component of trading must be experienced in order to overcome it. For anyone that is wondering how to become successful at trading, this part of the journey leads to loss of capital, and unfortunately, it is here when most traders fail. It is here where perseverance matters. All successful forex traders will attest to the fact that they went through a losing phase but did not give up. And eventually, the trading profits came, began to be consistent. At this point success as a forex trader is possible.
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Hopefully, you have enjoyed today’s article. Thanks for reading!

Have a fantastic day!

Nisha Patel

Live from the Platinum Trading Floor.