| Updated: November 8, 2024- Jump to:
- Types of Profitable Traders
- Success in Forex
- Traits All Good Traders Share
- Successful Traders
- Becoming a Good Forex Trader
- Your Trading Style
- Practice with a Demo Account
- Educate Yourself
- Set a Goal
- Choose a System
- Keep a Consistent Journal
Getting good at Forex is a process that requires a lot of time, determination, and patience. If you want to become a successful Forex trader, then you must be prepared to lose some money and a lot of your free time. Of course, if you stay on course, follow your goals and work to improve your trading skills, it won’t be long before you start making profits on the Forex market.
People are drawn to trading because it is widely accessible and offers tons of opportunities to earn money. However, many of them fail to yield satisfactory results and end up losing their balance because they forget one essential thing – good foreign exchange traders are made rather than born.
Becoming successful on the Forex market is difficult, time-consuming, and requires effort, persistence, and dedication. Continue reading if you are serious about trading. This article defines success in Forex trading, differentiates between the two types of successful traders, and outlines the qualities you should nurture in yourself to improve your chances of turning a profit.
Also featured in brief are the inspiring stories of four of the most successful Forex traders in history. We finish off with six pieces of practical advice you should follow to become a better trader.
Types of Profitable Traders
First things first, a foreign exchange trader is a person who places orders on the Forex markets, either as an independent trader or on behalf of other individuals or financial institutions. Respectively, the placed orders are either in the name of the individual trader or in the name of the clients or institutions they trade for.
There are different categories of traders depending on the financial instruments they deal with. Currencies are traded in pairs against one another on the foreign exchange (Forex) market. An equity trader, on the other hand, purchases and sells shares in different companies whereas a commodity trader trades in goods such as coffee, cocoa, silver, gold, meat, natural gas, crude oil, and so on.
We can make a distinction between two basic types of successful traders, the first one being the part-time trader who places orders via a personal account in their name. Respectively, one such person uses their own funds for trade execution.
They need to open a live account with a broker who uses either a proprietary trading software or a third-party platform. There are many successful part-time traders out there, although it is common for such people to trade smaller volumes compared to professional investors in the Forex markets.
The second type is the professional who trades on behalf of other individuals or different financial institutions such as hedge funds, major banks, and investment funds. It is not uncommon for such a person to manage the accounts of other traders, generating a commission from each order they place.
When working for a financial institution, these traders are paid salaries, similarly to loan officers, bookkeepers or bank tellers. They use the funds of their clients to purchase or sell financial instruments, which is to say they are not directly exposed to market volatility. Such professionals often handle significant amounts of money in their day-to-day trading activities.
Defining Success in Foreign Exchange Trading
The concept of success is not easy to define since each person has a unique notion of what it means to be successful. The Cambridge dictionary defines success as “achieving the results wanted or hoped for” or as “something that achieves positive results”.
A novice trader must first determine what their definition of success is. What does it mean to you to be a successful trader? What do you wish to achieve by joining the Forex markets? Remain realistic when answering these questions.
It is of utmost importance for any trader to establish a quantifiable, clear, and attainable goal. You cannot expect to make millions with an investment as small as $1,000. Your goal can be something like achieving a 15% annual growth of your initial investment, winning $10,000 per year from your trades, or getting 200 pips each month.
Remember these are only examples. It is up to you to determine what you will strive after when you join the markets. Another important thing is to choose a long-term rather than a short-term goal. It is easier to remain committed and motivated when you have something to work toward to.
Once you establish a goal, you should consider what you must do to achieve it. Think about what financial resources you have at your disposal and whether they coincide with your goal. Some of the things worth considering are your deposit’s size, the amount of time you can invest into Forex trading, and how much money you are willing to spend on trading-related materials such as signals, algorithmic trading robots, software, education, etc.
All of this seems overwhelming and difficult to trading novices but then again, nothing worth achieving is easy. Success requires a full commitment, meticulousness, and tons of work. Last but not least, remember money is not necessarily the only measurement of success. You will never be truly successful if you lack passion for Forex trading.
Once you have determined what Forex success means to you, you must devise a clear plan about how to achieve your goal, i.e. what pairs you intend to trade, the number of positions you are going to open, what strategy you will follow, and so on.
Traits All Good Forex Traders Share
Success in Forex is not only about strategy, risk management, and constant monitoring of the markets. There are certain qualities inherent to all good traders such as patience, discipline, mental stamina, emotional detachment, and the ability to set reasonable expectations. These are the qualities all novices should strive to develop and nourish if they are looking to become successful traders.
