How to Become a Profitable Forex Trader – 14 Actionable Steps

How to Become a Profitable Forex Trader - 14 Actionable Steps
How to Become a Profitable Forex Trader - 14 Actionable Steps

How to Become a Forex Trader? A Profitable one.

This is a question every beginner trader has – What path do I need to take, what trading strategy do I need to follow and more.

Well, at the time being, everyone has the potential to become a Forex trader thanks to the easy accessibility of forex brokers, trading platforms and countless education resources.

However,

Even though it is easily accessible, it doesn’t mean that it is easier to become a profitable forex trader. It is hard, it involved lots of hard work, dedication, patience and, above all, stay disciplined and confident in the state of adverse markets conditions.

Have you ever heard that the success of forex trading is too low?

If not, Keep in mind that, only a handful of traders are successful in trading, in percentage, it is around 5%.

With these things in mind let’s talk about what kind of trader you want to be.

What Type of Trader do You Want to Be?

The Forex market offers great flexibility for all the type traders, and since there is no opening and closing hours, the opportunity to make potential profits is 24 hours a day 5 days a week.

With this flexibility in your hand, you can trade on a routine you’re comfortable with. Isn’t that great?

Now, the first step of becoming a forex trader is to choose what type of trader you want to be.

A day trader, swing trader or a price action trader?

Here are 3 common types of traders…

  1. Short-Term Trader – A trader who looks to open and close a trade within minutes, often taking advantage of minor market fluctuations for a huge amount of leverage.
  2. Medium-Term Trader – Usually, a trader trying to keep positions for one or two days, sometimes taking advantage of opportunistic technical conditions.
  3. Long-Term Trader – A trader seeking to hold positions for months or years, mostly on the basis of long-term fundamental factors.

Now, it is up to you to choose what kind of trader your want to be and keep in mind that, when choosing the type of trader you want to be, please consider your personality and your day to day lifestyle.

With that chosen, let’s talk about the 14 Actionable Steps to Become a Profitable Forex Trader.

14 Actionable Steps on How to Become a Forex Trader – Step By Step Guide

The following 14 points on how to become a forex trader are listed based on a step by step manner. Therefore, go through every step without ignoring any.

Also, Each point contains links to various reputable resources, allow you to get more in-depth knowledge. Think of these steps as your curriculum to become a forex trader.

Let’s dive in.

Step 01 – Start With Your Expectation

Do you expect too much from forex trading? Like newbie traders, if so, now its time to stop that.

It is important to be realistic when setting goals in forex trading, especially if you are new to trading. Your trading goals must be practical and achievable in real market condition.

Majority of traders make the mistake of expecting too much from the forex market, they set goals like I will make 50 PIPs per day, I will make 10% per week, I will make 1000 PIPs every month, and, some of traders are even making goals like I will double my trading account every month which is a far more realistic thing to do in the forex market when considering the volatility and constant motion of the FX market.

Therefore…

You should be realistic when setting your trading goals. The first step to do so is to avoid all the weekly and monthly trading goals.

Instead, focus on longer-term by setting annual trading goals.

For example, if your the purpose of trading is to grow your wealth AKA investing in longer-term, your annual trading ROI can be 20% to 30%. When considering the compound interest, this ROI is more than enough.

Or, if your focus is to make a side income from forex trading, then you should aim for 50% to 60% which is also achievable.

This is the first step, by getting your expectations right beforehand will help you focus on your trading process rather than a single outcome or your trading P&L. Therefore invest some time to cultivate your mind with realistic expectations.

With that here are some valuable resources for further reading

Step 02 – Learn The Fundamentals

Basic knowledge is very important for success in any field, whether it be the medical sector, the engineering sector, digital marketing or Forex trading. Without that, we will face a lot of problems in the future, particularly when adverse market conditions arise.

Therefore, to be a good trader, we first need to lay a solid base for our trading career by aggregating knowledge about forex trading.

As a beginner trader, you should start by learning about areas like,

  • What is FX
  • How do you trade it and how the profit will be made?
  • Basic chart analysis
  • Chart patterns
  • Basic risk management
  • Basic money management
  • Risk reward ratio
  • Trading platforms
  • Forex Brokers

The School of Pipsology from the Baby Pips is a perfect starting point. They’ve got a well-organized trading course for beginner traders. That’s where I started my trading career as well.

Go there and read all the lessons of that course. Click here to go to the course.

After completion of this basic forex trading course, we now can move into the advance learning area.

Step 03 – Move on to the Advance Learning Materials

After completion of the previous course, now you had the basic knowledge of many different areas in the world of forex trading. From the history of the forex trading to build your own trading plan.

But this is the basics of everything, this knowledge is not enough to get started. Therefore we need to specialize in one area and continually need to study in that area.

