It is the world's biggest financial market, so it is not surprising the forex market has attracted traders of all levels.
From beginners to experienced traders, the forex market can provide significant gains, and even be a lucrative side-hustle for some.
However, things may quickly go awry if traders do not observe certain practices to keep their potential losses in check.
Here are five trading routines that can help deliver maximum returns, while minimizing risks.
1. Apply the risk rule
Stock markets are volatile and never predictable. The one thing traders can control is their risk.
Successful traders believe they should never risk more than 1% to 2% of their trading account per trade.
It does not necessarily mean you should only spend up to 1% of your account on trades. Adhering to a 1% rule means that is the maximum amount of risk you are willing to bear for any single trade.
This typically is carried out with a stop-loss position, so trading is halted once 1% of the account is lost.
It limits losses and avoids creating large dents in trading accounts. Some traders, especially those who trade with higher amounts, set their risk rule at less than 1%.
Why do this
Sticking to this rule keeps capital losses at a minimum when a trader experiences an off day or harsh market conditions, while still allowing substantial monthly returns on income.
2. Do the legwork first
This may be stating the obvious, but every trader should know the fundamentals before hitting the floor.
That means getting a grip of the lingo and studying different trading strategies. Traders also should be tracking and analyzing market trends.
There is no single road to success with forex trading. Every trader needs to grasp the basics, read all the graphs, and know the essentials.
Maintaining a trading journal will further help you identify your strengths and weaknesses. You then can tweak your trading strategy to improve your gains.
Traders also can tap on tools in the market to help them trade with the right information on hand. These can include forex calculators and economic calendars. Trading platform Forex4you also offers Trading Central to provide free technical analysis of six major currency pairs, including USDJPY, AUDUSD, and GBPUSD.
Why do this
It takes a strong stomach to get through volatile days on the trading floor. Arming yourself with the right knowledge and foundation will help build resilience. It puts you in a stronger position to stay calm and think clearly, even as the market fluctuates.
3. Put in the time
Learning the jargon and studying the markets are just theories if you do not put them through the motions.
As you study market trends, you also need to apply your analyses to assess their effectiveness.
You can test them out with free trading accounts that are available online. These offer a risk-free way to ready yourself mentally for the actual trading floor.
Platforms such as Forex4you provide demo accounts to allow you to carry out forex trading, without any capital, and test your trading strategy in a live market.
Why do this
Practice makes perfect. You need to familiarize yourself with key trading tools, so you can navigate your way with ease as the market moves. Your ability to quickly decide on which trading strategy to use as you spot upcoming market opportunities is vital to mine bigger gains.
4. Keep eye on win-rate
Apart from a risk rule, traders also may want to keep their eye on their win-rate.
It looks at the number of profitable trades over a specific time against the total number of executed trades.
Alternatively, a win-loss ratio looks at the number of winning trades to the number of losing trades. It tracks solely the winners and losers, and not how much is gained or lost.
Successful traders will want to maintain a win-rate of at least 50%. They also should aim to keep their win-loss ratio above 1.
Why do this
While they should not be used on their own to measure success, win-loss ratio and win-rate can allow traders to quickly assess their daily trading returns. The figures can tell them if they should keep pushing their current trading strategy or tweak it to improve their gains. These stats, though, should be used alongside other data insights to provide a more complete assessment of your trading plan.
5. Have some capital for better leverage
While it is possible to enjoy healthy returns from a small starting capital, more substantial amounts offer flexibility.
You can start trading with as little as $100, but some traders believe $5,000 provides more appropriate income in return for the time you will be putting into trading.
More importantly, when traders begin on limited capital because it is all they can afford, they risk becoming emotional due to the high leverage. They can end up making irrational and costly decisions, especially on a volatile trading day.
If you trade with a more reasonable capital, it leaves more room to strategize.
You also think more calmly knowing you can stop trading for the day, when you have hit your stop-loss position, and have sufficient capital to return the next day when the market picks up.
Why do this
When the risks are higher, mistakes are more likely to happen and can escalate. Be aware of the risks involved in forex trading. Trade with only what you can afford to lose and mitigate your risks.
Forex Trading involves significant risk to your invested capital. Please read and ensure you fully understand our Risk Disclosure.