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Guide To Successful Forex Trading

If you were wondering, forex trading is nothing more than direct access trading of different types of foreign currencies. In the past, foreign exchange trading was mostly limited to large banks and institutional traders however; recent technological advancements have made it so that small traders can also take advantage of the many benefits of forex trading using the various online trading platforms.

The world’s currencies are on a floating exchange rate, and they are always traded in pairs Euro/Dollar, Dollar/Yen, etc. Thus, about 85 percent of all daily transactions involve the trading of major currencies.

Four major currency pairs are usually used for investment purposes. They are Euro against U.S. dollar, U.S. dollar against Japanese yen, British pound against U.S. dollar, and U.S. dollar against the Swiss franc. Right now, I will show you how they look in the trading market: EUR/USD, USD/JPY, GBP/USD, and USD/CHF. As a note, you should know that no dividends are paid on currencies.

If you think one currency will appreciate another, you may exchange that second currency for the first one and be able to stay in it. However, if everything goes as you plan it, eventually, you may be able to make the opposite deal in that you may exchange this first currency back for that other and then collect profits from it.

Dealers perform transactions on the FOREX market at major banks or FOREX brokerage companies. FOREX is a necessary part of the worldwide market, so when you are sleeping in the comfort of your bed, the dealers in Europe are trading currencies with their Japanese counterparts.

Therefore, it is reasonable for you to believe that the FOREX market is active 24 hours a day, and dealers at major institutions work 24/7 in three different shifts. In addition, clients may place take-profit and stop-loss orders with brokers for overnight execution.

Price movements on the FOREX market are smooth and without the gaps that you face almost every morning on the stock market. Moreover, the daily turnover on the FOREX market is somewhere around $1.2 trillion, so a new investor can enter and exit positions without any problems.

The fact is that the FOREX market never stops; even on September 11, 2001, you could still get your hands on two-side quotes on currencies. The currency market is the largest and oldest financial market in the world. It is also called the foreign exchange market, F.X. market for short. It is the biggest and most liquid market globally, and it is traded mostly through the 24 hour-a-day inter-bank currency market.

When you compare them, you will see that the currency futures market is only one percent big. Unlike the futures and stock markets, trading currencies is not centered on an exchange. Trading moves from major banking centers of the U.S. to Australia and New Zealand, to the Far East, to Europe, and finally back to the U.S., it is truly a full circle trading game.

In the past, the forex inter-bank market was not available to small speculators because of the large minimum transaction sizes and strict financial requirements.

Banks, major currency dealers, and sometimes even very large speculators were the principal dealers. As a result, only they were able to take advantage of the currency market’s fantastic liquidity and strong trending nature of many of the world’s primary currency exchange rates.

Today, foreign exchange market brokers can break down the larger-sized inter-bank units and offer small traders like you and me the opportunity to buy or sell any number of these smaller units. These brokers give any size trader, including individual speculators or smaller companies, the option to trade at the same rates and price movements as the big players who once dominated the market.

Your FOREX Trading Philosophy

“Easy money” is the allure that captivates many beginning FOREX traders. FOREX websites offer “risk-free” trading, “high returns,” “low investment.” These claims have a grain of truth in them, but the reality of FOREX is a bit more complex. 

Mistakes Of The Beginning Trader

There are two common mistakes that many beginner traders make: trading without a strategy and letting emotions rule their decisions. After opening a FOREX account, it may be tempting to dive right in and start trading. Watching the movements of EUR/USD, for example, you may feel that you are letting an opportunity pass you by if you don’t enter the market immediately. You buy and watch the market move against you. Then, you panic and sell, only to see the market recover. 

This kind of undisciplined approach to FOREX is guaranteed to lose money. FOREX traders must have a rational trading strategy and not make trading decisions in the heat of the moment. 

Understanding Market Movements

To make rational trading decisions, the FOREX trader must be well educated in market movements. He must be able to apply technical studies to charts and plot out entry and exit points. He must take advantage of the various types of orders to minimize his risk and maximize his profit. 

The first step in becoming a successful FOREX trader is understanding the market and the forces behind it. Who trades FOREX and why? This will allow you to identify successful trading strategies and use them.

Accountability

There are five major groups of investors who participate in FOREX: governments, banks, corporations, investment funds, and traders. Each group has its objectives, but one thing all groups except traders have in common is external control. Every organization has rules and guidelines for trading currencies and can be held accountable for their trading decisions. Individual traders, on the other hand, are accountable only to themselves. 

Large organizations and educated traders approach FOREX with strategies, and if you hope to succeed as a FOREX trader, you must follow suit. 

Money Management

Money management is an integral part of any trading strategy. Besides knowing which currencies to trade and recognizing entry and exit signals, the successful trader has to manage his resources and integrate money management into his trading plan. 

There are various strategies for money management. Many rely on calculating core equity, your starting balance minus the money used in open positions. 

