Being Consistently Profitable in Forex & CFD Trading - a Myth or a Reality?
Reading time: 9 minutes
The majority of retail traders struggle to find out how to be consistently profitable in Forex and CFD trading. This article discusses whether or not it's actually possible to make regular profits trading Forex and CFDs, as well as some useful tips for traders that may help them to achieve success in the markets!
First of all, a trader must create or adjust their trading strategies to fit their personality, trading schedule, and risk appetite. Every strategy should be historically back-tested before use, and its average effectiveness should also be measured. You must be aware that historic performance is not an accurate representation of future performance, and therefore does not guarantee anything.
Secondly, a trader must develop a certain mentality to be able to follow his or her strategy consistently. This second part will be the prevailing topic of this article, because failing to understand it is the very reason that so many beginner traders quit Forex and CFD trading after losing their funds.
Chasing Profits Often Causes Losses
Some people can obsess over profits, which can ultimately lead to their downfall. Chasing money is one of the main obstacles in learning how to be consistently profitable in Forex and CFD trading. To avoid this, a good place to start is to forget any unrealistic goals and targets. The notion of making large amounts of money off a few swift trades is extremely unlikely.
Trading too flippantly and over-confidently can be what causes you to lose your initial investment. Intraday novice traders who follow short-term price action are exposed to this way of thinking. The turnover in this group of traders is high, and they can lose their capital in a matter of a few months or even less. Many veteran traders live with the sentiment of "to make money you need to forget about making money". By setting the money goal high, a trader places themself under a lot of emotional pressure, which results in one of the biggest mistakes possible – overtrading.
As an alternative to focussing on making profit, try focussing on learning trading strategies, and research which trading tools are available to you. See which techniques seem to have sound logic, and think about how they can be used in your own strategy.
You should also invest your time into studying how markets behave, and learning how the industry functions – this is crucial. The biggest takeaway from this article should be to never stop learning, because there are always new strategies and techniques emerging, new concepts and more that you can benefit from and use to your advantage. The markets are constantly changing, and if you want consistency, you need to be able to keep up and adapt to these changes.
Overtrading Is Deceptively Dangerous
Overtrading is another word for curve bending or market chasing, and it's caused by a faulty mindset, as described above. Overtrading is a result of recognising opportunities on the market not because they are actually there, but because a trader wants them to be there. Traders may or may not realise this and that is where the deception comes into play. There are two kinds of overtrading – trading too often and trading too much. First, let's deal with trading too often:
Trading too often
In his speech titled How to stay out of debt, Warren Buffett stated that you need discipline when investing:
"You have to wait until you see the fat pitch to swing at, because investing is a no called strike game. In baseball, you have to swing at pitches you don't necessarily like. In business you don't have to swing at anything.
You can just sit there… and if you don't like the prices you don't have to swing day after day, after day, after day, and there are no called strikes. You can simply wait for that one time in a month when you like the price, when you really know what you are doing, and then you swing.
And you only need a couple of swings."
Although Warren Buffett was referring to long-term investing (such as stocks), If you apply that same principle to Forex and CFD trading, it is still sound. The bottom line is this: the trader doesn't need to make a lot of trades, just making the right ones is enough. By the time you decide start trading with a live account, you should have a strategy with preset specific conditions for entering trades. Simply follow your own strategy – and don't trade when you shouldn't.
Trading too much
The other part of overtrading is trading too much. A lot of people say that frivolous leveraging is to blame. Well, is it? Forex and CFD brokers often offer significant leverage on their trading accounts. In theory, this was originally to provide traders with the chance to make reasonable profits from small investments, thus enabling more people to see the value in trading, and use it as a service that brokers provide.
In practice, however, taking high leverage is still common for beginner traders who are tempted by maximising their potential profits, but instead maximise their actual loss.
Yet the devil is in the detail. High leverage is not intrinsically a bad thing. It allows a trader to deal with larger volumes, which results in them having less free margin to use in the case of a drawdown. Higher volumes mean more pip value – the engine of profit and loss. However, it is the trader's choice to trade an unreasonably high volume that makes an account more susceptible to margin calls. As for the leverage itself – if anything, it's there to help a trader who should already understand how leverage works and respect it.
The lesson here is to:
- Ensure that you know and understand the risks of trading before starting
- Avoid overtrading and always test new trading systems and strategies in a risk free trading environment.
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Nobody Makes Profits All the Time
How does a Forex and CFD trader achieve profits consistently? Truth be told, it can't be done. Closing every trade in profit is simply a trading urban myth. If we are talking about how to be consistently profitable in Forex and CFD trading in the long-term, some professional intraday traders may be consistently profitable on a daily basis, but not even they can present a trading report that that doesn't include regular losses as well.
If you experience difficulty with taking losses, you may struggle with Forex and CFD trading. Successful traders with decades of experience confess to less than 40% of all their trades being profitable. Some even go as low as 20%.
The trick is that those that are profitable yield enough to cover the losses and make profit. Keep in mind that this is common for long-term, trend-following traders. It takes a lot of mental fortitude to admit miscalculations in your decision making (if your strategy allows it) and to close a losing trade early with a small loss. Conversely, it takes about as much fortitude to trust yourself and not close a winning trade too early. You need to be patient.
A lot has been discussed about trading discipline, but very little about organisation. Everything starts with your trading routine. You need a strict trading plan that will cover most of your trading activity, and will help you to reduce the random factor to an absolute minimum. A lot of beginner traders develop negative trading habits. For example, they overtrade once, get lucky, carry on, and end up wiping out their account.
Once such a trader has made a profit this way once, they have reinforced a negative trading habit that proves nearly impossible to break. How can that person be organised and trade carefully when overtrading has worked so well for them already? Reinforcing proper trading habits may help you to be profitable in Forex and CFD trading - but, again, this is not a cast iron fact – like everything in the world of trading.
Below is a cheat sheet in list form which may help you:
- Let go of your expectations
- Have a risk management plan
- Pick a trading strategy that you like
- Make sure it has strict conditions for entering and exiting trades
- Backtest it until you trust it
- Stick to it, remembering that it proved profitable in your tests
- Do not overtrade under any circumstance
- Record everything in a diary to analyse your trades
- Gauge your long-term progress, rather than short-term success or failure
- Use a feature-rich trading platform to enhance your trading decisions
Remember, the short-term is unimportant. What happens on average and in the long run is what you should focus on. One last tip – try not to slouch when trading. Research shows that people who slouch are less advanced at solving logical problems than those who sit straight.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the