Last Updated : Monday 15th August 2016
Written By Tim Baudin
Forex Trading Instructor
Forex trading can be a serious career or business opportunity.
You can make decent full time or part time income working online from the comfort of your home and being your own boss!
But like any other thing in life, there are many things to learn before you start seeing positive results.
Taking some time to educating yourself can help you in preventing big mistakes in future.
Is Forex Trading For Me?
There must be so many questions in any beginner’s mind like
- how to get started?
- which broker do I need to open an account with?
- Should I demo trade?
- Is day trading better than swing trading? etc.
But the first question you must ask is, "is Forex trading for me?" Not everyone can be a Forex trader like not everyone can be an artist or musician.
It can be really tempting to trade in the forex market. Forex has a relatively low barrier to entry and sometimes you hear about people making ridiculous amounts of money on just one trade.
However, before getting into forex trading you must understand what you are doing or you can lose a lot of money.
Follow the advice in this article to get you started on the right foot.
Do you have money to lose?
Obviously, nobody ever wants to lose money, but before getting into forex trading you must first decide if you have a cushion of money that you can lose without getting into too much trouble financially.
If you’re just scraping by paycheck to paycheck then forex trading would be a very risky endeavor for you.
However, if you have some money to spare then you can just look at forex trading as a hobby where you won’t be too broken up if something goes wrong.
Another thing you can do is just do mock trades on the forex market with “fake money”. You can practice by doing this so you know what to do before actually putting your real money at stake.
Are you a very emotional person?
People who are very emotional should probably not get into forex trading. Emotional people can let their emotions cloud their better judgment and clouding your judgment can make you lose a lot of money in forex.
To be successful in forex, you must always be able to keep a clear head even if something goes wrong that you weren’t anticipating.
Have you ever had a problem gambling?
Are you someone who has had a gambling problem in the past or do you think you’re the type who may have a gambling problem in the future? If so, forex trading is probably not for you because in a way it is gambling.
If you lose money while forex trading, you won’t want to keep trying to trade “until you break even”. This can just lead to a downward spiral where you lose huge amounts of money.
Make sure you can be reasonable even if you lose a little bit of money from the start.
Can you stick to a trading plan exactly?
With Forex trading, you will want to create a trading plan before you actually begin trading anything. You will then want to stick you your plan the exact way you planned it out from the beginning.
Do not be tempted to do something that is in your plan because you will not be adequately prepared for something like that and may end up making a big mistake.
Do you have the time to devote to learning your currencies and learning the market?
It goes without saying but you will also actually have to learn the market and learn about different currencies. Educating yourself on these subjects will take quite a bit of time.
You’ll have a pretty big advantage if you understand the rewards and the potential risks of forex trading before you actually start trading in the market.
The fact is that for some people forex trading will not fit them well.
If you think that you will be a strong forex trader, why not get started today?
Even if you think Forex trading is for you then also you must require patience, discipline, courage and experience to really be good at it.
Don't rush but try to make a slow steady progress with your trading journey. Initially, your focus should be improving knowledge and money will follow later on.
I suggest following 7 steps to getting started. Though we have covered many things on this site for educating traders, I am presenting here a step by step guide for beginners.
Understanding Forex Basics
You must have a solid grasp on Forex basics before you learn advanced trading strategies or open your account with any broker.
We have tried to cover most of the important basics topics here in Forex trading basics course for beginners. Going through it thoroughly will help to create a solid base.
Having a professional trader as a mentor or being part of any forex traders community can really help you move faster than learning just your own.
Start With Demo Trading
Like most other things in life, the best way to learn is by practicing and getting stuck in!
Fortunately with forex trading, you don't need to risk your hard earned real money for that.
Start with demo trading with a good reliable Forex broker.
Purposes of Forex Demo Account:
There are several purposes of opening a demo account.
- Practices trading without risking any real money before you start real trading
- Know about the trading platform provided by your broker
- Developing new trading strategies and backtest them
- Measure the performance of different trading strategies to choose the best one among them
- Practice trading in different time frames to know which suits you most
Most of the forex brokers offer a free demo account, but some of these demo accounts are usable for a limited time. There are some forex brokers who offer an unlimited demo account.