Core Equity And Limited Risk

When entering a position, try to limit your risk to 1% to 3% of each trade. For example, this means that if you are trading a standard FOREX lot of $100,000, you should limit your risk to $1,000 to $3,000. You do this with a stop-loss order of 100 pips (1 pip = $10) above or below your entry position. 

As your core equity rises or falls, adjust the dollar amount of your risk. For example, with a starting balance of $10,000 and 1 open position, your core equity is $9000. If you wish to add a second open position, your core equity will fall to $8000, and you should limit your risk to $900. Risk in a third position should be limited to $800. 

Greater Profit, Greater Risk

It would be best if you also raised your risk level as your core equity rises. For example, after $5,000 profit, your core equity is now $15,000. You could raise your risk to $1,500 per transaction. Alternatively, you could risk more from the profit than from the original starting balance. Some traders may risk up to 5% against their realized profits ($5,000 on a $100,000 lot) for greater profit potential. 

These are the kinds of strategic tactics that allow beginners to get a foothold on profitable trading in FOREX.

You Don't Pay Commissions In Forex Trading

The Foreign Exchange market is the largest financial market in the world. The U.S. alone has a daily trading volume of $1.2 trillion, which outshines the stock, bond, and other commodity markets. But just what is currency trading or Forex trading, as it is more commonly known?

Forex trading is where you will buy one currency and sell another, or it may be a combination of a few different currencies in total. Your trading involves matching one currency against another. That is, you buy the Euro hoping it will rise against the U.S. Dollar. This also means you hope the U.S. Dollar will fall against the value of the Euro.

This does not mean you wish the U.S. Dollar bad tidings; you are just trading using financial information about the two currencies. You can do the same for the Swiss franc against the Japanese yen. Most people probably call this form of trading speculation. But consider that some individuals and groups make millions of dollars daily using the techniques available for trading in currencies.

You would usually do Forex trading using a margin. This means you leave a small deposit with your broker and can trade the value of your deposit many times. For example, let’s say you want to open a trade matching two currencies, and you want to trade for $5,000.

You can deposit $50 with your broker and stand to gain much more than the $50 after you close the trade. You benefit from not using your own money but earning a tidy profit. Of course, you could lose on the trade, but your losses would be no more than your deposit if you took the necessary precaution to exit the trade once you reached your margin.

It would be best if you still had a broker as you do in the other markets. With Forex, your broker will open an account for you to make your trades. Different brokers stipulate different amounts you should deposit to your account. Some ask for just $50 to open an account, but you wouldn’t trade much on such a small amount.

Most brokers set the margin at 3-5%, so if you want to open a trade for $10,000, you will need to have on deposit $300-$500. The great thing about Forex trading is that you do not pay a commission on your trades. But don’t cry for the market makers just yet. They manage to recover their expenses and profit on all your trades by picking up the spread between the two currencies you trade. The spread is the difference between the bid and asks prices of the two currencies.

While you may look at Forex trading as pure speculation, you must consider that to succeed; you need to understand the nature of chance as it applies to the market. For example, you may get up one morning to hear the U.S. Dollar dipped against the Euro because exports to Europe fell sharply for the third consecutive quarter.

If you take this information without further research and decide to trade the Euro against the U.S. Dollar, you are speculating. However, you do not have any solid proof the dollar will continue to fall against the Euro. Successful traders don’t only digest the financial news; they also use other tools to decide how to trade.

Yes, You Can Start Trading Forex For Free!

Yes, it’s true; you can trade the forex markets for free and use the same state-of-the-art software packages that professional Forex traders worldwide are currently using to make real-time, live currency trades.

And you can also experience the same dynamic market action and go through the same process of making decisions based on breaking news, reacting to charting patterns, and tracking one’s performance the same way professional Forex traders do.

And all this can be done even if you don’t put any real money into your account; you won’t see any difference in how the market behaves and how you react. In short, at some point, every new forex trader needs to start Demo-trading.

Once you start placing demo trades, you will learn a lot about how Forex transactions are placed. I can’t emphasize to you enough that this is a very important step for you to learn how to become a trader. A demo account allows one to become familiar with trading procedures, such as placing Market, Limit, Stop, OCO Orders without any risk. In addition, all dollar losses or gains on a demo account are imaginary, but, as mentioned above, the trading experience you acquire is not.

You should notice that making big gains in a demo account does not guarantee profits in live trading; however, those who are not successful in paper trading rarely are successful when money is on the line. So, yes, just playing around and getting familiar with a demo account can be a great learning experience; however, you will not learn how to become a trader this way. It would be best if you had a trading strategy.

Once you sign up for a mini-demo account, you will need to try one of the trial charting packages from the broker you choose. Any demo software you choose will do because they all have the necessary indicator tools you need. Once you have downloaded the software, you can set up your demo account and start drawing trendlines, marking support & resistance levels, monitoring moving averages, etc. This is also a very good way to get used to how orders are placed. Once you have a simple trading system, you will already know how to place orders properly.

