How to trade Forex

This is an article for new Forex traders, who want to learn how to trade Forex. This guide is divided into two parts. First part will guide you through technical aspects, so you can open your trading account and place your first trade. Second part answers lots of questions new Forex traders have.

This article was based on this entry – Vad är forex – form Comparic portal.

Roadmap to become forex trader:

  • Choose Forex broker
  • Open demo trading account
  • Play on demo, learn how to place orders, test some trading strategies.
  • Set a goal on demo
  • Switch to live trading
  • Practice, practice, practice

Part I. Technicals – from chosing broker to placing first trade

Select a Forex Broker

To start trading forex, you need a Forex broker. There are many brokers and for new trader it may be hard to chose the best one. Remember, most of them offer a demo account, where you can test their trading platform. You can start with Oanda (http://www.oanda.com/), which has a wide selection of trading instruments. They also have a good spreads. I never had any problems with them, so this is my recommendation for new traders.

Registration is quick, you need only some recent bills to prove your address is valid.

Install trading software

OK, with selected broker you need to install trading software. This will be MetaTrader4 platform or other custom platform from broker.

Some brokers use their own trading platform like eTorro, but the big advantage of MT4 is that you have many indicators, expert advisors. It is a good plaftorm overall.

Trading from Mac

MetaTrader 4 is a Windows application. If you have a Mac computer with Mac OS X system, then you have to use software like Wine to run MetaTrader 4. I tested it on my Mac and it works fine.

Fund your account

When you registered an account, you can add funds. It is very easy. You can start with few hundreds dollars on mini account.

Test platform on demo

Even if you registered a real account, test a platform on demo (especially if you are new to fx trading). You will have some virtual 10k or 100k to play with on demo. Test how order placing works, how to place stop loss etc. You do not want to learn these things with your real cash.

 

Part II. Most common problems

In this part I write about important things you should know, when you are starting to trade forex. I also share with you some good links to other resources.

Trade size? Start small – Nano, microlots

You won’t get rich fast by trading micro and nano lots, but thanks to them you will stay in the game and you will have opportunity to learn from live trading. The reason why so many traders lose all their money in the Forex is because:

  • their trading capital is too small
  • they open too big positions, because they do not understand leverage

So yeah, it is like in many ads you could see in the past – “you can open account with just 100$. Leverage even 1:500”. In the end you need one or few positions of 1 lot size to blow up your account.

You have to remember that 1 lot is a base for calulating size of your position.

1 lot = 100,000 units of a currency

In MetaTrader4 it will be on select list like:

  • 1.00
  • 2.00
  • 3.00

So if you open short on eur/usd of size 2 lots you will be shorting 200,000 euros. One pip will be around 10$. Magic of leverage (and the curse same time, hehe).

There are also smaller base sizes like:

  • 1 mini lot 10,000 units of currency

So if you open long position on eur/usd of size 0.1 then you will be long on 10.000 euro.

In MetaTrader4 it will be on select list like:

  • 0.1 (it will be one mini lot)
  • 0.2 (two mini lots)
  • 0.3 …

One pip will be here around 1$.

1 micro lot 1000 units

In MetaTrader4 it will be on select list like:

  • 0.01 (one micro lot)
  • 0.02 (two micro lots)
  • 0.03 (three micro lots)

Going long with 0.01 lot on eur/usd mean that you are long on 1000$. One pip is here around 0.1$.

1 nano lot 100 units

In MetaTrader4 it will be on select list like:

  • 0.001 (one nano lot)
  • 0.002 (two nano lots)

Not every broker offer trade size as small as nano lots or micro lots. You have to check it first in the offer.

Trading sizes are simple. First you may get confused, because it is different than trade sizes in stock trading. Try to do some operations on demo account, try different position sizes and you will understand quickly what it is all about with nano, micro, mini and full lots.

Live trading or demo?

As a new trader you have many things to learn and develop. Things such as:

  • you have to learn how FX works – things like position size, type of orders, how your trading software works
  • you have to build some trading plan because you do not want to place random orders

I can answer from my own experience. Start demo trading to see how it really works. How trades are executed, how much can you lost with 1 lot position? How to set stops? Learn how to use trading software (this will be probably MetaTrader). With all that mastered, try to develop trading plan. Play with it for few weeks or months.

When you will feal comfortable with trading software and you will think that you have a good trading strategy, move to live trading so market can prove you wrong :).

