Guide to Trading Forex
Learn to Trade Forex in Seven Steps
- Maximize Your Tools
ForexPremium provides multiple tools to help you become a better forex trader including free market news and real time charts. The most valuable tool, however, is trading a Demo account, which allows traders to test out strategies and learn from their mistakes without risking real money.
- Risk Management
Every successful trader knows how much risk he is willing to take and what profits should result from a trade. This is the basis of every realistic trading strategy.
- Two Ways to Trade
There are two types of traders, technical and fundamental. Both have radically different approaches to making trading decisions. In this section, find out which camp you belong to.
- The Basics of Technical Analysis
All Technical Analysis starts with a few basic building blocks. With these as a foundation, you can start to make sound trading decisions.
- Applying Technical Analysis
ForexPremium provides tools for basic technical analysis. Test your knowledge of technical analysis.
- Fundamentals Everyone Should Know
All Traders should understand why economic releases, interest rates and international trade are important to movement in currency markets.
- Psychology of Trading
The biggest enemy to most traders is not the market but themselves. Learn four trading principals that will help you avoid the four biggest mistakes that traders make.
Maximize Your Tools
Most reputable forex brokers offer Demo accounts, which give clients access to the firm's live trading platform including price action and execution. Utilizing a demo account gives traders the opportunity to become familiar with online forex trading. Traders can watch the market move in real-time and can practice getting in and out of positions by applying different trading strategies. The initial balance is usually set at $50,000, leaving plenty of room for trial and error. Aim for a profit before going live with a real trading account.
If you have not done so already, we recommend opening a demo account with the ForexPremium Trading Station.
Register for a free demo account and enter the appropriate information. You will then receive you login and password. Once you have downloaded the free FX trading platform, follow the instructions for installation.
There are three basic questions that every trader should answer BEFORE entering a trade.
How much do I believe the market will move and where do I want to take my profit?
Limit Orders allow traders to exit the market at profit targets. If you are short (sold) a currency pair the system will only allow you to place a Limit Order below the current market price because this is the profit zone. Similarly if you are long (bought) the currency pair the system will only allow you to place a limit order above the current market price. Limit orders help create a disciplined trading methodology and enable traders to walk away from the computer without constantly monitoring the market.
How much am I willing to lose before I exit the position?
Stop/Loss orders allow traders to set an exit point for a losing trade. If you are short a currency pair the stop loss order should be placed above the current market price. If you are long the currency pair the stop loss order should be placed below the current market price. Stop/Loss orders help traders control risk by capping losses. Stop/Loss orders are counter-intuitive because you do not want them to be hit, however, you will be happy that you placed them! When logic dictates you can control greed.
Where should I place my stop and limit orders?
As a general rule of thumb traders should set Stop Orders closer to the opening price than limit orders. If this rule is followed, a trader needs to be right less than 50% of the time to be profitable. For example, a trader that uses a 30 pip Stop/Loss and 100 pip limit orders needs only to be right 1/3 of the time to make a profit. Where the trader places the stop and limit will depend on how risk-adverse he is. Stop/Loss orders should not be so tight that normal market volatility knocks the position out. Similarly, Limit Orders should reflect realistic expectation of gains given the markets trading activity and the length of time one wants to hold the position.
Test Your Skills
If you haven't already you will need to register for a Demo Trading Account and download the Free Software. We recommend the ForexPremium Trading Station. To register for a free 30-day demo account click on the following link: email@example.com
- Buy three different Euro positions. Place a 20-point stop order, 35-point stop order and a 100-point stop order.
- Buy three more Euro positions. Place a 20-point limit order, a 70-point limit order and a 200-point limit order.
- Buy one Yen position and place a 30-point stop order and a 100-point limit order. Now buy one more yen position without a stop or limit order.
Two Ways to Trade
There are two basic approaches to analyzing currency markets, fundamental analysis and technical analysis. The fundamental analyst concentrates on the underlying causes of price movements, while the technical analyst studies the price movements themselves.
Technical analysis focuses on the study of price movements. Historical currency data is used to forecast the direction of future prices. The premise of technical analysis is that all current market information is already reflected in the price of that currency; therefore, studying price action is all that is required to make informed trading decisions. The primary tools of the technical analyst are charts. Charts are used to identify trends and patterns in order to find profit opportunities. The most basic concept of technical analysis is that markets have a tendency to trend. Being able to identify trends in their earliest stage of development is the key to technical analysis.
Fundamental analysis focuses on the economic, social and political forces that drive supply and demand. Fundamental analysts look at various macroeconomic indicators such as economic growth rates, interest rates, inflation, and unemployment. However, there is no single set of beliefs that guide fundamental analysis. There are several theories as to how currencies should be valued.
Technical Analysis or Fundamental Analysis?
Most traders abide by technical analysis because it does not require hours of study. Technical analysts can follow many currencies at one time. Fundamental analysts, however tend to specialize due to the overwhelming amount of data in the market. Technical analysis works well because the currency market tends to develop strong trends. Once technical analysis is mastered, it can be applied with equal ease to any time frame or currency traded.
