There is no definitive answer to this question. Different traders make money on Forex in different ways. Some use fundamental analysis, while others use technical analysis. Some trade short-term, while others trade long-term. However, there are a few basic principles that all successful traders follow. In this article, we will explore these principles and discuss how you can apply them to your own trading strategy.
The first principle of trading is to trade with a plan. Before you ever place the first trade, you should have already prepared your mind and devised a strategy for how to deal with various market conditions. What happens if prices rise? What if they fall? Which technical indicators will you use to determine when prices are likely to go up or down? How many pips can you afford to give up per trade? How much of your account will you risk on one trade?
What entries and exits will you use? What will happen if your entry or exit signals are wrong? Which strategies do you intend to employ for day trading, swing trading, long-term investing, etc.?
The more time and effort you put into preparing for your trades in advance, the more likely you are to succeed at Forex trading.
The next principle of trading is to risk only 1-3% of your total capital on any single trade. You may be able to make several hundred or several thousand pips when trading an account balance of $10,000, but you will not be able to do so using an account balance of $100.
Your capital is the total amount of money in your trading account, and it is the amount you stand to lose if you happen to make a bad trade. However, it is also possible for you to lose more than 1-3% of your capital if you are not careful. If you risk 10% of your account on each trade, then a 1-3% loss will result in total mind and body meltdown.
The final principle of trading is the simplest: follow your plan. This may sound like such an obvious statement that it hardly deserves mention, but it is vital to success in Forex trading that you always follow your plan.
Your plan of action should be derived from your market analysis and your risk parameters, but once it has been devised, you must stick to it no matter what happens during the course of a trade. The moment you deviate from the plan is the moment you begin to increase your chances of failure. There will always be market conditions that are beyond your control, but if you have planned for them in advance, you will have an answer. You can take a loss gracefully or even walk away from the market altogether.