You can start live account with few hundreds bucks. Trade with very small positions like micro or nano lots. Point here is to simply trade with real cash. In that situation you think different, there is greed and fear. You do not have that on demo account, where cash is virtual.

Even if you think that you have a great trading plan, you had good results on demo or (God forbid) you bought some trading system, trade with as small positions as possible.

That’s funny, because on paper nano or micro lots are so small that you think that there is no point in trading such small positions. You will see thoe that even on small trade, when you are losing few dollars you do not feel well. Similar with winning – when you are up few dollars, you feel good. You do not have that on demo account. Trading psychology is very important if you want to survive in that market. That’s why I believe that the best environment to develop and master your trading strategy is real account with the smallest postions.

How much money do I need so I can be a FX trader?

There is no simple answer to that, but I want to try cover that topic.

No, you won’t earn 1,000,000$ in a year, starting with 300$. Few hundreds bucks are ok for start in learning process. You can play with that money, make some mistakes, learn new things, grow as a young trader.

When you learn how to trade, use money you can afford to lose. That is very important. Never trade with money you can’t lose. This is brutal game. Save some money for your trading accout.

People see all that adverts, read about leverage and think that they do not need that much capital. That is a huge mistake.

Trading full time is different. You need solid capital because with that capital you can make profits. So how much do you need? Depends from trader, but 10,000$ is a minimum in my opinion. Optimal amount for start is in range 50,000 – 100,000$. The amount is strongly connected to your trading system (how you handle risk level, do you trade short term or long term, and many other things).

When you follow the path described above (demo -> real with small capital and micro/nano) and you will be profitable, you will be able to count how much money you need to think about going full time.

I like the quote from Alexander Elder. He said that you can start thinking about trading as full time career when you make more money in a month from trading then from your dayjob. Simple as that.

Remember that you need capital for start because you have to follow some risk ratio rules (defined by you). So you can follow rule to not risk 1% or 0.5% capital at current time. Try to use that in real life trading and you will understand quickly why you need all that money for start.

 

Avoid magic trading systems!

When you browse a web looking for info about Forex, most likely you will see ads or reviews of some super automatic trading systems. In a description, you will see list of trades made on historical data even 10 years back:

 

forex-trading-system

Looks great. So where is a catch? These systems are optimized for historical data. On many times you will see that possible drawdown is very big. It is because authors use very wide stop losses. This way many trades are closed eventually with profit, but when something goes wrong, you end up with huge loss.

There is no magic automated system for 99$ or 999$. Forget about it.

Control your risk!

One of the most important things you have to master. You’ve probably read that it is so easy to blow your trading account. That is because many new traders have too small accounts and they play with leverage to hard. Yep, leverage can be your friend or your enemy – depends how you will use it. You have to know how big your possible loss is, where to put stop loss, where place take profit. It all comes with practice, but there is no place here for wild west.

Forex major currency pairs

forex-pairsYou can see a lot of pairs in your brokers offer, but four of them are most popular. Traders call them majors:

  • EUR/USD: The euro and the U.S. dollar.
  • USD/JPY: The U.S. dollar and the Japanese yen.
  • GBP/USD: The British pound sterling and the U.S. dollar.
  • USD/CHF: The U.S. dollar and the Swiss franc.

Which pair is best to trade?

I think that it is best to start with majors, because you have there the lowest spreads and best liquidity. Eur/usd is still a good pair to trade. Eur/usd is great both on lower time frames and on bigger ones.

How many pairs should you trade?

As a new trader, you should start with one pair. Why? Two or more pairs are hard to follow. Remember that you have to check situation on few time frames to take a trade. With two or more pairs you will struggle to follow price actions. Select one pair. It is enough.

Do I need 10 displays?

You probably saw photos of trade stations where traders have 4, 6 or even more displays. It is not necessary, you can easily start with your current setup.

forex-trade-station-setup

So why traders use so many displays? Couple of reasons. They follow action on many pairs. They also follow news, check important levels on other time frames. Simply, it is much easier to do all that with few displays.

But if you start trading, don’t worry about that.

If you want to have more than one monitor, it is not that costly. You can buy a PC with graphic card which has two slots for displays or you can use SLI technology (more than one graphic card in one computer). Displays are also not expensive. You can buy a 24 inch display for around 150 – 200$.

