5-Step Guide to Winning Forex Trading

Master the art of forex trading

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5-Step Guide to Winning Forex Trading

Here are the secrets to winning forex trading that will enable you to master the complexities of the forex market. The forex market is the largest market in the world in terms of the dollar value of average daily trading, dwarfing the stock and bond markets. It offers traders a number of inherent advantages, including the highest leverage available in any investment arena and the fact that there is market action every trading day. Rarely, if ever, is there a trading day in the forex markets when “nothing happens.”

Forex trading is often hailed as the last great investing frontier – the one market where a small investor with just a little bit of trading capital can realistically hope to trade their way to a fortune. However, it is also the most widely-traded market by large institutional investors, with billions of dollars in currency exchanges happening all around the world every day that there’s a bank open somewhere.

Trading foreign exchange is easy. Trading it well and producing consistent profits is difficult.

To help you join the select few who regularly profit from trading the forex market, here are some secrets to winning forex trading – five tips to help make your trading more profitable and your career as a trader more successful.

To learn more, check out all of CFI’s free Trading Guides.

Winning Forex Trading - Image of a man looking at a forex trading chart

Winning Forex Trading Step #1 – Pay Attention to Daily Pivot Points

Paying attention to daily pivot points is especially important if you’re a day trader, but it’s also important even if you’re more of a position trader, swing trader, or only trade long-term time frames. Why? Because of the simple fact that thousands of other traders watch pivot levels.

Pivot trading is sometimes almost like a self-fulfilling prophecy. What we mean by that is that markets will often find support or resistance, or make market turns, at pivot levels simply because a lot of traders will place orders at those levels because they’re confirmed pivot traders. Therefore, often times when significant trading moves occur off pivot levels, there is really no fundamental reason for the move other than a lot of traders have placed trades expecting such a move.

We’re not saying that pivot trading should be the sole basis of your trading strategy. Instead, what we’re saying is that regardless of your personal trading strategy, you should keep an eye on daily pivot points for indications of either trend continuations or potential market reversals. Look at pivot points and the trading activity that occurs around them as a confirming technical indicator that you can utilize in conjunction with whatever your chosen trading strategy is.

Winning Forex Trading Step #2 – Trade with an Edge

The most successful traders are those who only risk their money when an opportunity in the market presents them with an edge, something that increases the probability of the trade they initiate being successful.

Your edge can be any of a number of things, even something as simple as buying at a price level that has previously shown itself as a level that provides significant support for the market (or selling at a price level that you’ve identified as strong resistance).

You can increase your edge – and your probability of success – by having a number of technical factors in your favor. For example, if the 10-period, 50-period, and 100-period moving average all converge at the same price level, that should provide substantial support or resistance for a market, because you’ll have the actions of traders who are basing their trading off any one of those moving averages all acting together.

A similar edge provided by converging technical indicators arises when various indicators on multiple time frames come together to provide support or resistance. An example of this may be the price approaching the 50-period moving average on the 15-minute time frame at the same price level where it’s approaching the 10-period moving average on the hourly or 4-hour chart.

Another example of having multiple indicators in your favor is having the price hit an identified support or resistance level and then having price action at that level indicate a potential market reversal by a candlestick formation such as a pin bar or doji. 

To learn more, check out all of CFI’s free Trading Guides.

Winning Forex Trading Step #3 – Preserve Your Capital

In forex trading, avoiding large losses is more important than making large profits. That may not sound quite right to you if you’re a novice in the market, but it is nonetheless true. Winning forex trading involves knowing how to preserve your capital.

No less a trading wizard than the great Paul Tudor Jones, creator of the hugely successful hedge fund, the Tudor Corporation, has flatly stated that “The most important rule of trading is to play great defense.” (By the way, Tudor Jones is an excellent trader to study and learn from. Not only does he have a nearly unparalleled record of profitable trading, but he is also a major philanthropist and was instrumental in creating the ethics training program that was eventually adopted as a requirement for membership on all U.S. futures exchanges.)