First, just learnmechanical execution aspects of trading (don't think about if you winning or losing at this time). Just try executing trades without making errors. Understand trading platform environment.
You can demo trade for 1 or 2 weeks but if you do it for too long then it can kill your mood. Better move trade with a micro account as soon as you feel comfortable.
It'll help you to learn about psychological effects of winning and losing as you are trading with your real money. But as same time if you blow your micro account and it's not as damaging as blowing a real account with big money in it.
eToro's social trading network is a one of the great ways to start for any beginners.
It's free to join and in addition to demo trading, it also allow you to be part of large community of Forex traders.
You can read opinions of other traders and also discuss with them which can provide you first-hand knowledge of their strategies, trading style, and experience.
You can actively participate in learning by asking questions or reading questions asked by others.
- You can learn more about social trading by reading our complete guide How to Trade Forex with Power of Social Trading Platform
Learn Advanced Concepts and Strategies
- Combining both of them to develop your own strategy can be a good way to start
You can also read books and articles written by expert traders and try to learn from their trading style.
Finding Your Trading Style
Now it's time to fine trading style. It can be based on various things like your behavioral, emotional and personality traits.
It also depends upon your lifestyle!
So for example, if you are doing
You must have tested various strategies on demo or micro account by now. So look into what appeals to you so far and what fits in with your trading personality as well as current lifestyle.
If you still not sure then read a very this very good book Market Wizards. This book has many interviews with successful professional traders with various trading style.
Once you decided your trading style, find everything you could on it through books, Google, Youtube etc. You can also follow try to find and follow other successful traders on twitter who are trading with your style.
Different trading styles are as follows,
- Day Trading
- Swing Trading
- Position Trading or Long Term Trading
If you like excitement and want quick profits then, this trading style will be suitable for you. This is a profitable trading style for those who are impatient, and can think and react faster than many other traders. Scalpers aim to make small profits (1 to 2%) every day.
In this way, they gather reasonable profit in few days or a week.
- Higher accuracy or winning rate.
- Capable of generating faster profits than any other trading styles.
- Require a high level of experience and understanding about Forex market.
- A trader should be active and focused for several hours.
- Any mechanical error such as internet interruption, slow execution might lead the investment to a large drawdown.
Day traders do not hold any position to the next day. If you are afraid of holding an overnight position and not a scalper then you should try this trading style.
In this trading style a trader open and close positions anytime before the end of the trading day.
- Lower trades per day
- Less trading commissions
- No overnight position
- Less trading stress
- Neither very short term, nor long term
- A trader should have sound knowledge and wide understanding about technical analysis.
- A trader needs to monitor the market whole day.
Swing trading is a longer term trading style than day trading. Swing trading is suitable for those who do not have time to trade or monitor the market whole day but can spend some time every day to analyze the market.
The holding period in this style may vary from a couple of hours to a couple of days. This trading style requires patience and larger stop loss level.
- Easy to understand and easy to follow for beginners.
- Profits are larger so the lower winning ratio is not a problem.
- Flexible trading style and a trader get some time to think before entering into a trade.
- The lower number of trades so lower trading commissions.
- Required larger stop loss.
- Chance of overnight positions.
- Profitability is lower than scalping and day trading.
Position Trading/Long Term Trading:
Position trading or long term trading is suitable for those traders, who have the patience to hold the positions for a long term. A position trader might hold a position for a couple weeks to months.
Position traders use long term charts such as daily, weekly or monthly charts. Position trading requires patience and calmness. Position traders often focus on fundamentals as long-term trends are a reflection of fundamental impacts.
- Very low transaction cost as only a few trades per week or month.
- Profits are large enough to cover up many small losses.
- Highly flexible and carries less trading stress.
- Require a high level of patience.
- Low profitability in the short term.
- Stop losses are larger.
Every trading style has both advantages and disadvantages. A trader should know advantages and disadvantages of these trading styles before choosing one.
Developing Your Trading Plan
Now it's time to make a plan and follow it. Plan your trade, trade your plan.
As human beings, we are prone to emotions. We trade on hope and fear.
