Getting Started: Learn to Trade Forex in 7 Steps
Step 1 - Maximize Your Tools
Fx Trading provides multiple tools to help you become a better currency trader including free market news, and real time charts. The most valuable tool, however, is the Fx Trading Demo account, which allows you to test out strategies and learn from your mistakes without risking real money.
Step 2 - Risk Management
Every successful trader should know how much risk he is willing to take, and what profits should result from the trade. This is the basis of every realistic trading strategy.
Step 3 - Two Ways to Trade
There are two types of traders, technical and fundamental. Both have a radically different approach to making trading decisions. Look below to find out which camp you belong to.
Step 4 - 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.
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Step 5 - Applying Technical Analysis
Fx Trading provides tools for basic technical analysis. Click Here to test your knowledge of technical analysis.
Step 6 - Fundamentals Everyone Should Know
All Traders should understand why economic releases, interest rates, and international trade are important to movements in the currency market.
Step 7 - Psychology of Trading
The biggest enemy to most traders is not the market, but themselves. Learn four basic trading principals that will help you to avoid the four biggest mistakes that traders make.
Getting Started: Step 1 of 7
Fx Trading provides you with access to a live trading platform with a virtual balance of $50,000. The account looks, feels, and behaves identically to the real Fx Trading trading system including price action, and trade execution.
How to Trade Your Demo
1. Choose the right currency pair. Find out based on your risk parameters, which currency is best suited for your trading style. Some may be too volatile and some to slow so decide which currency pair is most appropriate for your strategy and time frame.
2. Choose the right currency pair. Find out based on your risk parameters, which currency is best suited for your trading style. Some may be too volatile and some to slow so decide which currency pair is most appropriate for your strategy and time frame.
3. Decide on how long you plan to stay in a trade. If you are an inter day trader, what is the average time of your trade, few minutes, couple of hours,a full day, swing trade (couple of days to a week).
4. Before you enter a trade you should also have clear exit plan. Place your stops and limits accordingly.
5. Know how much you are willing to risk and how much you are looking to gain.
6. Keep track of important news and technical levels, which may be tested within your time frame.
Keep a Trade Log
A diary is a trader\'s best friend; it will show you what works and what doesn\'t. It will also keep you from making the same mistakes, which is the reason most traders fail. The diary should have but not limited to the following information:
1. Time and date you placed the trade.
2. A note describing your strategy and why you chose to enter the trade.
3. Why you exited the trade, and if it was at your stated stop or limit level or did you get out for other reasons etc.
Keeping trade logs or a diary of all the past trades can help a trader recognize why some trades worked and others didn\'t. Once you start recognizing successful patterns, you can rest assured they will develop again, and when they do just be there to take advantage of it. This is made much easier to practice in the currency market because of reliable technical patterns that consistently develop in this market.
Trading Tools
The right trading tools can mean the difference between profit and loss.
Real-Time Charts
For currency trading, a crucial trading tool for capturing key entry and exit points is technical analysis. Fx Trading offers a variety of free basic and advanced charts as well as professional chart at a discount to meet the needs of all traders.
For guidance on using these trading tools, Fx Trading\'s team of charting specialists is available around-the-clock to help you determine which charts are right for you.
FX Quote is Dedicated to FX News and Analysis
A diary is a trader\'s best friend; it will show you what works and what doesn\'t. It will also keep you from making the same mistakes, which is the reason most traders fail. The diary should have but not limited to the following information:
1. Current Market Reports - Read these weekly reports to gain a macro view of general trends in currency market. This will help you to understand the underlying factors and current issues that affect the movement in currencies. Fundamental based traders will particularly find this useful.
2. The Daily Fundamental forex report provides commentary on the most important events that occurred in the past 24 hours and provides an outlook for the day ahead. It also recaps the key economic releases and global market movements.
3. DailyFX Technical Triggers -Study and spend time learning the multitude of chart patterns that develop on a daily basis. Use DailyFX daily technical triggers to see which patterns developed in the last 24-hours to identify bullish or bearish trends across the major currencies.
4. Bank Research -Make sure you read market analysis from major banks and find out where the markets recognize support and resistance levels, which are readily available. You don\'t have to necessarily always agree with them but its good to have them on your side! FxQuoteprovides link to over 10 highest rates banks for FX research.
5. Daily Technicals - A technically trained trader can easily identify new trends and breakouts, which provide multiple opportunities to enter and exit positions. As a result, t he currency markets are the most technically traded markets in the world. The daily technical report includes updated support and resistance levels, intraday probability bands, and pivot points on the major currency pairs, which you can use to determine entry and exit positions.
Getting Started: Step 2 of 7
Fx Trading provides you with access to a live trading platform with a virtual balance of $50,000. The account looks, feels, and behaves identically to the real Fx Trading trading system including price action, and trade execution.
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/loss 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 s/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.
Getting Started: Step 3 of 7
There are two basic approaches to analyzing the currency market, 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
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
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 with Fx TRADING COMPANY 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.
Getting Started: Step 4
The Basis of Technical Analysis explains trend analysis and how to use basic trend following techniques.
Chart 1. What is Market Trend?Trend is simply the overall direction prices aremoving -- UP, DOWN, OR FLAT. |
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Chart 2. Types of Trends The direction of the trend is absolutely essential to trading and analyzing the market. |
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Chart 4. Information About Trendlines The basic trendline is one of the simplest technical tools employed by the trader, and is also one of the most valuable in any type of technical trading. Drawing Bullish Trendlines |
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Chart 5. Trend Analysis and TimingMarkets don\'t move straight up and down. The direction of any market at any time is either Bullish (Up), Bearish (Down), or Neutral (Sideways). Within those trends, markets have countertrend (backing & filling) movements. In a general sense "Markets move in waves", and in order to make money, a trader must catch the wave at the right time. |
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Chart 8. Trendlines IITrendlines show support boundaries under prices. These boundaries may be used as buying areas. |
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Chart 9. Trendlines IIITemporary trendline penetrations are not as significant as a close beyond the trendline. |
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Chart 10. Channel Lines When prices trend between two parallel trendlines they form a Channel. |
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Chart 11. Find Price Support LevelsPrice supports are price areas where traders find that it is difficult for market prices to penetrate lower. Buying interest in the dollar is strong enough to overcome Selling interest in the dollar keeping prices at a sustained level. |
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Chart 12. Finding Price Resistance LevelsResistance is the opposite of support and represents a price level where Selling Interest overcomes Buying interest and advancing prices are turning back. |
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Chart 14. 33% and 66% RetracementsThere are also 33% and 66% Retracements. |
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Getting Started: Step 5 of 7
Currency 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 currency charts give the technical trader a longer-term context in which to conduct trades.
Test Your Skills
Look at the 5-minute, 15-minute, and one-hour currency 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.
Getting Started: Step 6 of 7
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.
Interest Rates
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, believing that higher borrowing costs will affect ballance sheet negatively and result in devalued stock, 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.
International Trade
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 US consumers wanted Japanese products, major automobile dealers might sell US dollars to pay for the import of Japanese vehicles with yen. The flow of dollars outside the US would then lead to a depreciation in the value of the US dollar. Similarly if trade figures show an increase in exports, dollars will flow into the United States due to inreased confidence in the economy and then the value of the US dollar would increase. 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.
Getting Started: Step 7
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 were, everyone would be a millionaire!).
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