To become a successful trader, it’s very helpful to develop a sound trading strategy and have sufficient risk capital.
Risk capital is the amount of funds that you could afford to risk without a significant impact on your financial and overall well-being if those funds were to be lost.
In addition to financial resources, to be successful at FX trading you should also invest in time and education and experiment with various strategies, sometimes through trial and error. You will also need to understand multiple trading strategies as
no single strategy is foolproof - the effectiveness of each will depend on the specific market circumstances at the time you make a trade.
If you don’t already have an FX trading strategy, here are a few questions which might help you get started in developing one.
How experienced am I?
FX and CFDs are sophisticated trading products, and their pricing is influenced by a host of factors that might not be obvious to a novice trader, and sometimes aren’t even obvious to advanced ones.
If you are a beginner, one way that you can gain experience is by taking the time to learn about capital markets, how they work, and the trends that move them.
Your next step could be to practice demo account trading with virtual funds. When you’ve built up your confidence through working with demo accounts, you could migrate to a live account where you are trading real funds. However, it’s important
to note that there is a real difference between a practice and live account in terms of the psychological impact good and bad trades can have on you - be careful not to overestimate your skills.
When you’re first trading with real money, one option could be to start with trading with smaller contracts (micro or mini sized) in order to acclimate yourself to the market, volatility, risk exposure, and how the changes in profit and loss can
impact you emotionally.
What is my risk tolerance?
As a trader you should define the level of acceptable risk you are willing to expose yourself to and be strict about staying within that level. This can help you maximize the potential returns, while not exposing yourself and your investments to excessive
risk.
How much time can I invest in trading?
As part of any strategy, you will need to decide how much time you can allocate to trading and monitoring the markets.
If you have only a limited time available each day, it’s unlikely that a day trading strategy would be suitable for you. You can’t just consider the time you’ll spend trading either - you should account for preparation and research time
as well. In order to simply identify the trading opportunities you want to pursue, you might need to review charts, read up about the markets in other countries, or review economic calendars.
One interesting factor of FX trading is that the time you are available (and the time zone in which you live) can influence the product and markets you might want to trade in. If you live on the east coast of Canada, it might be easier to trade the active
times on European markets, while on the west coast it might be easier to trade the Asian markets.
What product do I want to trade?
FX offers a lot of choices. If you choose to focus on a smaller list of currencies, you make it easier to stay on top of the news and prices involved, which can help you make more informed trading decisions.
Do I have any expertise in technical and fundamental analysis?
Are you a technical trader who prefers to use charts and analytical tools, or a fundamental trader who prefers to study news and economic indicators for your trading decisions? Either way, it’s worth knowing a bit about the opposing school of thought.
Knowing both technical and fundamental analysis can help you with your trading decisions as they provide you with different information and perspectives. We talk more about market analysis later in this article.
Do I have the discipline to adhere to my strategy?
There can be a lot of temptation to simply react to random news or market movement rather than sticking to your strategy. You should only enter a trade if it makes sense to you based on your analysis at the time, and if circumstances change, you shouldn’t
let your ego deter you from selling a losing position before the loss grows. One tool you might consider to manage the risks of your open positions are stop loss orders.