For example, If you’re into the price action trading, then your focus should be to learn the price action and become an expert in it.

At the beginning of my trading, I fell in love with reversal trading. That is when I decided to go with it and master it. Now I even have my own indicator which helps me identifying trend reversal effectively.

Now, What is the area you would get in? Let me know in the comment section, Maybe I can help you to get started.

In general here some broad areas to get started,

Also, use the tweet below to follow traders you’re interested in.

best traders to follow on twitter

I think you got the idea here. After getting the basic right, your next objects is to focus on one specific area and master it.

“In reality strategy is actually very straightforward. You pick a general direction and implement like hell. – Jack Welch”

Step 04 – Open a Demo Trading Account

It is now time to master the area you have selected (Reversal trading, Price Action Trading or Trend Continuation Trading) by trading it in real market conditions using a demo trading account.

You need to play around with the market at this point. Try different indicators, currency pairs, chart patterns, and play around with different lot sizes to see how it affect to your trading account.

And also, in this stage, you need to make enough mistakes and learn from it to become a better trader. The entire aim of demo trading is to master the area you’ve selected in the previous step by making enough mistakes.

Bear in mind that, at this point, concentrate on one trading methodology and make an effort to implement it into a killer trading system, and never think about to change one trading strategy to another.

Don’t worry about what broker to choose when you’re opening a demo trading account. Its just a demo trading account, go with any forex broker.

Go to Mtrading to open a demo trading account with just one click. Head over to Mtrading.

Step 05 – Start Developing a Trading Strategy

At this point, you have little experience in the Forex market. Now you know how to open and close a trade, how to use different lot sizes, how to use different indicators and chart pattern.

Simply, it is time to come up with a rule-based trading strategy by using all the knowledge you have so far.

So what is a trading strategy?

A Trading Strategy is a well-defined document that lets traders make buying and selling decisions based on a predefined set of rules.

One of the main benefits of having a trading strategy is that it helps you to execute trades using the same set of rules over and over again and eventually this help you to stay consistence in any situation like drawdowns or losing streaks.

Next, how to develop a trading strategy?

Start with the right expectation, it’s easy to form a trading strategy. Learn a few trading tools and indicators, and you can do it.

Let’s say, for example, that you’ve learned about support, resistance, and engulfing candlestick pattern.

With these two trading confluences, you can come up with a basic trading strategy. You can literally look for a selling opportunity where a bearish engulfing pattern has established at the resistance level, and vice versa you can look for a buying opportunity when a bullish engulfing pattern has formed at the support level.

Just like this, you can come up with a very simple trading strategy to get started. But the above plan only highlights the entry criteria. There is more element to a trading strategy. Here is a list to get started:

  1. Choose which currency pair you’re going to trade
  2. Choose a trading timeframe
  3. Choose a tool to determine the trend, high probability trading areas or identify specific market conditions
  4. Define your entry trigger – how to place your trades
  5. Plan how to place stop-loss and take-profits
  6. Define your risk

Follow the above steps when creating a trading strategy to come up with a detailed trading strategy.

However, even though you are developing a trading strategy by following every step described above, it is not realistic to think that your first attempt to develop a trading strategy would be a successful one and would make you a consistently profitable trader.

Then, how do we decide whether or not our trading strategy is profitable?

This is where back-testing comes into play.

Here are some resources for more knowledge:

  1. How to Build a Trading Strategy

Step 06 – Backtest Your Strategy

So, what is backtesting?

Simply put, Backtesting is essentially putting the strategy to work with historical market data.

Successful traders are using this to see how reliable their strategy is, how profitable it is and how it works under different market conditions.

And above all, backtesting helps us to trade confidently in despite market conditions.

Next, back-testing a trading strategy is easy, all you need is a spreadsheet and a trading view chart. Then scroll down all the way back to one or two years and review how well your trading strategy has performed in the past. Do it like you’re placing trades in the real market.

Also, make sure to record every trades in a spreadsheet. Like below.

how to backtest a trading strategy

Have you noticed anything about the above backtesting data? Yup, that’s the number of losing trades we had when backtesting.

According to the backtest data listed above, we may conclude that this trading strategy has not proven to be profitable. Now what?

Jump to a new trading strategy and test it again, is it. NO!

Instead, fine-tune your trading strategy, make a minor changes, and back-test it again to see whether it’s different or not. This is how you bring an average trading strategy to a killer trading strategy.

Here are some resources for more knowledge:

  1. How to Backtest a Trading Strategy Even if You Don’t Know Coding

Now backtesting part is done. Next, it is time to…

Step 07 – Forward Test Your Strategy

Forward testing, also known as demo trading or paper trading, provide traders with another set of sample trade data on which to evaluate their trading strategy.

