Having the right mindset and trading approach are key prerequisites for making profits as a trader in the forex market. Many new traders get overwhelmed and intimidated by the market volatility and end up making many costly mistakes in the trading process. Everyone talks about the importance of having a solid strategy but developing your mindset and selecting a suitable trading approach is just as important to survive in the fast-moving currency market. This is also a challenging task for a beginner who is not very well-versed in the workings of the forex market and the complex trading concepts.
In this blog, you will learn about how you can develop the right mindset and trading approach to trade forex with ease.
Pay Attention To Risk Management By Setting Personal Trading Rules
We can refer to risk management as the backbone of a trading system. Even the best strategy will not lead to the desired results if you don’t focus on managing the risk. Risk management is not just about closing the losing trades early by placing stop-loss orders. Stop loss is an important tool that helps in limiting potential losses but there are many more aspects that you need to consider for limiting your risk exposure. You should never risk more to earn more.
Because whenever you underestimate the risk for the sake of making more profits, you will end up making irrational decisions that lead to huge losses in the end. Thus, you need to take a calculated risk and set some personal trading rules to follow. This includes setting a risk/reward ratio based on your risk tolerance and profit targets and limiting the use of leverage to protect your trading account. You should also use a margin calculator to determine the level of margin needed for a trade.
You should decide the trade size or position size in an optimal manner as it determines your risk per trade. All traders are advised to limit the risk per trade to 2% which means only 2% of the total account balance should be used for a single trade. This helps to minimize the account drawdown even if you lose 2 or 3 trades in a row. If you have a favorable risk/reward ratio, you won’t be in much trouble even with a low win rate and will be able to maximize the gains from the winning trades.
When it comes to setting up personal trading tools, you should decide the maximum number of trades you can enter for a day or week depending on your trading style. For instance, scalpers and day traders will be entering more trades than swing traders and position traders. But you need to draw a line and trade within a limit so that you don’t slip into overtrading or deviate from your strategy as you come across trading opportunities that do not come under the scope of your trading plan.
Enhance Your Analytical Skills
The next thing to do to develop the right mindset and trading approach is to enhance your analytical skills. Those who are good at market analysis will always rely on logic instead of making impulsive decisions by trusting their gut feelings. Whether it is technical analysis using candlestick charts or fundamental analysis based on economic indicators and news releases, you should be good at interpreting the market scenario from the real-time data that is available to you.
Sometimes, you will also have to look back on history and see how the market and currency pairs reacted to a similar situation in the past. This is especially helpful in the case of fundamental analysis. For technical analysis, you will have to master the art of chart reading and pattern recognition as you should be able to anticipate the potential price movements based on the patterns that are formed on the price chart for the selected timeframe. It is about focusing on the price action.
But you can also add a few technical indicators to the chart for more precision. However, these indicators cannot be 100% accurate and you should not be too dependent on any tool or indicators. Even the patterns that you see on the chart can be misleading and an example of this is false breakouts. Thus, you need to double-check your analysis and assess the situation from different perspectives before reaching a conclusion.
Start With Demo Trading
Last but not least, starting with demo trading is one of the easiest yet essential steps that you need to take to develop the right mindset and trading approach. On a demo account, you get to place trades in real-time market conditions while also being free from the risk of losses as you are only trading in a simulated environment. You don’t need to invest anything to activate a demo account as the broker will be depositing virtual funds that you can freely use for practicing in a realistic manner.
When you are demo trading, you can also use various time-saving trading tools like automated forex calculators and learn how to use them properly for precision in your trading decisions. Calculating values while Forex trading can be a complicated and time-consuming task, so it is better to get it done via specialized tools. These will calculate fluctuating exchange rates, pip value, and lot sizes. Thus, the possibility of errors will be high when you do these calculations manually and it can lead to trading mistakes. But when you use trading calculators, they provide instant and accurate results.
Besides getting familiar with the trading tools, demo accounts are also useful for testing your strategy and trading techniques in a risk-free environment. The results you get with the strategy in demo trading can reveal a lot about the strengths and weaknesses of your trading system. Then you can work on fixing the shortcomings of your strategy and refine your skills to get better results in live trading later on. However, a demo account’s success does not mean your strategy is flawless.
One challenge that you will face while trading on a demo account is that you may not be able to experience the emotional rollercoaster which is a part of the live trading process. Because you know that the wins and losses on a demo account do not make any difference and you will not be dealing with any kind of stress when there is no risk involved, but you should treat the demo account like a real account and follow a serious approach as that helps in training your mind.
Final Words
In a nutshell, developing the right mindset and trading approach is a time-consuming process for a new trader in the dynamic forex market. It is easy to lose your sanity when you step into the stormy sea of forex for the very first time. But those who can balance themselves amidst the waves and decode the secret to sensing the market direction can surely catch the profitable opportunities and sail smoothly. Risk management is your safety net that saves your trading account from sinking and enhancing your analytical skills and demo trading prepares you for any situation.
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