Thinking And Trading Like A Professional Forex Trader

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There are two primary types of professional Forex traders in the market. The first type is the professional retail FX trader, who typically trades for his own account or may have an arrangement with a proprietary trading firm. The second type is the professional institutional FX trader, who is employed by and trades on behalf of an institution such as a bank or hedge fund. In this article, we will focus on helping you to better understand what it takes to excel as a professional retail FX trader.

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What Is A Professional Forex Trader?

A retail professional Forex trader engages in the foreign exchange market as a speculator for the purposes of making profits from their trading activities. These currency traders can participate in either the spot Forex market, the currency futures market, the currency options market, or the currency ETF market. As you might imagine, most tend to gravitate towards the spot Forex market due to the depth of that market, and the relatively high liquidity within it. After the spot Forex market, the second most popular venue for professional currency traders is the futures market.

For the most part, professional Forex traders consider their trading activities as their primary income source. And the trading activities can come in many forms including ultra short-term scalping, shorter-term daytrading, intermediate-term swing trading, or longer-term position trading. Unlike many other types of work or business activities, the amount of time spent on trading often has little correlation to the amount of money that can be earned from it. This is a characteristic that draws in many aspiring traders to the foreign exchange market.

Unlike many amateur Forex traders, who generally tend to treat their trading activities as a hobby rather than as a business, professional Forex traders will have a very specific trading plan that they follow. This includes outlining the various steps and routines around their market analysis and trade execution.

If there is one thing that sets a professional trader apart from most amateur traders, it is that most professionals will tend to be overly obsessed with risk containment at all times, as opposed to amateur traders who tend to be overly obsessed with profit maximization. Professional traders have learned that the most important aspect of trading is not the return on one’s capital, but rather the return of one’s capital that is paramount. In other words, if you are able to take care of your downside risk, then you can survive long enough to enjoy future profits.

Become A Professional Forex Trader

As with most things in life, if you aspire to do something, you should put your full efforts behind it. And this is no different when it comes to becoming a professional Forex trader. To start with, you need to get as much education as you can about how the currency markets work, and the different analytical techniques used for market analysis.

This education can come in the form of reading industry-leading blogs, and subscribing to relevant newsletters from experienced traders. Generally, this will be free of any cost, and should get you started in getting a better feel for the Forex market. Based on this you can decide whether or not FX trading aligns with your personal goals.

After you have done some preliminary research into this area, then you will need to fine-tune your learning process. In other words, at some point you will have to commit to learning more about a specific market analysis technique to help you make informed trading decisions in the market. Some traders will lean towards fundamental analysis, while others will be more drawn to technical analysis. Within each of these two categories, you will find many subsets of market analysis techniques.

For example within the technical analysis field, traders can choose from techniques such as order flow analysis, Elliott wave and Fibonacci analysis, price action and candlestick analysis, and chart pattern analysis to name just a few. Once you’ve taken a few in-depth courses in the area that you find the most interest in, then you may consider getting some personalized coaching from an expert in that area to help advance your understanding.

Although premium trading courses, and personalized coaching do come at a cost, it is often well worth it if you have the right mentor to guide you along the way. They can often help you accelerate your learning curve and journey to reaching consistency in the market.

When you have a trading methodology that you’re comfortable with, then you need to thoroughly test that strategy. If the variables within your strategies are more mathematically based, then you may be able to use a back testing software to perform the historical test. If however, your methodology is discretionary based, then you may need to perform your back test manually.

In either case, it’s imperative that you perform the proper due diligence on the strategy, so that you can become comfortable with the performance metrics. Only if you are thoroughly comfortable with your strategy will you be able to stick with it during losing streaks and drawdown periods.

professional-forex-traderHow Pro FX Traders Think And Act

In addition to gaining expertise in market analysis techniques, aspiring Forex traders also need to acquire the proper mindset required for successful trading. Below are some of the important traits that many professional Forex traders share.

Embrace Uncertainty – It’s often said that the only thing certain in the markets is uncertainty. Professional Forex traders know this to be true. Anything can happen in the market, and often does. Many individuals have a tendency to want to control everything around them. This personality trait can be counter productive when it comes to the markets. Successful FX traders know how to thrive in uncertain market conditions. They have learned that trading is a game of probabilities, and that the best he or she can hope for is to try to stack those odds in their favor whenever possible.

