Successful Forex Trading - 4 Essential Elements

Successful forex trading is a realistic goal if you'd like to earn a living working at home. Deciding in which direction a currency will move against another is not, however, very easy. Things that are difficult take time to learn. So in addition to the four essential elements outlined here you will also need the virtues of patience, determination and perseverance...I know, I haven't got them either.

Trouble is, if you're not trading with all the odds on your side your money is going to end up out of your hands. So after trawling the internet reading about all the magic courses/systems/methods which - and I'm quoting directly from a Google web search in front of me - offer '$100,000 a month guaranteed', '£500 in ten minutes', '£2,299.71 - £30,000 a month 100% fully guaranteed and proven'...I could go on, but you get the idea...how on earth do you pick a system which fits your needs?

It could be of course that those systems mentioned will indeed find you examining Caribbean real estate catalogues before you can get to the end of my article. But when looking at any trading system – no matter whether it’s forex, options, stocks or geegees – it must contain four essential elements.

1: Simplicity

Fibonacci numbers, Bollinger Bands, Andrew's pitchfork, Moving Averages, Crossovers, RSI...if only you understood them surely you'd be invincible? Well, no. The ones who tend to get rich are the sellers of these gloriously convoluted systems. What you need is a set of simple-to-read signals to show when to enter and exit a trade. Most importantly, anyone seeing the same signal would act in the same way so that it's no longer left to an individual's skill at reading the tea-leaves. The fewer indicators used the better. The trade might still go against you: you are not God, and your system cannot ever be perfect. So you will lose, and that is something very difficult to have to get used to. But a strong system will have larger wins than losses, and more often.

2: Reliability

It's all very well having a simple system, but it must work. I've seen articles recently giving away an entirely free system of great simplicity: buy at a four-week high, sell at a four-week low...I haven't quite got my head round it, nor have I checked to see if it's viable. At least it doesn't rely on decidedly risky tactics like trading around news events, where sudden rises and falls are common. Your system must be reliable, one that shows you the right move to make without letting you down too often (no system is perfect). The best way to trade is to use a system which will keep plodding along, quietly adding to your trading bank over time. Rather than aiming for hundreds of pips a day - very tempting! - it's far more productive to target, say, 5% a day, and achieve that with small risk and steady gains.

3: Consistency

You must find a trading system which suits your way of trading and then stick with it - provided, of course, that it fulfills all the essential elements. Then you must put it into practice in a regular and systematic manner. That may involve sticking to one currency pair, a particular time of day, a specific set of signals. And being consistent means not blowing your entire account on one trade 'which cannot lose'. Consistent money management is absolutely critical. You simply must stick to your rules regarding this because it's the difference between success and failure, no matter how wonderful your system. Risk a small proportion of your bank, be prepared to lock in profits and allow trades to run. If you make 5% a day, you'll double your bank within a month: double your bank every month and...well, I'll leave you to do the maths.

4: Risk Control

The quoted ads above come from a Google page. The internet is stuffed with claims about the thousands you can make, the pips won this month and so on. Of course you can be true. I could put $10 on sterling to rise against the dollar this minute, and if it rises 100 pips in an hour I’ll be $1000 better off – very nice! But what if it goes the other way? How much will I lose? The first question, before any other you ask, must be: how much am I willing to lose on this particular trade? With a million dollars in my account I will behave differently to someone with $50.

What you need to start off with in forex - or in any kind of venture, come to that - is a way to start small. You need to take a starting bank of $50-$100 and by targeting small, regular gains build up your trading capital reliably and consistently. Then you can take out your well-earned salary.

Using these four essential elements will help you to successfully trade forex with all the odds in your favour.