Fundamental vs technical analysis

It is a personal choice.

Only one advaice here. Do not ignore the other side. If someone says that he is technical trader and do not look at fundamentals and news then he is stupid and you should unfollow.

There are so many evidence that news can move the market. Many big players simply close all trades before important news, because market can be unpredictable.

You can see on my blog that I mostly use technical analysis, but I always start the day from checking the schedule for current day.

Good source for news and data? http://www.forexfactory.com.

Trading tools

OK, that is a huge topic and you have to take what works for you. There are like thousands indicators out there and it can be confusing which one should you use. Only one? Hmm..

And you end with dozen of indicators on your chart.

All that indicators are based mainly on price so there is no point of using so many of them. Other thing is you are not able to create any trading plan based on so many tools.

You should choose one indicator for start and master it. How it works in a trend move, and how it behaves in a range move. When you have more false signals?

We can divide trading tools in two main groups.

Lagging indicators.
Leading indicators.

Lagging indicators trails the price action. These indicators lag the price of the asset, a stronger move will generally take place before the indicator is able to provide a signal. Examples of lagging indicators: moving averages..

Leading indicators tries to anticipate changes in trends. For example in stochastic we have oversold and overbought states, which is a signal that current trend move may be ending.

So which indicator is the best? Again, it is up to you, which suits you best. Just do not use too many indicators. Select one and try to master it.

In your trading education you should also check two most important indicators:

  • pivot points
  • fibonacci trading tools

These tools are used by professional traders. With them you know where are possible resistance and support areas.

Naked trading

You have to try it once 😉 As staded before, most indicators are calculated on price. Yet, still many traders can’t read a single thing from a chart. It is all because they relay so heavy on indicators and do not put enough attention to price itself.

Goal is to remove all indicators, all moving averages and other indicator from charts. You want chart to be naked. This way you can see clearly price action and make decisions based on price itself.

I have read about trader who uses indicators and other tools but every few weeks he turns them off and trade only based on price action.

Why is that important? Thanks to naked trading you will learn much faster about price action. There are moments when it is crucial. You will get first signals from price and then, later, from indicators. This is why it is important to know how to spot signals which price gives you.

Time frame

Another big question – which time frame is the best? Again, it depends from trading styles, but I can give you few tips.

The lower time frame, the more automatic trading you will see. On time frames such low as 1 minute there is no time to think slowly and analyse your decision twice. When price hit some important level, you may see strong counter move from that point (because of orders from robots).
I do not trade lower than 5 min time frame.

When you are looking for swing trades, then you should look at higher time frames such as 1 hour +.

Of course you do not look only at one time frame. You should be checking few higher time frames to know what is going on.

On lower time frame it may look like there is a downtrend, but higher time frames may suggest that main trend is up.

But I have a job…

OK, it is not like there is only one proper way to trade Forex. If you start your trading adventure, you probably do not have time to look a whole day at chart.Is there another way to do it? Yep. You can switch to higher time frame such as 1 hour, 4 hour or simply start with EOD trading. EOD – End of Day Trading is trading where you base your trading decisions on daily chart. Of course you have position open for few days, your stop losses are wide, but also there is a chance to get a bigger move from stronger swing move.

Will your strategy work on lower time frames? Yes. Do not worry about that. In most cases your strategy will be perfectly fine on lower time frames. Of course you may need to modify it and rebuild more or less, but it should be a solid strategy to move on to trade on lower time frames.

There is a great article about EOD trading by Forex Guy. You can read it here at http://www.theforexguy.com/forex-end-of-day-trading/.

Trading journal

It is a must.

My biggest mistake in first years of trading was not to run a trading journal. I started few times, but was too lazy to keep it running. In the end I was struggling to be profitable.

Then I started journal in form of spreadsheet. It was ok. Beside info such as entry, exit, profit/loss it has information about trading signals. But… There is always one ;0. I am not stricte mechanical trader. I use trading signals, but I also analyze the current market situation, higher time frames and many other things.

There is better way to run your trading diary.

Write it down in a notebook.

I saw on twitter that few of traders which I follow do that. They keep diary in form of notebook. They describe trade, what was the current situation, how did it look from technical analysis perspective. Later they write how it ended. Or they simply write new things they have learned. See this example of trading journal:

I believe this is the best way to do it. Thanks to that description you can also write what you were thinking at the moment, what was the main motivation to take the trade. Later it is easier to spot mistakes you are doing in your decission process.