Forward testing is a simulation of actual trading and this involves virtual money as well.

Remember in step 04, we opened a demo trading account to feel and to play around with the different trading indicator and tools.

But this time it is different, Now you have a proven trading strategy in your hand with a precise set of trading rules. Now your object is to trade consistently with the trading strategy you have without breaking any trading rules.

The main goal of forward testing is to build your consistently and test your trading strategy with the real market condition.

If your trading strategy is doing well in this step, congratulations, you have a proven trading strategy and you can use it to trade with real money.

Here are some resources for more knowledge:

  1. The Beginner’s Forex Forward Testing Guide

With that, now it is time to learn how to apply risk management to your trading strategy.

Step 08 – Learn How to Manage Risk

Now it is time to bring your trading strategy to the next level by reducing the downside of your equity curve.

But first, what is risk management in forex trading?

Forex risk management is sets of rules which enable the trader to manage their downside (potential losses).

Now, when you are trading without risk management rules, you are in fact gambling, you are not looking at the long-term return on your investment. Instead, you are only looking for that magic bullet.

But if you have a risk management plan in hand, it will not only protect your trading capital, but it can help you to stay in the game for long-run, which ultimately allow you to compound your trading capital annually.

Next, here are some risk management rules to get started,

  • Never risk more than 2% per trade
  • Never lose more than 5% of your trading capital in a single day.
  • Have a maximum drawdown limit, like 10%.
  • Always willing to cut your loses, when the trade opportunity is invalidate

Don’t focus on making money; focus on protecting what you have.” Paul Tudor Jones

Here are some resources for more knowledge:

  1. What Is Risk Management?
  2. Forex Risk Management and Position Sizing (The Complete Guide)
  3. The Art of Cutting Your Losses Short – Forex Risk Management

With that let’s move into the next step.

Step 09 – Implement a Money Management Strategy

Let’s start with the definition, What is the money management in forex trading?

In trading, Money management is a strategy for increasing or decreasing the position size to limit risk while achieving the greatest growth possible from a trading account.

Now keep in mind that Risk Management and the Money Managment play totally different roles in trading.

While risk management reduces the downside of your trading capital, the main goal of good money management is to focus on one thing along, and that is the account growth.

With that, below is a short overview of the different techniques of money management, including how they affect your trading account.

  • The 2% rule – the technique of money management for beginner traders. In this case, the trader uses a percentage of his/her trading account for each trade. Growth is slow and there is a low risk.
  • Fixed Fractional – Trade 1 contract for every X dollar amount. If X is high, growth is slow and the risk is low. If X is small, growth is geometric and the risk is high.
  • Fixed Ratio – Use a metric called Delta and use it to decide when to increase and decrease the size of the position. Growth is geometric and there is a low risk. The best all-rounder in all five of these strategies.
  • Optimal F – Use the optimal version of a given fraction of a range of trades. Growth is geometric and there is a high risk.

Now, among these five money management strategies, what’s the better one?

We suggest the method of fixed-ratio money management. One of the main advantages of this strategy is that it allows you more control over the drawdowns.

Now you’re working with the Risk and Money Management Strategy in your hand, right? In a week or month, you will see a world of difference in your equity curve as a result of the risk and money management strategy you have adopted.

Here are some resources for more knowledge:

  1. Fixed Fractional and Fixed Ratio Money Management Styles
  2. Further Talk on Money Management
  3. Money Management Models

Step 10 – Find a Trustworthy Forex Broker

Choosing a right broker is an important decision. Perhaps, the forex broker you choose is actually the biggest trade you’ll ever make.

You may have solid forex strategy, but if your broker is running away with your money, all your hard work and study is for nothing, right?

Therefore you should be very careful when choosing a forex broker.

Follow the five tips listed below when choosing a forex broker,

  1. Don’t listen to partner advertisers on the internet looking to pull in volume on behalf of their links. This will also be a conflict of interest, since they will be paying if you sign up via their link.
  2. Regulation is vital, but regulatory framework is more important than that. Look for FCA, FINRA, Swiss Regulation regulated brokers whose enforcement is at a higher degree than others. Don’t go to Caribbean regulators or offshore regulators. If you have a doubt, feel free to make a comment or send us a message.
  3. Also look at the footer section of their website, this will indicate who regulate the brokerage. If you have confirmed this, they will have a number, so you can double check if this is correct on the website of the appropriate regulators. On some regulators, you can even verify which brokerages have received penalties and how much.
  4. Don’t listen to social media, advertisement, high social media visibility is also a warning of a highly advertised yet unregulated white label broker.
  5. Forex brokerage comparison websites cannot be trusted, since often brokers recruit people to unfairly score their brokerage.

