Trading forex has undoubtedly gained huge popularity in recent years, attracting traders with varied expertise from across the globe.
However, the million-dollar question is, is forex trading a skill or simply a gamble? Let’s discuss.
The forex market is the most active financial market in the world, with global traders opening and closing positions every second, 24/5. Their goal is to speculate on the price movements of currency pairs in order to make a profit from the fluctuations. The forex market and consequently currency prices are impacted by a wide range of factors, e.g., geopolitical instability, economic news releases, natural disasters, and others. This makes the forex space incredibly volatile to handle, with skills playing a significant role in a trader’s potential success.
What skills do you need to start trading forex?
It’s all good and well to say a trader requires skills to maximize profits, but what does this mean in practice? Well, many of the skills required by a trader are common to those engaged in any type of activity in a high-stress field.
1. Patience, focus and discipline
Trading forex requires emotional discipline and a good hold on one’s psychology to be able to control emotions like fear and greed which often lead to impulsive actions. Skillful traders develop focus and discipline to stay consistent in their approach. This typically entails building and sticking to a trading plan and strategy that is best suited to their personality, temperament, and risk tolerance.
2. Continuous learning forex
Successful forex traders invest a significant portion of their time in learning about and understanding the forex market. This involves educating oneself on the concept of currency pairs, the factors influencing currency fluctuations (e.g., market sentiment, political tensions, etc), and the strategies for executing different types of trades. An important component of trading education also entails learning about technical and fundamental analysis which drives trading decisions.
Notably, there is no shortage of resources for traders to widen their scope of knowledge. The internet is packed full of material from which to learn. Forex brokers like T4Trade also offer an abundance of information through free podcasts, webinars, ebooks, videos-on-demand, Live TV, and even a real-time Economic Calendar. Additionally, T4Trade blogs cover a range of trading-related topics geared toward providing key insights that will improve your skills and expertise.
3. Research and analysis
Skilled forex traders are typically hungry for information and data that may impact the financial instruments they choose to trade, be this forex or any other kind. They want this information to be current, and up-to-date, to be able to quickly take advantage of trading opportunities as they arise. For many traders, this may look like monitoring the news vigilantly or making use of an Economic Calendar to set or track important releases.
As far as analysis is concerned, skilled traders are those who are well-versed in technical and fundamental analysis. How well they know each form of analysis may depend on the type of trader they are. For scalpers, day traders, or swing traders, technical analysis is of vital importance.
This entails the use of charts to identify pricing signals and price patterns. Technical analysts will look at historical price action in order to spot patterns and establish possibilities related to the direction in which prices will move.
In contrast, fundamental analysis is used to determine an asset’s intrinsic value before executing a trade. It involves the study of the wider economy, the health of the company to which the asset relates, as well as the state of the industry in which that company operates. The analyst will gather this data to forecast market developments and the relevant asset’s worth.
4. Effective risk management
Knowing how to manage risk is essential in forex trading. Skillful forex traders understand the importance of adopting risk management techniques that will safeguard their funds. This includes measures like setting stop-loss or take-profit orders to limit potential losses and hold onto their capital. Traders may also up the ante by making use of automated (algorithmic) trading that removes the emotional aspect of executing trades, reducing the risk of adverse trading decisions. Automated trading involves the use of trading robots (Expert Advisors or EAs) to enter and exit positions based on predetermined criteria or rules.
5. Picking a suitable forex trading strategy
A skilled trader will choose a trading strategy that is best suited to their character, risk tolerance, budget, and experience. To be able to determine what strategy is the best fit for you first requires identifying your objectives, i.e., what you intend to achieve. You must establish how much budget you have available, that won’t see you eat into your savings or other funds set aside for important events like purchasing a home, investing in a pension fund, buying a car, university fees, etc.
Learn everything you can about the most popular trading strategies to ascertain which strategy will best align with your needs and goals. Build a trading plan that incorporates your trading strategy (e.g., scalping, swing trading, day trading, trading on the news, position trading, etc) and ensure you include the relevant risk management measures to protect your capital.
6. Using a demo trading account to refine trading skills
Another way in which forex traders refine their skills is by using a demo trading account. Regardless of your level of experience, a demo account offers a way to practice trading without putting your own capital at risk. Further:
- The demo trading account environment mimics real market conditions, giving you a better feel for what live trading would look like.
- You can use the demo account to test a variety of trading strategies, from the easiest to the most complex, and assess outcomes.
- You are able to use virtual funds to enter and exit trades, thereby safeguarding your own money.
- It offers a way to learn technical and fundamental analysis better so that you can make more informed trading decisions.
- It provides you with the time needed to acquire the experience, confidence, and knowledge needed to move to a live trading environment.
While it’s clear that skill is an important part of trading forex, this is not to say that luck doesn’t play any role at all. Sometimes timing, market/investor sentiment, unexpected events, or even environmental disasters can unexpectedly drive currency movements, impacting trades in a way that has very little to do with skills or even experience. Saying that, expanding your knowledge in a way that boosts your skills, while having the ability to manage the unexpected, are key components to increasing your chances of success in this space.
Become a T4Trade trader
T4Trade offers traders a flexible trading environment of the highest standards through which 300+ tradable instruments from 6 asset classes can be accessed. This includes shares, indices, forex, futures, metals and commodities. Additionally, traders can choose a trading account based on needs and expertise, and enjoy competitive spreads, quick execution of trading orders, and fast withdrawals or deposits.
T4Trade also offers traders flexible leverage for traders to maximize all potential trading opportunities. Keep in mind however that leverage does come with high risk so care must be taken to implement proper measures to protect your capital. A highly responsive customer support team is also on hand to assist with all queries via telephone, email, or Live Chat.
Disclaimer: This material is for general informational and educational purposes only and should not be considered investment advice or an investment recommendation. T4Trade is not responsible for any data provided by third parties referenced or hyperlinked in this communication.