Maintain Risk Control – There are a countless number of risks  associated with Forex trading. This includes risk of adverse price movements caused by any number of economic or geopolitical events. Additionally there is infrastructure risk that relates to your particular trading platform or software. In addition, Forex traders can face correlation risk, meaning that their portfolio can succumb to overconcentration of a currency class. This is just a few of the common risks that FX traders face and need to manage on a continual basis. Professional Forex traders spend much more time evaluating potential risks, and putting in mechanisms for minimizing such risks, than they do thinking about potential profits.

Act In A Disciplined Manner – Amateurs are often driven by emotions in the market. This is seen as greed during a winning streak, or fear during a losing streak. These traders have a difficult time with balancing their emotions because they fall victim to the constant ups and downs, not much unlike the feeling of riding a roller coaster. Most Pro Forex traders on the other hand rarely become ecstatic after a winning streak. At the same time, they will rarely beat themselves up over a series of losing trades. They understand the need to maintain discipline in the markets. And this starts with mastering how to control one’s own emotion.

Never Obsess Over A Trade – Professional traders have usually done rigorous testing on their trading strategy. As such, they are very well familiar with the most important trading metrics for their system. For example, over a series of trades, they will know what their expected winning rate is, the average win to average loss amount, the largest drawdown, consecutive winners and losers, profit factor, and more. Because they have an intimate understanding of the key components of their trading strategy, and the historical metrics, they will not need to obsess over any single trade. They know that their success lies in playing out their specific edge in the market over a long series of trades.

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Trading Platforms Used By Forex Professionals

The most popular trading platform promoted within the Forex industry is the Metatrader platform. The Metatrader platform is a quality FX trading platform that is well suited for many beginning to intermediate traders. It is equipped with many of the tools required for strategy execution, back testing, and optimization. But Metatrader is typically not the go to platform for most professional Forex traders. Below are some more advanced trading platforms used by experienced Forex professionals.

NinjaTraderNinjaTrader is an award-winning platform that serves the needs of futures and Forex traders. It is very popular among active traders, especially those that trade directly off the charts. The software platform has excellent chart trading capabilities with fast execution and a simple yet elegant chart layout. Within NinjaTrader, users can build their own customized trading solution or automated strategy for deployment in the market.

TradeStation – TradeStation is a pioneer in charting software and trading platform technologies. It is most popular with futures traders, particularly those that trade stock index futures, and currency futures. TradeStation offers a wide range of technical studies and scanning capabilities within its platform. Additionally, their Easy Language program allows knowledgeable programmers to easily create customized execution commands and full on trading systems. Their back testing and optimization engine is one of the most sophisticated in the industry.

eSignal – eSignal trading platform caters to the advanced market technician, particularly shorter-term day traders and swing traders. The platform offers some unique technical tools that are not available in many other charting packages. This includes add-ons for Elliott wave analysis, Fibonacci analysis, and Gann analysis to name a few. Traders can access multiple data feeds, view various price charts, and receive real-time streaming news within a single dashboard.

Professional Forex Trading Strategies

Professional FX traders can be classified as either discretionary traders or system traders. Discretionary traders tend to have somewhat flexible rules in terms of deciding on whether to take a trade set up, and how they will enter the trade, manage the trade, and exit the trade.

Essentially, discretionary traders rely more on their experience and intuition in the markets. Systems traders utilize a stricter approach to the markets and implement automated trading systems to execute most if not all the components of their methodology. System traders feel that once they have programmed the rules within a mechanical trading system, that it’s best to let that system interact in the market. This reduces any chance of second-guessing a signal or missing a potential signal.

Now that you understand that different mechanics of executing a trading strategy in the market, what specific types of trading techniques do professional traders employ? As we touched on briefly there are two primary analysis methods that professional FX traders use. This includes fundamental analysis and technical analysis.

Fundamental analysts look at data points such as gross domestic product, interest rates, inflation, central-bank activity, retail sales, housing data, and other related economic metrics to gauge the overall strength of an economy. Using that information they can compare the currency of one economy to another to arrive at some directional bias for future exchange-rate price movements.