Why is playing great defense – i.e., preserving your trading capital – so critically important in forex trading? The fact is that the reason most individuals who try their hand at forex trading never succeed is simply that they run out of money and can’t continue trading. They blow out their account before they ever have a chance to enter what turns out to be a hugely profitable trade.

It’s only a slight exaggeration to say that having and faithfully practicing strict risk management rules almost guarantees that you will eventually be a profitable trader. If you just manage to preserve your trading capital by avoiding suffering crippling losses, so that you can continue trading, eventually a huge winner – a “home run” trade – will pretty much just fall into your lap and exponentially increase your profits and the size of your account. Even if you are far from being “the world’s greatest trader,” the luck of the draw, if nothing else, will have you eventually stumble into a trade that produces more than enough profit to make your year – or possibly even your whole trading career – a massively profitable success.

But in order to enjoy that trade, you have to have sufficient investment capital in your account to profit from such a trading opportunity whenever it happens to come along.

Paul Tudor Jones is not the only market wizard to counsel traders to utilize an approach to trading that basically consists of, “Just avoid losing all your money until a trading opportunity comes around that is somewhat akin to having a million dollars dumped on the ground in front of you, and all you have to do is pick it up.” No, trading opportunities like that don’t happen every day – but they do happen regularly, and more often than you might imagine.

To reiterate (because it can’t be emphasized too much): The most important practice for successful trading is minimizing your losses – by avoiding overtrading or taking on too much risk in any single trade – and thereby preserving your investment capital.

To learn more, check out all of CFI’s free Trading Guides.

Winning Forex Trading Step #4 – Simplify your Technical Analysis

Here are pictures of two very different forex traders for you to consider:

Trader #1 has a large, swanky office, a top-of-the-line, specially-made trading computer, multiple monitors and market news feeds, and plenty of charts, all of which are loaded with at least eight or nine technical indicators – five or six moving averages, two or three momentum indicators, Fibonacci lines, etc.

Trader #2 works in a relatively spare and simple office space, uses just a regular laptop or notebook computer, and an examination of his charts reveals just one or two – perhaps three at most – technical indicators overlaid on the market’s price action.

If you guessed that Trader #1 is the super-successful, professional forex trader, you probably guessed wrong. In fact, the portrait drawn of Trader #2 is closer to what a consistently winning forex trader’s operation more commonly looks like.

There is virtually an endless number of possible lines of technical analysis that a trader can apply to a chart. But more is not necessarily – or even probably – better. Considering a virtually limitless number of indicators typically only serves to muddy the waters for a trader, amplifying confusion, doubt, and indecision, and causing a trader to miss seeing the forest for the trees.

A relatively simple trading strategy, one that has just a few trading rules and requires consideration of a minimum of indicators, tends to work more effectively in producing successful trades. In fact, we know one very successful forex trader, a gentleman who takes money out of the market almost every single trading day, who has exactly ZERO technical indicators overlaid on his charts – no trend lines, no moving averages, no relative strength indicator, and certainly no expert advisors (EAs) or trading robots.

His simple market analysis requires nothing more than an ordinary candlestick chart. His trading strategy is to trade high-probability candlestick patterns – such as pin bars (also known as the hammer or shooting star patterns) – that form at or near support and resistance price levels that are identified simply by looking at the market’s previous price movement.

To learn more, check out all of CFI’s free Trading Guides.

Winning Forex Trading Step #5 – Place Stop-loss Orders at Reasonable Price Levels

This axiom may seem like just an element of preserving your trading capital in the event of a losing trade. It is indeed that, but it is also an essential element in winning forex trading.

Many novice traders make the mistake of believing that risk management means nothing more than putting stop-loss orders very close to their trade entry point. It’s true that part of good money management means that you shouldn’t put on trades with stop-loss levels so far away from your entry point that they give the trade an unfavorable risk/reward ratio (i.e., risking more in the event the trade loses than you reasonably stand to make if the trade proves to be a winner). However, one factor that frequently contributes to lack of trading success is habitually running stop orders too close to your entry point, as evidenced by having the trade stopped out for a loss, only to then see the market turn back in favor of the trade and having to endure watching price advance to a level that would have returned you a sizeable profit…if only you hadn’t been stopped out for a loss.