Having a trading plan helps to eliminate at least some of the emotions that are inherent in a risky activity like trading. Logical traders who plan their trades are successful traders.
- Trading is nothing but a set of guidelines or a structure that defines your trading
So, how to develop a good trading plan? It can be based on following factors
- You must know time frame (lower time frames like 5 mins. or higher time frames like 4hr or daily) & markets you'll be trading
- You must know what % of your account you are putting on risk for each trade
- You must know exact market condition requires to put a trade and how exactly you will enter a trade
- You must know how exactly you'll exit a trade in case of either you are right or wrong. At which point on a chart you exit if you are losing? If you winning, would you trail your stops or set a profit target ahead of time? Are you going to book partial profit or full ?
Each trading plan should include 3 main parts: A way to enter the market, a way to Limit your risk and a way to take profits once you’re in a winning trade.
Part 1 of any trading plan is the entry
The first part of any trading plan involves the entry. You should know exactly when you should get in a trade. Have you entry criteria written on a post-it note and slap that note on your monitor so that you can always keep an eye on it.
In addition to this, you should know your reasons for the entry, why you enter a particular trade.
Part 2 – Define your risk
The first thing you should do after you enter any trade is to limit your risk. You do this by having pre-planned exit criteria and knowing beforehand where to put your stoploss. Once the stoploss is set, don’t move it to allow “more room for the trade to breathe”.
Only move the stoploss if a trade goes in your favor to lock in profits. Moving the stoploss to allow more room is one of the biggest trading mistakes that newer traders make.
Always keep the stoploss where your trading plan says that it should be.
Limiting the risk is probably one of the most important distinctions between loser and winner traders. Losing traders trade without a trading plan or a stop loss and they HOPE that price stops and reverses once they’re in a losing position.
Winning traders know beforehand when they will get out of a losing trade.
Part 3 – Have a predefined way to take profits
The last part that any trading plan should include a defined way to take profits once you’re in a winning position. This doesn’t mean that you should always have a set take profit order that limits your upside potential.
You can use stop losses to lock in profits instead. The exit, not the entry is where the money is being made so you should always know in advance when to cash in those wins.
Executing & Recording Your Trading Plan
Once your trading plan is ready it's good to forward test it in the live markets. Back testing generally doesn't provide you a very clear picture.
You can forward test on either demo or small live account.
I suggest you trading withmicro account as it help can you understand how psychology of winning or losing affects your trading behavior.
This is where your discipline will be tested to stick with your training setups.
- Just executing your trades is not enough. All trades must be recorded to collect relevant statistical data. It can be easily done with excel sheet by recording all relevant metrics.
This helps you make an objective conclusion on performance of your trading plan.
Reviewing Your Trading Plan
After collecting sample size of 100 trades, it's time to review statistics to see how your trading plan performing.
Sadly, there is no one size fits all as different trades faces different issues. It's your duty to find out issues with your trading plan and fix it.
Once you come up with solution, just repeat entire process over again
Develop >> Execute >> Record >> Review
As a novice trader, some of the facts you must know are : "over trading" and "over leveraging" are two fastest ways to lose all your funds.
Simple forex trading strategies are the best to follow and removing of emotional trading is necessary to succeed in currency trading.
You should have a clear idea about proper ways to deal with your losses as you can't be winning 100% of your trades.
It's better to take a break from trading for a while if you feeling too stressed from series of loses.
Popular Forex Trading Myths and Realities
Forex is the largest marketplace in the world as it is the largest financial market. Financial markets react with the mass trader’s psychology.
This is why financial markets are full of rumors, news and myths.
Whatever how long you are trading in forex market, these rumors and myths are always around you.
These myths can lead a trader to unnecessary fear, greed, pride and excitement.
To keep your mind safe from these psychological impacts, you should know about these forex myths.
Some of the major myths are discussed below,
Forex is a quick way to get rich:
This is the most common myth in forex. Forex market allows a trader to trade for a very short term to long term, which is not so easy and available in other financial markets. Due to this specialty of forex market, most of the traders think that forex is the place to get rich in almost no time.