And remember, everyone makes mistakes placing orders. So you need to experiment before in a demo account, so you can make your mistakes without losing any real money.

Would You Like To Forex Or DayTrade?

Online trading is a great way for serious investors to make money, but inexperienced traders often wind up with big losses. A good set of instructions can minimize the risks and save months of expensive trial-and-error learning. 

Day Trading 

Day Trading had its heyday during the bull market of the 1990s. All the amateurs have since dropped out, but professionals are still practicing day trading. There are fewer opportunities in the current market, but skilled investors can still find them if they know what to look for. 

FOREX Trading 

The Foreign Exchange Market (FOREX), the world’s largest financial exchange market, originated in 1973. It has a daily turnover of currency worth more than $1.2 trillion. 

Unlike many other securities, FOREX does not trade on a fixed exchange rate; instead, currencies are traded primarily between central banks, commercial banks, non-banking international corporations, hedge funds, personal investors, and, not to forget, speculators. Previously, smaller investors were excluded from FOREX due to the huge amount of deposit involved. However, this was changed in 1995, and now smaller investors can trade alongside multinationals. As a result, the number of traders within the FOREX market has grown rapidly, and many FOREX courses appear to help individual traders increase their skills. 

It’s advisable to take FOREX training even before opening a trading account. It is vital to know the market mechanics of FOREX, leveraging in FOREX, rollovers, and the analysis of the FOREX market. Due to this fact, potential FOREX traders would do well to either enroll in FOREX training courses or even purchase some books regarding FOREX trading. 

There are pros and cons to enrolling in a FOREX course. For beginners, a FOREX course is a rapid method of learning the basics of FOREX trading. Not much time is spent on the history of the market or arcane economic theories. Often, online or phone support from a skilled FOREX trader is available to answer any questions. Also, the information is condensed and practical, often with graphs and charts. 

The disadvantage is the price, as courses are more expensive than a paperback from the bookstore. Also, the course may teach the trader’s approach who wrote it, and individuals have different trading strategies. The student may grow accustomed to the teacher’s logic and focus without realizing that nothing is predictable in the FOREX market. Many different strategies will bring profits in varying market circumstances. Also, knowledge of practical applications may not be enough, as FOREX is highly unpredictable. There are many external factors, such as political issues, affecting the flow of finances in the market.

World Events and Wise Forex Trading

Forex trading has the great potential of becoming a profitable and fulfilling career that will let you have a lifestyle that few other lucrative activities in the world can offer to people from many roads in life and without asking any of those men and women for a diploma or some special certification.

But Forex trading is not easy; it may be simple to enter and place your first trade, but becoming a profitable trader is different. You will need to acquire the right knowledge and techniques to understand and know when to enter or leave a trade, always fulfilling the main objective every trader must have; making money.

There are two kinds of analysis you can perform on the Forex markets. They are known as technical analysis and fundamental analysis. Commonly, traders tend to divide themselves into “technical” and “fundamentalists.” Each group devoting itself to the main tools each kind of analysis gives them.

Technical forex traders base their trading on the analysis of the charts and the number of indicators derived from the plots of price oscillations and patterns. Meanwhile, Fundamentalists traders base their trading mostly on countries’ economies’ real numbers and economic indicators. Though, even if divided, both tendencies tend to complement each other to some degree.

In this article, I will place myself on the “fundamentalists” side and focus on one of the situations every forex trader must be aware of and don’t let the events involved affect his trading efforts.

This risky situation is when unprecedented chaotic world events start to develop as the trading day goes on. The power of the media (tv, internet, printed) can magnify, and sometimes it may distort the events taking place and impact the trading journey effectively. The result of this magnification and rapid diffusion of the news about the series of unfavorable events taking place is an increased atmosphere of fear, confusion, and uncertainty in the trading world. And fearful traders are not prone to make the best trading choices because they have given themselves to panic and emotional reactions instead of reasoned and intelligent decisions.

Suppose you need to have more specific examples of this kind of event. In that case, you can search a bit inside your memories and consider the impact of just a few types of unfavorable chaotic world events as the political upheavals or corporate scandals of companies as; Enron, WorldCom, or of people as the case of Martha Stewart trial, etc. The terrorist attacks on September 11 in New York, March 11 in Spain, etc. Also, natural disasters: tsunamis, earthquakes, floods, freezes, droughts, hurricanes, and wars can cause great disruption in a trading journey.

In short, every forex trader should be sure that his trading method has built-in safeguards (stops, limit orders) to prevent a major financial loss from his trading account in case any of the unfavorable events I mentioned above ever takes place. And being realistic, many of those events will surely happen in the future.

Guide To Successful Forex Trading

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