“By failing to prepare, you are preparing to fail” – wise words from Mr Benjamin Franklin there.

He certainly had a point, and when you consider that the main peril of being a forex trader is not in knowing when to open a position, but in knowing what to do when you have an active investment in the game, having a trading plan is key.

Before even contemplating opening a position, you need to know the answer to a series of crucially important questions:

  • When will you look to close the position (from a time perspective)?
  • When will you look to close the position (from a financial perspective)?
  • What is your ‘take profit’ price?
  • What is the maximum you can feasibly risk?
  • What will you do if the market turns against you?
  • What upcoming economic/political factors could affect your position?

And so on. In short, you have to know what you are going to do to manage your forex trade in any conceivable situation or shift in the market.

Understanding risk and reward (failing to prepare)

It is human nature to be greedy, and by your very nature as a trader, you are seeking to create a primary or secondary source of income for yourself by investing in the markets – that in itself requires profitability.

However, there is a misconception that to make big money from trading, you also have to take on a whole heap of risk.

Wrong.

Think about it: if you do your research and take the time to learn trading on paper before using real money, you will execute some profitable trades – it would be nigh-on impossible to have a 0% ROI time after time.

On that basis, you can actually increase your profitability simply by minimizing your losses – e.g. scratching positions when the market appears to be turning, or even accepting a small loss rather than a large one.

In time, if you can learn to minimize your losses, you will maximize your return – it’s simple mathematics!

Using a stop-loss (preparing to fail)

You will not profit on every trade.

You will not profit on every trade.

You will not profit on every trade.

This is a mantra that should be chanted by all traders new and old. It should be written on Post-it Notes stuck all over your house/office and should be the first thing you think of when you wake up and the last thing you think of at night.

Good, now we’ve got that out of the way.

There are two types of losses: complete and total loss, with 100% of your investment gone, and managed loss, where you dictate what percentage you are willing to lose prior to even opening the position.

In the long term, which do you think will aid your profitability? It’s a no-brainer.

There is a strange reticence on the part of some traders to using stop-loss, and yet by implementing this one tool in your trading, you could minimize the impact of losing trades on your bankroll instantly – as we’ve already learned, this is key to being successful in the long run.

Pretty much every trading broker under the sun offers software where stop-loss is an available tool, though the flexibility and nuance of your stop-loss can differ – making a forex broker comparison based upon the intuitiveness of their software/tools is key.

However, you don’t want to be just plonking a stop-loss in at a pre-ordained point. Be fluid and be flexible, and while it is wise to have a maximum stop-loss in place if the market begins to move in your favor, there is no harm in trailing that stop-loss to a higher point to minimize your exposure to a downturn and thus risk.

What should your stop-loss be?It’s a good question, because most newcomers to trading will pick a designated monetary value as to when they will close their position.

However, for long-term profitability, it is recommended that you only risk a certain percentage of your trading bankroll – between 1% and 3% is wise. For example, if your bankroll is $10,000, you could set your stop-loss at somewhere around the $200 mark.

Minimize your losses to maximize your gains – we cannot stress that enough.

Managing trades before execution (preparing to win)

The funny thig about managing a forex trade is that once your position is open, there is only so much you can do.

You can manually take profit or loss, or you can alter your automatic tools such as stop-loss in order to alter your position.

For that reason, the golden rule that many traders stand by is to manage their trades before they even execute.

Think about it: you can set a take profit amount and a trailing stop-loss as you open a trade, automating the process using the best software you have available to you.

By doing this, you remove human emotion – the trader’s biggest adversary – and you know exactly what will happen to your money even in one of the most unpredictable of markets.

It’s the easiest way to get a good night’s sleep as a trader…