Yes, it’s important to only enter trades that allow you to place a stop-loss order close enough to the entry point to avoid suffering a catastrophic loss. But it’s also important to place stop orders at a price level that’s reasonable, based on your market analysis.

An often-cited general rule of thumb on proper placement of stop-loss orders is that your stop should be placed a bit beyond a price that the market should not trade at if your analysis of the market is correct.

To learn more, check out all of CFI’s free Trading Guides.


As an example to help you better understand this concept, consider the following two charts of AUS/USD, which look at the market price action on August 31, 2017. A trader looking at the 5-minute chart below might have entered a buy order around the 0.7890 price level (indicated by a red up arrow shown just above the medium-length blue candlestick that appears just above the word “level” on the left-hand side of the chart), based on the candlestick closing with the price above the two moving average (red and blue) lines plotted on the chart. The trader might also have chosen to place a very close, very low-risk stop-loss order just below the recent lows around the 0.7880 level, as shown by the horizontal red line drawn on the chart.

Winning Forex Trading - Image of an AUD/USD chart with stop-loss order

Unfortunately, the subsequent price movement (just left of the center of the chart, just to the right of the word “low”) would have stopped him from the trade before there was a substantial price movement in his favor. The resulting loss would have been minimal, so to that extent, the trader can be said to have practiced good risk management. However, as the price action on the right-hand side of the chart clearly shows, after the trade was stopped out, price, in fact, turned sharply upward. If the trader hadn’t been stopped out, he could have realized a very nice profit.

It may appear at first glance that the stop-loss was placed at a reasonable level in being placed below recent lows that appeared to show some amount of support (just before the trade was triggered, several candlesticks in a row showed price holding above the 0.7880 level). But was that truly a reasonable place to put the stop-loss order? An examination of the market’s price action as viewed on a higher time frame, the 4-hour chart, clearly reveals that the answer is “no.”

Looking at the 4-hour chart shown below, it seems fairly clear that price might have dropped to as low as around the 0.7870 level (support area again indicated by the horizontal red line drawn on the chart) without violating a potential scenario of price moving higher since the price had dipped to around that 0.7870 level before finding buying support several times in the preceding two weeks of trading.

AUD/USD 4-Hour Chart

Had the trader extended his market analysis to looking at support levels on the longer-term time frame rather than just on the 5-minute chart he was basing his trade on, then he might have chosen to place his stop at the more reasonable support level about 10 pips lower, below 0.7870. Yes, he would have been risking slightly more money on the trade, but still not any dangerously large amount. In fact, as things turned out, he wouldn’t have suffered any loss at all. Instead of having been stopped out for approximately a 10-pip loss, he would have realized a very nice profit, with a good chance of the market moving even higher in his favor.

Placing stop-loss orders wisely is one of the abilities that distinguish successful traders from their peers. They keep stops close enough to avoid sustaining severe losses, but they also avoid placing stops so unreasonably close to the trade entry point that they end up being needlessly stopped out of a trade that would have eventually proved profitable.

In short, a good trader places stop-loss orders at a level that will protect his trading capital from suffering excessive losses. A great trader does that while also avoiding being needlessly stopped out of a trade and thus missing out on a genuine profit opportunity.

Forex Trading Conclusion

Like any other investment arena, the forex market has its own unique characteristics. In order to trade it profitably, a trader must learn these characteristics through time, practice, and study.

Traders will do well to keep in mind the helpful tips for winning forex trading revealed in this guide:

  • Pay attention to pivot levels
  • Trade with an edge
  • Preserve your trading capital
  • Simplify your market analysis
  • Place stops at genuinely reasonable levels

Of course, that isn’t all the trading wisdom there is to attain regarding the forex market, but it’s a very solid start. If you keep these basic principles of winning forex trading in mind, you will enjoy a definite trading advantage. We wish you the greatest success.

Thank you for reading CFI’s 5-Step Guide to Winning Forex Trading. To keep advancing your career, the additional CFI resources below will be useful:

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