Upon the idetifcation of the trustworthiness and regulation of a broker, your next object is to find out what facilities your broker offer.

  • Deposit and Withdrawal – Ideally, the speed of withdrawal and crediting of deposit funds characterizes a trustworthy broker. Both large companies withdraw capital without delay in the shortest possible period. There must be a range of ways of deposit and withdrawal to engage in the financial market.
  • Broker commissions – Commissions are vital to every level of trader. The spread is split into set and floating ones. You pay the spread with both a loss and a profit. It is worth noting that commissions can vary from brokers. If the broker accepts a commission for trading activities, the profits of the Forex dealer are dependent on the disparity between the buy/sell rates.
  • Leverage size – If you are an experienced trader or have a small budget for trading on an exchange, pay heed to the amount of leverage. The best brokers are able to deliver a ratio of 1:1 to 1 300 or more.
  • Technical support – Support should be special and swift. If the broker is multinational, assistance is given in a variety of languages.

It is still worth noting that Forex trading is a highly profitable, high-risk industry. When the field grows gradually, it is becoming more difficult to differentiate a lawful broker from a fraudster. Yet having these information in mind will help you find what you’re searching for.

We Recommend you to go with the following broker if your starting out.

XM Group – Founded in 2009, XM Group is regulated in two tier-1 jurisdictions and one tier-2 jurisdiction, making it a safe broker (average-risk) for trading forex and CFDs.

FXTM – Or ForexTime was founded in 2011 and is a global CFD and FX broker. It is regulated by several financial authorities, including the UK Financial Conduct Authority (FCA) and the Cyprus Securities and Exchange Commission (CySEC).

IG – IG was established in the UK in 1974 and is one of the biggest CFD brokers in the world. It is regulated by several bodies globally, including top-tier regulators like the UK’s Financial Conduct Authority (FCA) and Germany’s Federal Financial Supervisory Authority (BaFin).

With that let’s next step of how to become a forex trader.

Step 11 – Start Using Trading Journal

After a series of trade losses or a drawdown, Trading Journal lets you see your trading in an objective way that ultimately helps you make solid and logical trading decisions by clearing your cloudy mind.

The key purpose of keeping a well-organized and consistent trading journal is to discourage you from taking impulsive trading steps, which would inevitably result in you saving in needless loses and drawdowns.

Now, what’s the easiest way to keep a trade log?

Use the spreadsheet. This is the easiest way to do this. One of the main advantages of using a spreadsheet is that it lets you make various reports that provide a variety of valuable information about your trading results.

Have a look at the peek view of our trading journal.

Forex Trading Journal

Here are some resources for more knowledge:

  1. How to Create a Trading Journal and Find Your Edge in the Markets
  2. Build a Free Forex Trading Journal Using Excel Spreadsheet

Step 12 – Work on Your Trading Psychology

In forex trading, controlling your trading emotions plays a significant role in your success as a trader.

The more you will handle winners and losers in the same manner, the more consistently you will be able to make a profit from the forex market. If you find like you are mentally out of balance, take a break from trading. Nothing would succeed if you trade for revenge.

Also make sure to cultivate your mind to control your emotions ups and downs more effectively. One of the best way to do this is to read trading books related to trading psychology.

Recommended trading books,

  1. Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude by Mark Douglas
  2. The Disciplined Trader: Developing Winning Attitudes by Mark Douglas

Also make sure read – How to Control Emotions Ups and Down When Trading Forex – Trading Psychology

And make sure to follow Yvan Byeajee and his website – Tradingcomposure.com

Step 13 – Never Stop Learning

One habit that all good forex traders have in common is the ability to learn new things. So, if you’re going to be a good trader, you need to be a regular learner. This can be achieved by reading books and blogs, following active traders and attending webinars.

The FX market is one of the largest markets in the world and this makes the market so volatile. As a result, the forex market is always changing, so you also need to be one step ahead of the forex market.

Follow our trading blog for weekly educational trading articles

With that let’s move into the last trading step on how to become a profitable forex trader.

Step 14 – Never Give Up On Trading

Trading is not a fast way to get wealthy. If you’re looking for something like that, go with something that suits your idea.

Let’s face the facts, trading is hard, but trading brings wealth, isn’t it?

But, much as every other career, failure will finally deliver the success that you desperately need. Thus, you should never give up on trading after a series of losses.

They you have it – 14 step to become a successful forex trader. So, at the moment, what stage are you? Are you still a beginner forex trader or an intermediate forex trader? Any way, I hope this article gives you some inspiration on where to get started or what direction to take to be a profitable forex trader.

As usual, if you have any questions, let me know in the comment section. 👇🏻

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