The forex market used to be an exclusive club for the big boys such as banks, financial institutions, governments, and high currency retailers who would set up shop strategically at airports, sea ports, and border points. Then came the internet and the whole house of cards came tumbling down.

The forex market became a free for all and anyone with a few dollars to spare and some basic knowledge of using a computer could trade 24 hours a day. While this lucrative form of investment has created instant millionaires, it has just as much created paupers.

This is because most newcomers succumbed to the hype of instant riches and failed to do their homework before placing their money on the line. The real trick in forex success is in knowing which trades to enter, when to enter, and when to exit.

Finding the Entry Signal

The first step to profitability is finding a trade worth risking your money on. Therefore, your very first decision is to choose your preferred currency pair to trade.

For instance, let us use the GBPUSD as it is one of the most traded, attracts the least spreads, and is easier to understand its workings. Once you decide on the forex pair to trade in, start scanning your price charts at a time of day when you are relaxed and fresh. This price chart scan should e done at the same time of day each day.

One of the best time periods for scanning your price charts is between the time the New York market closes and the time the European market opens. During this period, the forex market is relatively quiet especially in terms of your currency pairs though there is still some considerable activity being generated by the Asian market.

When scanning through the price charts, the shrewd trader is looking for 3 key things. The first is the price trend for the currency pair. The second is the price levels while the third is the price action.

This can be done by following a strategy of noting where the lower lows and higher highs lie. The trader should also mark out the low highs and the low lows. Additionally, check the direction of the daily 8 and 21 Exponential Moving Averages (EMAs).

One profit-rich combination you should keep a watch out for is price action combined with horizontal price levels. Mark out any other core levels you may come across on the chart but avoid marking out all kinds of levels. The core levels constitute the main resistance and support levels.

These core levels help you determine whether your currency pair prices are trending or consolidating. With this information and the drawn horizontal core levels, the trader can then search for price action signals.

Now, professionals understand one thing. Forex trading is all about trends and it rarely pays to go against the crowd. So the best place to enter a trade is when the price is at or near the resistance and support levels within a particular trend.

Finding the Exit Point

The best way to manage your exit is by placing a stop loss order and a take profit order. The stop loss minimizes your losses in case things go wrong while the take profit locks in your gains in case of a market reversal.

Note that these two forex trade exit orders need to be put in place at the same time that you enter the trade so as to avoid exposing your funds to unacceptable losses.

Thus, the best way to figure out where to place your stop loss is by being disciplined and using a well formulated risk management strategy. Always avoid making a stop loss order that has a risk reward level of more than 1:1.

Locating Your Profit Target

Most forex traders deem as preferable a profit target that provides a risk reward ratio of at least 1:2. Remember to be modest and not greedy in your expectations so as not to lose on gains made. Similarly, do not let fear hinder you from aiming for reasonable profits.

Once you have determined how much profit you are aiming for, that will be the point of placing your take profit order. Always check to ensure that no core resistance and support levels are in the way for your take profit level. If there is, you might consider lowering your expectations a little or forfeiting the trade altogether.

Placing Your Trade

Once you have identified your entry point and exit points, you need to act fast to set up the trade with your broker. The process will differ from one broker to another and depending on the trading platform in use.

Always double check that all your parameters are correct as per your analysis. The worst mishap for any trader is realizing that you had the right idea but used the wrong figures after you have made a loss.

Managing Your Trades

Once you have done the analysis and set your parameters then entered the trade, you now embark on the difficult part of the trade.

This is the point where most novice traders fail as they overreact to market changes due to panic or greed. This part of the trade should actually be the easiest as all it needs is for you to patiently wait out the trade. You can check from time to time the progress but it is much wiser to just let it work according to your analysis.

Conclusion

While it is the traders discretion how they handle their trades, it always works better when the trader does a thorough analysis then leaves the trade un-interfered with.

Traders should learn to handle emotions as exiting too early might deny the chance for higher profits while exiting too late might result in losing gains.

Traders should avoid at all costs switching their stop and take profit orders once they have entered the trade. These are usually effects of panic and greed and almost always end badly.

Remember to always keep a journal and record all your trade decisions for future reference.