Jesse Lauriston Livermore, one of the most successful stock traders of all time and the person to pioneer day trading, sums up these qualities by saying speculation is “not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurers. They will die poor.”
- Discipline is easily one of the most important qualities a Forex trader should possess. This trait is needed to develop an adequate trading strategy and execute it properly as well as to deviate from it if need be. Discipline also has to do with acquiring, sustaining, and reinforcing certain trading habits, such as utilizing Stop Loss and Take Profit, waiting out for favorable market opportunities, and placing trades that correspond to your risk level.
- Patience is, to a large extent, similar to discipline with several differences. Beginners are sometimes burning to close profitable positions too early, either because they want to lock in a sure profit or because they are scared the market might move against them, leading to losses.
The ability to exercise patience enables you to overcome these urges. Traders should control their fear of losing money rather than letting it control them. You can prevent second-guessing by adjusting your Stop Loss and Take Profit levels.
Closing your positions prematurely may help you generate small profits occasionally but more often than not, it prevents you from realizing more substantial gains. Patience can help you reach your maximum earning potential. To quote Jesse Livermore once again, “Money is made by sitting, not trading.”
- Emotional detachment is of essential importance for every good trader. You will never achieve success on the Forex markets if your decision-making is influenced by your emotions. Emotions usually begin to manifest themselves when you lose trades. Good traders are not exempt from losing, however.
Yet, they manage to maintain their focus, proceed with their plan, and remain rational despite the short-term losses they incur. The bottom line is you need a thick skin to succeed in one such volatile market.
If you stick to your plan but continue to lose consistently, this may be an indicator that market conditions are unsuitable for the trading strategy you have chosen. You can either wait it out or reevaluate your plan and change strategies. - Having sensible and clear expectations is also needed to become a successful trader. You are guaranteed to experience a major disappointment if you expect to generate thousands in profits per trade with $500 in your trading account.
Four Examples of Successful Traders
Most successful traders normally shy away from publicity but there are a select few who have gained international recognition due to their immense success. Such individuals have made fortunes thanks to their exceptional investment shrewdness, persistence, and risk management acumen. They are the traders we all can learn from and should aspire to emulate.
- Bruce Kovner began his trading career in the later 1970s by investing $3,000 in soybean futures contracts. Kovner collected decent enough profits of $22,000 from this trade, although he could have earned nearly twice as much had he known when to liquidate his position.
The investor later claimed this was an eye-opening experience, which taught him how important it is to manage one’s risk adequately. Kovner currently boasts a net worth of over $5.3 billion. He was inducted into the Alpha Hedge Fund Hall of Fame in 2008.
- George Soros, aka “the man who broke the Bank of England”, is a billionaire investor and a highly recognized philanthropist of Hungarian descent. Soros occupies the 56th spot on Forbes magazine’s list of the wealthiest Americans.
As of February 2020, Soros sits on a personal fortune of $8.3 billion after donating over $32 billion to the philanthropic organization Open Society Foundations, which he also founded. He is considered one of the most successful hedge fund managers of all time and generated a revenue of over $40 billion over the past five decades.
Soros earned the above-mentioned nickname back in 1992 during Black Wednesday in September of the same year. The hedge fund tycoon realized profits of $1 billion within 24 hours after short-selling US$10 billion for GBP.
- Bill Lipschutz is easily one of the most successful foreign exchange traders in history. His Forex journey began while he was still a student at Cornell University after his grandmother left him an inheritance of $12,000 in stocks.
Lipschutz then grew his portfolio to the staggering $250,000 before he lost it all because of one poor trading decision. Instead of despairing, Lipschutz saw his failure as a valuable learning experience. In the early 1980s, he began work in the newly established Foreign Exchange Department of the Salomon Brothers Bank and the rest, as the saying goes, is history.
Several years after he joined the Salomon Brothers he was generating $300 million in annual revenue for the investment bank. Lipschutz’s success as a trader earned him an induction in the Trader Monthly Hall of Fame in the fall of 2006.
- Stanley Druckenmiller started his career in finance in the late 1970s as a trainee at the Pittsburgh National Bank. He then worked with George Soros for over a decade, from 1988 to 2000. The two worked together on the infamous Bank of England trade of 1992. Following the immense success of this deal, Druckenmiller was featured in the 1994 best-selling book The New Market Wizards.
In 2000, he decided to part ways with Soros so he could fully concentrate on his own hedge fund, Duquesne Capital. Druckenmiller closed Duquesne Capital in the summer of 2010 because he felt worn-out by not performing on par with his high expectations. He explained handling such massive amounts of money made it difficult for him to generate satisfactory profits for his clients.