It is true that forex allows many advantages and opportunities that others markets don’t offer, but that doesn’t mean you have to trade too many times. Excessive trading can be dangerous as every trade carries equal amount of risk and opportunity.
Successful forex traders don’t aim to make a big profit in a short time and run away from the market. They build up the profit house brick by brick.
A trader should remind that forex gives us more opportunities than other financial markets but that doesn’t mean forex is the place to get rich quickly with little effort.
Forex is suitable for short term trading only:
This is another myth or misconception about forex market. A trader should not think that forex is suitable for short term trading only as it forex market won’t stop you from holding your positions for long term.
In fact, long-term trading is less risky and more profitable than short-term trading. In any financial markets including forex, price tends to follow the major trend most of the times. Thus, the price has a tendency to move in one direction for a long time.
If you can trade in the direction of price movement, then you can get healthy profits. On the other hand, short-term price movements are short-lived and not smooth enough to make a good amount of profit.
Forex market is rigged:
There is no tangible headquarter and regulatory authority for forex market. This is why many people think that forex is rigged or predetermined market. Many people even think that the whole forex market is a scam.
These are not true. Losing traders often blame the market as rigged or point a broker as a scam. Forex market is not rigged. Even the biggest bank in the world can’t manipulate the market for a single day. Forex is the largest marketplace in the world having hundreds of brokers.
This is so competitive business that if a broker is really involved with a major scam, then other competitors will take advantage over that broker. This might lead a broker to close the business.
It is true that some brokers do have minor scams. These scams are easy to find out and you can be on the safe side by knowing about these scams and avoiding them. There are some sites that publish scam reports of forex brokers and also rank forex brokers.
It is possible to trade with 100% accuracy:
This is a weird one. Only a fool can believe this way. Remember that, there is no certainty lies in financial markets. So, you can’t be right every time.
Losses will occur and you have to manage your profits and losses properly to be successful. It is not possible to achieve more than 70% accuracy in the long run whatever how expert analyst or trader you are.
News trading is an easy way to make money:
This is not that easy to make money by news trading in forex. It is true that news can impact on the price movement. Most of the times this price movement due to news impact is so rapid and short-lived that traders get trapped.
It is very hard to take a position or close a position when the news has just published. During these news sessions market fluctuates too much with low liquidity. In this time spread becomes higher, so it becomes risky.
One can take positions before news events and can wait for the news impact on price. Making a profit this way is not easy either, because sometimes price moves according to the news and sometimes price moves against the news.
More trading in more pairs gives better result:
Many traders generally think this way that if he/she makes one trade per day and gain 1%, then he/she would be able to gain 10% by making 10 trades a day.
This leads a trader to increase the risk by taking more and more positions to make big profits. In real, situation is different. It is better to avoid excessive trading in many pairs. It is better for a trader to trade in this pair which he/she understand better than other pairs.
Excluding expert scalpers, most of the cases market rewards that one who is patient and with the major trend. This is why patience is a profitable virtue in case of trading.
To make money, you have to predict the market movement:
This can be very dangerous in case of forex trading. Most of the traders have a tendency to predict the market moves and when his prediction fails, he becomes blind believing that the market will come in his favor soon. This makes him blind and as a result he violates his trading rules for the sake of his prediction.
Successful traders don’t try to predict they try to react to the market move and their trading strategy. To become successful you don’t have to know where the market will move.
All you have to know in which direction the market is moving and might continue to move for some more time. This can be identified easily by understanding the major trend.
Complex strategies work better than simple strategies:
This is another misconception of traders. They think this way because they start with simple strategies and fail to make money and then they start to think that they need to improve their simple strategy to make money.
This is why traders tend to add more and more rules which makes trading strategy complex and provide very little amount of trading signals. To make money by trading in financial markets a strategy is very important but it’s not necessary to have a complex or advanced trading strategy.
Any complete trading strategy is profitable if traded in a disciplined way. Trading strategy fails if it is incomplete, missing any important rule or if not traded in a disciplined way. Both simple and complex trading strategies are profitable. Simple trading strategies are easy to read, easy to develop and profitable.
On the other hand, complex trading strategies are profitable but complex, include too many rules, provide fewer signals and not flexible.