Resources

As I wrote before, the most important thing in your learning process is trading on real account. Only there you will be tested by Mr. Market.

But you can and should test new ideas, improve your trading plan. For that you can use many resources. I gave you some examples below.

Books

There are so many books about trading, that it is hard to recommend only few.

One important things about books. Reading more trading books does not make you a better trader. It can give you some ideas, you can learn something new but you have to practice this in live market. Just a quick reminder, because I met many aspiring traders who were reading too much and trading too little ;).

Candlestick patterns

No revolution here. Japanese Candlestick Charting Techniques by Steve Nison is still a good choice.

Chart patterns

I recommend books from Thomas Bulkowski like Getting Started in Chart Patterns. He did a solid study about chart patterns and included how often you can profit with them.

Multiple time frames

http://www.technicalanalysisbook.com/ I recommend Technical Analysis Book by Brian Shannon (from alphatrends.net). He is a stock trader but knowledge from this book is universal. It will give you ideas how to use and trade multiple time frames and I can say from my experience – this is crucial.

Trading psychology

Good trading system is not enough to stay profitable. Trader psychology and discipline is a key factor to success. There are many books about that topic, but you can start with Trading Zone by Mark Douglas.

Pivot Points

I use pivot points on daily basis and I wrote some articles about them. If you want to learn more, I can recommend two books about Pivot Points.

If you are totally new to the topic, Candlestick and Pivot Point Trading Triggers by John L. Person is a good choice. You can learn here how pivot works, how to use them and see some setups examples.

For more advanced stuff about Pivots, I recommend Secrets of a Pivot Boss by Frank Ochoa. One of best trading books. Not a cheap one, but worth its price. Lot of knowledge and trading ideas.

Fibonacci

As you know, I am a big Fibonacci fan. I write alot about that topic, but if you want to read a book about Fibonacci, then there is one position I can recommend. It is Fibonacci Trading. Master Price Advantage by Carolyn Boroden. It is a good introduction to various Fibo tools.

Ichimoku

There are few books about Ichimoku Kinko Hyo. I read them all, but I can recommend only Ichimoku Charts by Elliott Nicolle. I use Ichimoku only as additional indicator, but it is still important one. Especially in Forex.

Twitter

Twitter is a great app. Most people follow there celebrities, but you can find here many great specialists. Traders too. They share their quick thouths about market, sometimes they twit some chart or interesting link. You can see that they have similar problems – follow trading plan.

Which forex trader you should follow? You can start with this list https://www.newtraderu.com/2015/12/13/best-25-traders-follow-twitter-2015/ and see which you like most. My fav? Dante, alphatrends and Stewie.

Forums

I do not read any forex forums. I used to, but for me there is too much bullshit. Thousands systems, many argues… It is not for me, but if it is your thing then go and check http://www.forexfactory.com/forum.php.

Blogs

There are many blogs about trading. Below few of my favorites:

http://alphatrends.net/blog/ – mostly about stocks and some content is premium only. Still, great free video summaries of market.

http://thepatternsite.com/Blog.html – blog from Thomas Bulkowski. OK, it looks like it was started in the 90’s and is rather about stocks. Still, a great source for new traders to learn more about price patterns and how to setup a trade.

http://www.babypips.com/blogs – great site for new traders. Lots of resources, training materials. Even complicated things are well explained. I like articles about trading ssytems – you can learn here how you can come up with a trading system and how to test it.

http://www.theforexguy.com/ – lots of good, educational materials. Especially great site if you want to learn more about trading forex with price action.

http://www.forexcrunch.com/ – one of the best blogs/portals about FX. Lots of news and good educational articles.

http://www.newtraderu.com/ – Steve writes in interesting way about trading. You can find here many trading tips and materials not only about technicals but also about trading psychology and risk management. Steve is also very active on twitter.

https://www4.dailyfx.com/  is is a mix of forex portal and blog. You wil find here news section, but also good educational articles.

https://www.youtube.com/user/DailyFXNews – Dailyfx.com has also a great YouTube channel, whre you can watch daily analysis from their experts.

http://www.forexlive.com/ – if you look for most important, short forex newses then this is a great site. Also active on twitter.

One Response

  1. mohammad saleem June 28, 2016

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