Six Steps toward Becoming a Good Forex Trader
Now that we have hopefully inspired you with the success stories of some of the biggest investors in the world, let’s have a look at several pieces of practical advice that can help you improve your chances of becoming a successful Forex trader yourself.
Choose Your Timeframe, Methodology, and Currency Pairs
Before you go live and start trading with real money, it is important to choose your timeframe, methodology, and the currency pairs you intend to trade. The timeframe is essentially a reflection of your trading style and should correspond to your temperament and goals.
If you are uncomfortable with exposing yourself to overnight risk, you might consider short-term day trading. If not, you may choose long-term position trading where you hold your positions for days, weeks, and even months. Short-term strategies like scalping are suitable for traders who are looking for smaller but consistent profits. This style requires you to trade with higher frequency, opening multiple positions within 24 hours.
Once you decide on your timeframe, you should consider your methodology, i.e. what trading system to follow. Test the system to ensure it is consistent and gives you an edge. The best course of action is to try several trading strategies to see which one works well for you and your risk tolerance.
You also need to determine what currency pairs to trade. Beginners are usually recommended to start with major pairs where USD is traded against other stable currencies. Such pairs offer stronger liquidity. Some examples include USD/EUR, USD/GBP, USD/JPY, and USD/CHF, among others.
Practice with a Demo Account before Going Live
If you lack any previous experience whatsoever, it would be best to practice with a demo account rather than trading with real money right away. The demo account also gives you access to the live market but the difference is you trade with virtual money instead of risking real capital.
The trades you place in your demo account represent the profits or losses you would generate if you were using real money. Demo accounts enable beginners to build up experience through practice without the pressures associated with risking real money.
Educate Yourself and Study the Markets
One thing Forex traders cannot complain about is lacking educational materials. There are various tools you can use to study and analyze the markets. Many major Forex brokers cater to traders with economic calendars that contain important and in-depth information about upcoming events from the world of economy.
Traders have access to Forex live news feeds along with various tools for technical analysis that enable them to identify great trading opportunities. You can also subscribe to a signal provider to receive alerts about favorable trades.
These signals would tell whether you need to open a short or long position for the respective pair, at what price, and how to adjust your Stop Loss and Take Profit levels. Novice traders can also take advantage of various educational articles, videos, and webinars that can greatly shorten their learning curve.
Determine Your System’s Expectancy
Every successful trader begins by setting a goal, i.e. what profits they aim to generate for a given period when using a specific trading system. The expectancy of a trading system measures its reliability.
To calculate this, you need to check the profit ratio of winning to losing trades the system has yielded. Expectancy is calculated with the following formula: E=[1+(W/L) x P – 1 where W stands for your average winning trade, L stands for your average losing trade and P reflects your win ratio as a percentage.
Suppose you have made twenty trades, twelve of which were successful and the other eight resulted in losses. This scenario yields a percentage win ratio of 12/20 or 60%. If the twelve winning trades yielded profits of $2,000, your profit on average would be $2,000/12, or $166.
Provided that the eight losing trades have resulted in cumulative losses of $1,200, your loss on average will be $1,200/8, or $150. Therefore, the expectancy of your selected system will be equal to [1 + (166/150) x 0.60 -1 = 0.26. In other words, you will have a positive expectancy of 26%, which is to say your strategy will return 26% per every dollar you invest in the long run.
Choose a System for Algorithmic Trading
If you intend to trade the markets part-time to earn more income on the side, you can consider investing in a program for algorithmic trading. This software would monitor the markets for you in real-time to find potentially profitable spreads.
It would place trades with Stop Loss and Take Profit levels at the best current prices on your behalf. Using algorithmic trading programs has numerous benefits but its biggest advantage is discipline and unemotional trading. At the same time, it is also important to remember that algorithmic trading is by no means a sure recipe for success in one such volatile market.
Keep a Consistent Journal of Your Trading Activities
Keeping a consistent journal of trading activities is something most successful traders would do. It enables you to accurately track everything that happens in your trading account, including your profit-to-loss ratio. Journaling instills discipline in traders and helps them exercise greater control over their trading activities. This way, they can see precisely how much money they have invested and to what results.
Your Forex journal should contain information about the exit and entry points of your trades, the size of each position you open, the profits and losses from the trades, the Stop Loss and Take Profit levels, and the entry triggers.
Don’t just write all this information down without checking it ever again. You should inspect your trading journal as regularly as possible. This would allow you to spot any potential weaknesses in your strategy and eliminate them in due time.