The Basis of Technical Analysis explains trend analysis and how to use basic trend following techniques.
Click below to browse through:
Applying Technical Analysis
Charts can be used on an intraday basis (5-minute, 15 minute, hourly), weekly, or monthly basis. The chart you study depends on how long you plan on holding a position. If you are trading with a few hours in mind you may want to look at 5-minute or 15-minute charts. If you plan on holding a position for a couple of days, you may want to look at an hourly, 4-hour or daily chart. Weekly charts and monthly charts compress price movements to allow for much longer-range trend analysis. Therefore, these charts give the technical trader a longer-term context in which to conduct trades.
Test Your Skills
To access free charts click on the following link: http://www.ForexPremium.com/charts.php
Look at the 5-minute, 15-minute, and one-hour charts and find support and resistance lines for the EUR/USD. You will notice that once a major support or resistance line is broken, markets tend to trend strongly in that direction.
Fundamentals Every Trader Should Know
Currency prices reflect the balance of supply and demand for currencies. Two primary factors affecting supply and demand are interest rates and the overall strength of the economy. Economic indicators such as GDP, foreign investment and the trade balance reflect the general health of an economy and are therefore responsible for the underlying shifts in supply and demand for that currency. There is a tremendous amount of data released at regular intervals, some of which is more important than others. Data related to interest rates and international trade is looked at the closest.
If the market has uncertainty regarding interest rates, then any bit of news regarding interest rates can directly affect the currency markets. Traditionally, if a country raises its interest rates, the currency of that country will strengthen in relation to other countries as investors shift assets to that country to gain a higher return. Hikes in interest rates, however, are generally bad news for stock markets. Some investors will transfer money out of a country's stock market when interest rates are hiked, causing the country's currency to weaken. Which effect dominates can be tricky, but generally there is a consensus beforehand as to what the interest rate move will do. Indicators that have the biggest impact on interest rates are PPI, CPI, and GDP. Generally the timing of interest rate moves are known in advance. They take place after regularly scheduled meetings by the BOE, FED, ECB, BOJ, and other central banks.
The trade balance shows the net difference over a period of time between a nation's exports and imports. When a country imports more than it exports the trade balance will show a deficit, which is generally considered unfavorable. For example, if U.S dollars are sold for other domestic national currencies (to pay for imports), the flow of dollars outside the country will depreciate the value of the currency. Similarly if trade figures show an increase in exports, dollars will flow into the United States and appreciate the value of the currency. From the standpoint of a national economy, a deficit in and of itself is not necessarily a bad thing. However, if the deficit is greater than market expectations then it will trigger a negative price movement.
Psychology of Trading
Four Principles for Becoming a Better Trader
Trade with a DISCIPLINED Plan : The problem with many traders is that they take shopping more seriously than trading. The average shopper would not spend $400 without serious research and examination of the product he is about to purchase, yet the average trader would make a trade that could easily cost him $400 based on little more than a "feeling" or "hunch." Be sure that you have a plan in place BEFORE you start to trade. The plan must include stop and limit levels for the trade, as your analysis should encompass the expected downside as well as the expected upside.
Cut your losses early and Let your Profits Run : This simple concept is one of the most difficult to implement and is the cause of most traders demise. Most traders violate their predetermined plan and take their profits before reaching their profit target because they feel uncomfortable sitting on a profitable position. These same people will easily sit on losing positions, allowing the market to move against them for hundreds of points in hopes that the market will come back. In addition, traders who have had their stops hit a few times only to see the market go back in their favor once they are out, are quick to remove stops from their trading on the belief that this will always be the case. Stops are there to be hit, and to stop you from losing more then a predetermined amount! The mistaken belief is that every trade should be profitable. If you can get 3 out of 6 trades to be profitable then you are doing well. How then do you make money with only half of your trades being winners? You simply allow your profits on the winners to run and make sure that your losses are minimal.
Do not marry your trades : The reason trading with a plan is the #1 tip is because most objective analysis is done before the trade is executed. Once a trader is in a position he/she tends to analyze the market differently in the "hopes" that the market will move in a favorable direction rather than objectively looking at the changing factors that may have turned against your original analysis. This is especially true of losses. Traders with a losing position tend to marry their position, which causes them to disregard the fact that all signs point towards continued losses.
Do not bet the farm : Do not over trade. One of the most common mistakes that traders make is leveraging their account too high by trading much larger sizes than their account should prudently trade. Leverage is a double-edged sword. Just because one lot (100,000 units) of currency only requires $1000 as a minimum margin deposit, it does not mean that a trader with $5000 in his account should be able to trade 5 lots. One lot is $100,000 and should be treated as a $100,000 investment and not the $1000 put up as margin. Most traders analyze the charts correctly and place sensible trades, yet they tend to over leverage themselves. As a consequence of this, they are often forced to exit a position at the wrong time. A good rule of thumb is to trade with 1-10 leverage or never use more than 10% of your account at any given time. Trading currencies is not easy (if it was, everyone would be a millionaire!).