10 Habits of Successful Currency Traders

By Kathleen Brooks, Brian Dolan

Here are ten rules that define the best currency traders. Many of these rules apply to traders in any market, but some of them are unique to the currency market. The important idea to keep in mind: No one is born with all these habits. The only way to acquire them is the way other successful currency traders have — through patience, discipline, and experience.

Trading with a plan

No successful trader will last very long without a well-conceived game plan for each trade. Sure, you may have some short-run success winging it, but the day of reckoning will surely come. Successful currency traders have a specific plan of attack for each position, including position size, entry point, stop-loss exit, and take-profit exit.

They stay flexible with their take profits, sometimes settling for less if they judge that that’s all they can take out of the market at the moment, other times extending their profit targets if market developments are shifting in their favor. But they never move their stop-loss orders from the original setting unless it’s in favor of the position to lock in profits.

Anticipating event outcomes

Trading is very similar to chess, in which the best players are thinking several moves ahead of their opponents. Successful forex traders look ahead to future events and consider how much the market has (or has not) priced in an expected outcome. They also consider the likely reactions if the event matches, or fails to match, those expectations. Then they construct trading strategies based on those alternative outcomes.

While the rest of the market is trying to figure out what to make of the event, checking charts and redrawing trend lines, the forward-looking trader has a game plan already in place and is ready to trade.

Staying flexible

Successful currency traders resist getting emotionally attached to positions. They recognize that it’s not about being right or wrong — it’s about making money. They adapt to incoming news and information, and quickly abandon an open position if events run counter to it instead of waiting for price action to take them out of their trade.

At the same time, they’re alert to fresh opportunities that may develop in the market and are prepared to react. To be prepared, they must keep sufficient margin available for additional positions. Also, they need an ongoing mental model of other major pairs so they can factor in fresh news and events. They may not be actively trading AUD/USD, but they still know the lay of the land for Aussie.

Being prepared for trading

Successful currency traders are always prepared, at least as much as possible in a market that’s open 24 hours a day and subject to random events from half a world away. To stay on top of their game, successful currency traders are prepared for the following:

  • Upcoming economic data releases in the next week to two weeks: Know what the prior report indicated and what’s expected in the upcoming report.

  • Scheduled speakers: Find out who’s speaking (central bankers or finance officials), what they’ve said in the past, and what they’re likely to say this time.

  • Central bank interest rate setting meetings and announcement times: Know when they’re scheduled and what decision the market is expecting.

  • Important gatherings of financial leaders, such as G20 meetings or monthly get-togethers of Eurozone finance ministers: Get a sense of whether currencies are on the agenda and what actions are expected.

  • Liquidity conditions: Stay aware of time periods — such as end of month, market closings or holidays, and time of day (for example, European close, option expirations, or daily fixings) — when market liquidity may be affected.

  • Unexpected events: Use rate alerts to stay on top of price movements outside expected ranges. Follow up on alerts to check for significant news and to assess potential trading opportunities.

Keeping technically alert

Even if they’re not pursuing a technical-based trading strategy themselves, successful currency traders are still aware of important technical levels in the currency pairs they’re trading. For instance, they know the key Fibonacci retracement levels, where various moving averages are, important short- and long-term trend lines, and major recent highs and lows.

You may be trading based on price behavior or momentum analysis, but be sure to keep abreast of key technical levels as part of your overall strategy.

Going with the flow/trading the range

Successful currency traders are able to assess whether the market is trending or likely to remain confined to ranges. If they think the market is trending, they aim to go with the flow more often than against it.

When the short-term trend is higher, they’re looking for levels to get long at, and vice versa when the direction is down. At the same time, they’re aware that trends pause and frequently correct, so they’re also actively taking profit at key technical points as the larger trend unfolds.

If the environment favors range trading, successful currency traders are able to switch gears and become contrarians, selling near the top of the range when everyone else is buying, or buying near the bottom of the range when everyone else is selling.

Just as important, when they’re in range-trading mode, they’ve defined an ultimate point when the range is broken. If that point is hit, they throw in the towel without any remorse, possibly even reversing direction and jumping on the breakout.

Focusing on a few pairs

Many successful forex traders focus on only one or two currency pairs for most of their trading. Doing so enables them to get a better feel for those markets in terms of price levels and price behavior. It also narrows the amount of information and data they need to monitor. Above all, they recognize that different currency pairs have different trading characteristics, and they’re able to adjust their tactics from one pair to the next.

Focus on gaining experience and success in just one or two major pairs before trying to broaden out and take on the whole market. Look at other pairs only when they’re trending or trading at key levels.

Protecting profits

There are numerous market aphorisms on the benefits of taking profits, such as “You can’t go broke taking profit.” One of our favorites is “Bulls and bears each get a seat at the table, but pigs get slaughtered.”

Successful traders take profit regularly, whether it’s a partial take profit (reducing the size of a winning position) or squaring up completely and stepping back after a profitable market movement. Above all, when a trade is in the money, successful traders focus on keeping what they’ve made and not giving it up for the chance to make a little more.

If you don’t take some money off the table from time to time, the market will do it for you.

Trading with stop losses

All successful traders lose money from time to time. What makes them successful in the long run is that their losses are relatively small compared to their average winning trades. The absolute key is to have a stop loss in place at all times to prevent an everyday losing trade from becoming an account killer.

No one likes to lose money, but the best traders are able to accept it as part of the cost of doing business. And the only way they can regularly accept losses is by keeping them small in the first place. Master this habit, and you’re halfway there.

Watching other markets

Currencies don’t trade in a vacuum, and smart traders keep an eye on other major financial markets as a matter of routine. The primary markets they focus on are benchmark bond yields of the major currencies (U.S., German, U.K. and Japanese ten-year government notes), oil, gold, and major global stock indexes.

On an intraday basis, they look to these other markets for confirmation of short-term U.S. dollar directional bias. For example, if the dollar is moving higher, U.S. ten-year yields are rising, and gold is falling, it’s confirmation from other markets in favor of the dollar’s move higher. If yields are flat or down, and gold is higher, the dollar’s move up may be only short lived.

On a longer-term basis, currency traders analyze those other markets for significant technical levels and overall directional trends, just as they do the currencies.

Spend the extra money for charting services that include live rate feeds for those other markets.