The first step towards becoming a profitable trader is knowing what it takes to succeed in this high-pressure environment. The good news is that four essential skills are needed to become an effective and profitable forex trader:
- Technical analysis;
- Risk management;
- Scalping strategies;
- Market timing.
We will go over each skill individually so you can determine if they apply to your style of trading. It’s important to understand that anyone can learn these skills. It all depends if you got the best forex trading courses to understand them.
Technical analysis is the study or practice of price action as it relates to market trends and cycles. It’s one thing to know how markets move, but another entirely to be able to tell when prices are likely to reverse direction. You need both types of knowledge to position yourself properly at any given moment. Without being able to read the tea leaves correctly, you could end up making poor decisions in the market. This would result in losses rather than gains.
There are many different forms of technical analysis available to traders, such as charting software, indicators, moving averages, volume profiles, Fibonacci retracement levels. Each has its own strengths and weaknesses based on the type of trader using them. Some people prefer simple strategies like trend lines, while others prefer more complex systems with multiple variables.
No matter which system you choose, though, you must always remember two things about technical analysis: 1) it doesn’t guarantee profits, and 2) you have to understand why the strategy works before implementing it into your own trades.
Risk management is all too often overlooked by new forex traders and even experienced ones who don’t recognize their mistakes until after they’ve made them. In fact, some of these same traders may not realize the importance of managing risks until they’re already out $100,000+. So let’s take a look at some common errors most beginning traders make and discuss ways to avoid those pitfalls.
Overconfidence – Most novice traders think they have mastered the art of reading charts simply because they watch other successful traders trade successfully. They believe they can do no wrong and therefore feel safe taking outrageous positions without considering potential consequences.
Unfortunately, this isn’t actually true. If you find yourself getting overly confident during periods of solid momentum, then stop right away! Remember that just because someone else was lucky enough to get a winning trade does NOT mean YOU should follow suit. It only means he didn’t lose his shirt doing it yet.
There are a lot of unique forex trading strategies to choose from, but this is one of the most popular among traders. If you haven’t heard of scalping, you probably live under a rock somewhere deep within the ocean. Basically, scalping refers to buying low-volume stocks quickly and holding onto them long-term. The goal here is to capitalize on small moves in stock prices by purchasing shares shortly after breaking above resistance.
Once a stock begins trending down again, sell off your holdings and wait for another opportunity to buy back in. This process repeats itself over and over again until there are large movements in either direction. What makes scalping unique compared to traditional investing methods is the lack of money invested. Instead, scalpers use leverage to magnify profit opportunities. Leverage allows scalpers to enter trades cheaply, allowing them to capture larger portions of each movement.
Market timing involves trying to predict future events prior to their occurrence. One popular method used today is Elliott Wave Theory. Essentially, the Elliott wave theory states that markets move up and down in five waves. Each wave consists of three smaller waves which represent various degrees of bullishness and bearishness. By identifying when the next major top or bottom occurs, one can make accurate predictions.
In addition to predicting tops and bottoms, Elliott wave analysis also serves as a useful tool for analyzing price trends. In fact, many professional forecasters utilize Elliott wave patterns daily to help determine whether bulls or bears currently control the market. Although Elliott wave analysis has been widely discredited among mainstream analysts and technical chartists alike, its popularity remains high among amateur investors looking for simple ways to improve returns. While it certainly cannot replace more complex systems such as Fibonacci retracement levels or moving averages, it can serve as a helpful supplement to those techniques.