The 4 Most Important Ds of Forex Trading
Anyone who forays into the forex markets does so in the hopes of making a profit. It is, after all, the largest and most liquid financial market in the world. But trading has its fair share of risks as well. It takes skill and a good strategy to make the most of trading opportunities. And, talking about strategy, there are 4 Ds that should be a part of every forex trading strategy. Here’s a look.
It is essential for every new trader to be aware of how the markets function and the fundamental factors that move it. While it is absolutely essential to find a winning trading strategy and stick to it, forex education is a continuous process, given that this is a dynamic market that evolves over time. So, for long-term success in this market, it is important to always look for new strategies, fresh information and ways to hone your skills.
A demo account can offer great support for back-testing new strategies. This account can also help you fine tune your skills and do so without losing real money. Whether you wish to learn more about a new technical indicator to ensure that you place precise entry-exit signals or to adopt a new timeframe or even adjust the position of your stop-loss order, everything can be tested before applying it to the live market.
The aim is to continuously strive to be a better trader. Reputed and regulated forex brokers provide traders with rich educational resources, such as articles, webinars, e-Books and videos, to help them make informed trading decisions. Apart from this, you could also seek out renowned books authored by successful traders to gain valuable insights.
Forex trading requires discipline and focus. Many traders waste a lot of time on creating the perfect trading strategy. But the reality is that no single strategy is perfect for market conditions. Rather, it is important to have an executable plan, as opposed to a perfect one. Discipline includes having patience to see the trades being executed as per your strategy, and not quitting trades too early, out of fear or anxiety.
Many traders might also abandon a strategy altogether, because it failed to deliver the expected results. This habit of continuous experimentation with different strategies only leads to frustration. One can try out strategies on demo accounts for practice.
It also helps to build a set of written rules and follow them to the end to ensure consistency. These include:
- Which instruments to trade?
- How much capital to risk?
- What timeframes to trade in?
- What should be the maximum number of trades in a week
- A defined stop-loss and take-profit level
- Defined leverage limits
- 2 or 3 technical indicators that don’t give similar signals
- Defined signals for entry and exit
Having a set of rules makes it easier to stick to the plan. Disciplined traders also abide by their stop-losses, and do not succumb to greed or fear. Setting a proper stop-loss level prevents emotions from creeping into trades.
Another aspect of discipline is not to second guess your trading system and pre-defined limits or exit strategies. Market fluctuations are common in forex, but it should not push a trader to change their course. Finally, it is always a good idea to conduct rigorous market research or fundamental analysis, to see whether the market conditions correspond to your plan.
Even the most successful forex traders have losing streaks, but they are also known for their determination and hard work. Owing to its high liquidity, 24/7 access, flexibility and low cost, forex trading is often seen as a lucrative option by young traders, who enter the market with the aim of making quick profits. But they soon get disillusioned, on account of a few losses in the early days.
There is a steep learning curve, and only those who are willing to accept their mistakes and learn from them are ultimately successful. This is why most successful traders keep a trade journal, where they note down every step taken, and the emotions associated with the trades. It helps them to look back and identify mistakes, in order to rectify them. Rather than jumping right into the live market, newbies should consider practicing their strategies till they get a grip of the market.
One might also call this determination being a little thick-skinned. After every losing trade, there should be an urge to bounce back. As stated earlier, most successful traders face losses from time to time. What they focus on is keeping their wins higher than their losses. The key is to remain rational and focused even during losing streaks and not let the setbacks affect your judgement.
The markets can always take a turn for the worse, which is why efficient risk management is indispensable while trading. Apart from tools like stop-loss and take-profit, it is also a good idea not to put all your eggs in one basket. By allocating investments across various instrument and asset classes, traders can minimise risks and put in place a better plan to reach their long-term profit goals. The idea is to diversify your portfolio such that different assets react in different ways to the same event or market conditions. This way, losses incurred in one asset class or instrument can be compensated by gains in another.
So let’ say that a trader invests in USD currency pairs, and faces losses due to sudden depreciation of the US Dollar. In such a scenario, a long position in commodity CFDs, say oil, could be beneficial, since we know that commodity prices have an inverse relationship with the greenback. Investment in the cryptocurrency markets through crypto-CFDs could also be a good option to hedge against declines in fiat currencies.
Cryptocurrencies fundamentally, are decentralised assets, which means economic factors like inflation and interest rates do not affect their values. This is why Bitcoin has been considered a safe-haven investment for all countries that are facing economic instability. US stock prices, on other hand, has a direct relationship with the value of the US Dollar, which means a declining dollar will usually not be good for the US equity indices too.
Successful forex trading is a culmination of several factors, and the 4 Ds bring in consistency and confidence for you to make informed trading decisions.