Technical analysts on the other hand believe that all publicly available information is already absorbed within the price action, and thus, the best way to analyze future price movements is by studying the price chart, and other derivatives of price such as trading indicators. In addition many technical analysts use pattern-based analysis in evaluating the best trading opportunities. Some types of pattern-based analysis include classical chart patterns, harmonic patterns, and double and triple bar patterns.

forex-trader-incomeProfessional Forex Trader Income

One of the most common questions that new traders ask is the following: How much does a professional Forex trader make? Well, the answer to this question is – It varies. I’m sure that’s not the answer that you were looking for, but it is the best answer nevertheless.

That is to say that some Pro FX traders make millions of dollars a year, while others may have a breakeven year or even wind up losing money for a particular year. And so, there is no clear-cut answer to this question. Additionally, much of a professional traders total yearly earnings will depend on their account size.

And so, I think that the better question would be what is the average return that can be expected from trading the Forex market? This too is a difficult question to answer, but is one that is more appropriate. Returns in the Forex market can be influenced largely by the amount of leverage that a trader uses.

Typically novice traders will utilize a high level of leverage in their trading, believing that this will have a positive impact on their overall returns. While this can be the case if your strategy proves to be profitable over a specified period of time, it can also have an adverse effect and amplify your losses in case your strategy turns out to have a negative return over a specified period.

Most professional Forex traders tend to be very conservative in their use of leverage. This is because they have learned from experience that leveraged returns often come at the cost of increased drawdowns. Having said that, most pro traders will tend to utilize a reasonable amount of leverage to help boost their returns. This usually ranges from 2 to 1 leverage all the way up to 5 to 1 leverage or so. It’s rare to see any veteran FX trader go beyond 5 to 1 leverage on a regular basis.

Now assuming that you’re using leverage responsibility as outlined above, then it is not unreasonable to expect a return of 20% to 40% from your trading activities. Although, this may not seem like an exorbitant percentage return to some, it is relatively high when compared to other markets such as the equities market. Obviously, this expected range is just a guideline, and will require time to achieve consistently. Regardless, it is well worth the effort, as anyone who understands the power of compounding returns, can attest to.

How To Copy Professional Traders?

There are a few different ways that newer traders can gain experience from the expertise of professional FX traders. Although, the ultimate goal for every trader should be to learn the necessary skills to be able to confidently trade for themselves, it can be helpful in the early stages to mimic the trades of other expert FX traders. Below is a list of a few ways that you can follow more experienced traders while you’re learning the ropes.

Copy Trading Platforms – There are a few reputable social trading platforms in the market today. These types of platforms allow you to follow and copy the trades of more experienced traders on the network. Some of the more well-known companies that offer such services include eToro, Darwinex, and Collective2. Traders should do their own due diligence into the various signal providers on these platforms.

Forex Signal Services – Some Forex professional traders offer premium Forex signal services, wherein members can receive messages either via email or SMS whenever a trade signal is issued. There is a wide disparity in the quality of Forex signal services in the market. Some are run by very reputable professionals who have the best interest of their members in mind, and provide a valuable service to them. Some other so called professional trading groups are run by less than reputable outfits that are only out to make a quick buck, and offer little real value to their subscribers.

Managed Forex Accounts – If you have a sizable account to invest in the foreign exchange market, you can opt for a managed Forex account. Some professional traders offer a managed account service and can provide a customized solution for you based on your specific trading goals and risk parameters. The minimum required by professional Forex managers can start around $25,000. Many require much more than this to enroll in their Forex managed account program.

Forecasting Newsletter Services – Some Forex market analysts and traders offer a forecasting service as well. Based on the expertise of the analyst, they will provide either in-depth fundamental or technical information within their newsletter. In addition, they can provide you with viable trading opportunities. Most of these types of forecasting newsletters are issued on a monthly basis.

Download the short printable PDF version summarizing the key points of this lesson…. Click Here To Download

Summary

If there’s one thing that new traders should know about the Forex market it is the following – Forex trading is not a get rich quick scheme. That is to say that unless you come into this market with the right mindset and work ethic, you will find it very difficult to compete with other professionals in this arena. So you have to be ready to put in the necessary screen time and preparation to make it in this business. Only then can you have a chance to elevate yourself to the status of professional Forex trader.

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