Exploring the Importance of
Financial Skills in Forex Trading

See also: Investment Tips

Forex trading is a lucrative investment with high liquidity and narrow spreads, so it is not surprising if you want to be a part of the world’s largest and most liquid financial market. However, it is also a highly volatile market that can be high risk. If so, then how come there are so many successful Forex traders who have made it to stardom? They have mastered the essential aspects of trading – patience and perseverance – and have gained a deep knowledge of market dynamics and the ability to leverage price movements.

However, one essential thing that all successful Forex traders have is good financial management skills. With well-developed financial skills, they are better able to manage investments and mitigate the risks involved in Forex trading. In this article, we explore the significance of learning financial skills for trading Forex.

Improving Your Financial Literacy

A crucial aspect of trading is improving your understanding of various financial aspects involving the Forex market. For this, it is important to analytically study the market first. You cannot simply hit the Foreign Exchange market and start trading right away just because you had a dream last night!

You should gain proficiency in technical analysis and numeracy – sifting through historical and current price charts and computing entry and exit points to understand how the market moves. Get hands-on with various financial tools and indicators such as an economic calendar to interpret price action and devise short-term investment strategies.

It is also invaluable for traders to keep updated with the latest events, general trends and news announcements to predict potential surges or downfalls in price action. Although this isn’t a common financial skill, it can benefit you in foreseeing market changes and help you make informed trading decisions.

Effective Financial Planning Plays a Key Role

Let’s face it – without a rules-based approach and definitive plan, you are just trading in the Forex market by the seat of your pants. Well, your instincts may work for a while but the market is highly volatile and you are likely to get carried away by emotions – making costly mistakes. By making an effective financial plan before opening a trade, you can better project the outcomes and set clear goals about when to enter or exit the market.

When creating a financial plan for Forex trading, ask yourself:

  • Should I trade only a particular currency pair or several?

  • How much money do I want to make from the trade?

  • Will I trade daily or hold my positions for longer?

  • If I trade daily, how much loss am I willing to accept for the day?

  • Should I set one profit target or several?

  • How do I analyse the market? Should I examine price movements and charts or look at current events and news?

  • How to use stop to mitigate my risks?

  • How much should I practically expect to make?

Get answers to the above questions to devise a short yet comprehensive plan of action.

Risk Management – An Important Skill You Should Master

Whenever you see a trading-related advertisement, they’ll tell you “Forex trading is subject to significant market risks and is not suitable for all types of investors. Increasing leverage on trade will increase your risks.” And this is not far from being true. Therefore, risk awareness is one of the essential skills you should focus on.  This is particularly important if you are just getting started with Forex trading.

In-depth technical analysis, comprehensive planning and a rules-based approach can help you master the basics of risk management. For instance, if the market is moving against you, place take-profit and stop-losses orders to price charts. This will ensure you close out your position right at the exact price specified. So, if you have placed a stop-loss order at 6% below the buying price, you can potentially limit your losses by 6%.

Strategies like Guaranteed stop-losses (GSLOs) enable you to control your losses irrespective of market gapping or volatility. Another good idea is to create a Forex demo account first which provides you a simulated environment of trading using virtual money. So, you can get familiarised with the market, products and platform before you can actually start trading with real money.

Financial Decision Making

The Forex market is highly liquid and constantly changing…in the blink of an eye. There is a huge number of buyers and sellers ready to exchange their foreign currencies – and you don’t want to miss out on an opportunity, right? As a trader, you need to have excellent financial decision-making skills, so you can identify the right entry and exit points every few minutes or seconds. You should be able to make decisions quickly and effectively manage your time, ensuring you do not lose money.

Here, it is important to mention that diligent record-keeping is the secret mantra that most successful traders follow to make informed decisions. Even if you are a beginner, you should try to maintain a record of your trading activities to have an overview of all your transactions at a glance. This will give you a historical outlook to determine the efficacy of your trading approach.

Having your trading data handy can also help you identify potential opportunities and areas of improvement to achieve better gains.

Other Skills to Become Proficient in Forex Trading

Trading in the Foreign Exchange market isn’t just about honing your financial skills. Seasoned traders aren’t limited to refining their financial literacy and have various knacks up their sleeves. The most essential ones are discussed herewith:

  • Stamina and mental stability: The Forex market is highly volatile and this can be nerve-wracking at times. Whether you have it or not, you need to get the stamina and mental stability like that of a marathon runner. When things are going out of hand, you should call it timeout and return only when you can regroup.

  • Discipline, discipline and discipline: If you think you have a great strategy, make sure you stick to it. Be alert at all times and make sure you do not lose focus amid all the chaos in the market.

  • Patience pays you well: Have you set the entry and exit points? Now hold your patience and wait for the prices to hit those points. Regardless of how adverse the market seems at times; you need persistence to stick to your plan.

The Bottom line

Forex trading demands a high level of skillsets that can help you navigate through the market, mitigate your risks and gain more profits. Working on your financial skills, combined with patience and perseverance, can go a long way towards helping you become a successful trader.

About the Author

Dukascopy Bank is a leading provider of Internet-based and mobile trading services, primarily in the Foreign Exchange, Bullion, Binaries and the CFD market. The company was established in 2004 and is based out of Geneva, Switzerland. It operates both as a banking institution and a securities firm.