The US dollar surged to an 18-month high this week, influenced by expectations that interest rates could rise combined with global political uncertainties. The Wall Street Journal suggested that Brexit, Italy’s budget and Chinese trade tensions have all had an impact on the US currency’s rise to the highest intraday level that traders have seen since April 2017.
As always, forex traders worldwide will be doing their best to capitalise on the USD high, but there is a lot more to forex trading than tracking price action. Read on for some advice on how to make wise and well-informed decisions as a forex trader.
Develop your forex mindset
Developing the right mindset is almost as important as developing the right strategies. Perhaps more accurately, your mindset will allow you to follow your strategies more effectively. Your personal trading philosophy helps you maintain discipline in the face of stressful and unexpected market fluctuations and stick to your strategy when emotions are running high.
Closely linked to your mindset are discipline and money management. It is advisable that forex traders put rules in place and always follow them when it comes to money management. Many smart traders have rules such as:
Developing the discipline to stick to your risk management guidelines, no matter how well or badly that a particular currency is doing, marks a big step towards making better decisions while forex trading.
Develop your forex strategy
To have discipline, you must first have a strategy in place. To devise a strategy, you will want to look at the following factors:
The key to making better decisions as a forex trader is to make those decisions in a cool, calm state of mind. You should work out your strategy before you start trading for the day and follow it regardless of what happens in the markets. Strategies are always growing and changing, and if you have taken a series of consecutive losses, then it is definitely time to tweak your approach. Again, you should do this in a calm state of mind when you have had time to analyse why your losses happened and what you need to do to recoup them.
Successful traders do not enter and exit positions on a whim. They do so when their strategy indicates that they should. They do not suddenly decide in the heat of the moment to trade a new currency pair when they have not carefully researched the pros and cons of trading that pair. They do not decide to throw a large percentage of their capital at a currency that they are barely familiar with just because it seems to be trending upwards.
Understand technical analysis
Technical indicators are an invaluable decision-making aid for most traders, but these indicators do not make trading decisions – traders do. Technical indicators merely track, monitor and (imperfectly) predict what is happening in the markets. As a trader, you decide on your strategies and then use your indicators and your technical analysis skills to implement those strategies. Learning technical analysis skills will, however, certainly enable you to make more informed trading decisions.
Understand fundamental analysis
As mentioned, the Wall Street Journal credits several global events as contributors to the recent rise of the US dollar along with expectations that US interest rates will also soon rise. Monitoring worldwide political shifts and uncertainties as well as other fundamental indicators such as interest rates and inflation is always a good idea for a forex trader. Just remember that world and industry events simply provide data to analyse. It is possible to make better decisions as a forex trader if you are monitoring fundamentals, but only if you understand what the data means and can accurately predict the effect that it will have on price action.
Keep your leverage low
Those who trade with too-high leverage may be more apt to make bad decisions, simply because they feel that they have more capital than they really do. Trading with high leverage means that the possibility to make larger amounts of money is always there and always tempting. When a large amount of capital is involved in a trade, then you may consider ignoring your carefully prepared strategy and even signals from your technical indicators in the emotion-fuelled hope that you will be able to win big. Sometimes, trading with high leverage does allow traders to make big gains. However, it often results in them making big losses.
Start small and grow organically
The most successful long-term traders are typically those who started small out of pure necessity. They did not have a lot of capital to invest or the confidence to use high leverage, but they did have the time to learn how to trade successfully. Traders do not need a lot of money to open a forex account. Most brokers offer micro-accounts with deposits of as little as £100 or less. Neither do new traders need to spend a great deal of money to invest in education and training. Most brokers offer free training videos, tutorials and online learning resources.
The traders who make the best decisions may simply be the ones who took the time to grow organically into their forex careers. They used demo accounts to really learn the ins and outs of their chosen platform, then used micro-accounts to try out strategies without losing a lot of capital. They learned how to use technical indicators one at a time and then practised combining and layering them for the best results. It takes time and patience to improve your decision-making process as a forex trader.