You can make money by following others signals or advice:
There are traders who think that simply following other signals or advice or trades he/she can make money easily. This is not true most of the cases. Real trading involves psychological barrier which resist a trader to trade in a disciplined way.
This is why it hard to follow others advice and rules properly. In fact, it is quite difficult to follow the own developed trading strategy in a disciplined way. All of these forex signals or advice are not that much reliable.
So, before following these signals or advices you should judge those by own analytical skills. Before trading in forex one should develop own trading strategy and then trade with it. It is your money so the decision should be yours.
You should be an expert economist to trade forex:
Economy drives the forex market. Economy reflects the major trend of the forex market. But it doesn’t mean that you have to be an expert economist. If you have economic knowledge then it is an advantage. However, you can still trade forex successfully without in-depth knowledge of economics.
Successful forex trading requires quick reaction, understanding market trend, money management and discipline. You can cover these attributes by using technical analysis.
There are many reputed analytical websites which include economic forecast and analysis. These websites can help you to understand economical aspects easily.
You need a large investment for forex trading:
There was a time when forex trading was allowed for only banks and large fund managers. That time has come to an end with advance internet and online trading concept. Now a day, you can open a forex trading account with as little as $25. As forex brokers allow high margin ratio, you can trade big size with a small investment.
But you should be careful about using high margin or leverage as it carries a high risk beside high profitability. Almost every forex broker offers demo accounts. You can open a demo account without any deposit.
Forex trading is easy:
This is a huge misconception and those who think this way end up with a loss. Forex trading requires good analytical skills, fast execution, proper money management and disciplined approach.
Without these skills, it is almost impossible to make a profit in the forex market.
You need to watch forex market whole day:
It is not necessary to watch the market whole day for forex trading. Forex brokers provide advanced platforms by which you can place advanced orders.
If price hits the placed order, then your orders will be executed automatically even if you are not online.
These misconceptions can make any trader confused or frustrated about forex trading. A trader should know these myths of forex trading so that he can keep himself away from these misconceptions.
7 Golden Forex Trading Tips for Beginners
To be successful in this market, you have to follow some golden tips without which you can not be able to make money here.
1 – Plan your trade, trade your plan
The first rule to follow is to develop a trading plan and then stick with the plan. A trading plan should consist of entry, exit, and stop loss rules with sound money management strategy.
Without a trading plan, it is almost impossible to be successful in the forex market or forex trading.
2 – Trend is your friend
The trend is your friend and you should be with the trend to be successful in forex trading. The trend is a projection of financial or economic change in the chart. This long lasting one-sided direction gives us the opportunity to enter and pull out profits in the short term.
This major movement is called as a trend. To follow the trend, you should go long in the uptrend and go short in the downtrend.
3 – Preserve your trading capital
In forex trading, you cannot win every time, so if you do not have money to invest then you will miss many opportunities to make profits. To protect your trading capital, you should not invest all money in a single pair.
If you invest all of your money in one pair, then you will be out of the market very soon. If you use a sound position sizing strategy and sound money management then your investment carries less risk.
4 – Cut your losses in short
Small losses are the best losses. It reduces the risk of getting ruined or getting a margin call. If you do not take a small loss, then you will have to take bigger losses soon.
A stop loss strategy should be used to avoid getting a large loss or a margin call.
5 – Let your profits run
A large profit can cover up many small losses. A traders’ exit plan should be able to catch or trail large profits so that he can recover his small losses and be on the winning side.
An exit strategy is very beneficial due to this reason. The risk to Reward ratio can be helpful to set up the profit target.
6 – Trade your own analysis
In forex trading, you should avoid others suggestions and your trades should be based on your own analysis. Many traders do not have confidence in their own analysis, and thus, they often trade the suggestions of other traders.
This is not going to bring profit for you in the long run. A trader should have to rely on his own analysis with confidence.
7 – When in doubt, stay aside
Standing aside is the best solution when you are confused to make any decision. It is also one kind of position in trading. When you are confused about the market or pair, then there is no point to increase the risk.
In this kind of situation, a trade should stand aside and should wait for next complete entry signal.
These tips mentioned above are the most important tips for beginners to follow among all the trading rules.