emotions in trading

5 Ways To Improve Forex Trading Skills

Forex trading is a tough nut to crack for most investors, and it's a common fact that a large percentage of them lose money.

There are so many stories of traders losing thousands and thousands of dollars in a matter of days.

And knowing that, you'd question if there's actual money to be made in currency trading, or is it just a losing proposition.

Well, the truth is Forex is no different from other markets -- there is a potential to make and lose money from fluctuating prices.

Yes, it can be a vehicle to create decent income, but what screws that up are the traders themselves.

This article aims to help you understand how you can avoid falling into the same trap that losing traders have been victims of.

You'll first read about common trading mistakes.

Then, you'll learn about specific ways to improve your Forex trading skills.

And hopefully, when you have implemented our suggestions, you'll see a dramatic improvement in your results.

Common trading mistakes

If you compile the typical errors of traders, you'd probably have a list that includes leverage, risk management, and psychology.

A propensity to gamble is another, and it best describes those who got into trading with insufficient knowledge and experience.

In some cases, traders would lose money because of the wrong strategy. And while it's true that certain strategies would be suitable for specific scenarios, it still boils down to how a trader approaches a trade and manages risk.

You can sum up why traders fail using the following statements:

  1. 1
    Right tools. Wrong approach.
  2. 2
    Right approach. Wrong tools.
  3. 3
    Wrong tools. Wrong approach.

You might be wondering if the right tools pertain to only technical strategies, and that isn't the case because it also encompasses your overall understanding and skill.

To learn more about the common trading errors, you can read this article.

Now, here are the steps to improve your trading:

1. Tackle Your Trading Psychology

trading psychology

Your first step to improving your results is addressing your psychology. This isn't exhaustive of how you handle your emotions when trading; it also includes how you view Forex trading in general, aka your approach.

For example, do you see Forex as no different from gambling, or do you genuinely believe that there is a potential to make money in this market? Having the right answer to this will have a positive impact on the way you trade.

And when it comes to handling the psychology part of the game, you have to remember to control your greed and hopefulness.

Greed will tempt you to take on higher leverage to accelerate profit-making, which, correspondingly, increases your risk. And hopefulness is similarly deleterious as it sucks you in a bad trade for an extended period.

2. Learn to manage your risk properly

The next tip here is to be mindful of your risk. You might hear professionals mention the word risk over and over, and that's for a good reason.

Trading the Forex market is all about grappling with risk, and the thing you must understand is that yes, you have to risk a certain amount of money per trade, but what you must ensure is that it stays within that predetermined value.

For example, you expect to lose only $150 in a trade, then your stop-loss and your lot sizes should conform to that.

a hand holding a coin and inserting it to a risk meter

Think of it as putting down initial capital for a business, and if you constantly inject fresh capital just to keep it afloat, it could mean that you probably invested in a bad business.

The same goes for a losing trade: it will not help if you can't force yourself to close it if it doesn't go your way.

Here's more about money management.

3. Perform regular Backtesting and Demo Trading

Now, this third step is perhaps the best way to improve your trading skills because it allows you to experience actual trading without risking real money.

Most experienced traders who develop a new strategy would not use a real account to assess its performance but would instead run it on a backtesting software or a demo account. This allows them to understand how a strategy works in two scenarios: historical and real-time performance.


Source: Forex Tester 4

It is equivalent to what athletes refer to as practice and is crucial to how they improve their skills in the sport they play. Since this article talks about Forex trading as a skill, it would necessitate the same preparation before doing the actual thing.

Editor's Note: There's a question about which among the two methods would be the most effective in producing optimum results, and the answer is backtesting. Backtesting allows you to control the pace of your trading, which demo trading cannot. And that capability alone can speed up the way you come to grips with your strategy's results.

4. Look for a dependable trading partner

two business people sitting back against each other

Finally, the last step here is to look for someone you can trade with, a sort of trading buddy.

You might ask why this is necessary, and the answer to that is to have an extra set of eyes.

A trading partner can provide you a trading day with someone to share insights and compare trade ideas with; it's also like a human trading indicator to add another layer of justification for your trade entry and exit.

This is not for you to rely solely on another person for everything, but it's just a way to get a second opinion on your analysis.

Tip: Find someone who can be as objective as possible, someone who'll say that every idea of yours is stupid -- like how Charlie Munger is to Warren Buffett.

If you can get someone who will often disagree with you, it gives your analysis more merit and helps you construct an unbiased trade setup.

5. Keep A Forex Trading Journal

Traders often forget that their trading history also offers clues that can help them improve. You should not make the same mistake.

Every trade that you've taken should provide you lessons for your future transactions. But how do you do that exactly? The answer is to keep a trading journal.

If you keep a journal of your trades, you can record each transaction with corresponding notes that details your rationale for taking them.

Therefore, when you look back at your trades, you understand the reasons why some of them ended up as losers and some as winners.

Trading journals are one of the most cost-effective ways to improve in trading because all you need is a simple spreadsheet and a history of your transactions.

But the thing that you have to remember when journalizing is to register every trade.

This article teaches you how to create a trading journal with a free template that you can work on.


So, as you work to improve your skills and follow the four suggestions in this article, you will find that you can't leave off any of them.

Your ability to control your emotions will lead to proper risk management, and your backtesting sessions will be your prelude to ensuring that.

And when you're starting to gain some ground, a trading buddy will offer you a more objective analysis.

But of course, these are just some ways to be a step ahead and is a clear direction away from just placing trades arbitrarily.

Ultimately, your improvement will still depend upon your desire to learn more. The market evolves as its participants become more knowledgeable, so if you expect to compete in a dynamic market, you have to evolve as well.


How can you do that?

Answer: Backtesting

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