Forex Trading For Beginners
Last updated on March 18th, 2015
I still remember the day I decided that I wanted to take a shot at trading. Due to the massive amount of information about Forex trading for beginners that can be found online, Forex was my market of choice. The problem was that I would purchase e-book after e-book hoping that I found the definitive beginners guide to Forex trading. Other than tweaks on standard indicators that really make no difference, these e-books were all the same and I can admit they were a colossal waste of money.
This article is designed to help you learn about Forex trades online and how you can get started fairly quickly in this market. I say that with hesitation because I don’t want you to jump into any Forex trades until you have done some serious testing on whatever trading strategy you choose to use.
No Forex trading for beginners guide would be complete if it didn’t include what Forex is. To keep it simple, think of attending your local bank and exchanging your home currency with another. Using the USD as your currency, you decide you want to buy British Pounds. If at the time of purchasing Pounds your USD was worth less than Pounds, you would lose money on the transaction. You just trade one currency for another but the difference on line is you don’t physically take control of the money. In fact, due to leverage, you can trade more than what you have in your account. Right now, the maximum leverage is 50:1 which means for every $1 you have in your account; you can control $50 worth of currency. Forex trading for beginners can be financially devastating if they don’t fully understand the power of leverage.
Now that you understand the concept of what Forex trading is, I want to list the top 3 things you should know when you learn about Forex trades online.
- There is no commission but you pay spread. A Forex spread is the difference between the bid and ask price. To understand this better, pretend you buy the Euro by using the USD as the selling currency. If in a split second you sell the Euro by buying it back with the USD, you will lose money. Yes, you will lose money without the market moving one pip! This is how most Forex trader end up blowing up their account. When Forex first came onto the scene, spread costs were high. Nowadays, the average retail Forex trader can get spreads as low as 1 pip on popular currency pairs. Depending on the size of your positions, Forex trade costs can exceed the commission cost of most Futures markets such as the Dow E-Mini or the Euro Futures.
- You can control more money than you actually have. This is called leverage and you can think of this as credit given to you by your broker. You put up what is known as margin and right now, the maximum leverage allowed in North America is 50:1. That simply means that for $2000 in margin, you can control $100000 in currency. Leverage is a double edged sword and one reason why Forex trading for beginners can quickly become a disaster.
- Demo accounts are practice accounts offered by most Forex brokers. Often, included in that is a free charting package such as Metatrader. Demo accounts are great for getting used to the charting package, order entry system, back testing your trading system and practicing your trading system in real time. I don’t think demo accounts are a good indicator of what your future success will be. There is no comparison between trading virtual money and real money.
You have probably heard of the term “technical analysis”. This is what many traders use to determine if and when they will take a trade. The chart below will show you several examples of technical analysis that are used on a daily basis by people around the world who trade various markets such as Forex. We are going to cover three of my favorites and those are:
- Support and resistance areas
- Trend lines
- Trend lines that run counter to the trend
- Support or resistance zones are located by drawing a horizontal line across previous high or lows. On the chart, we have drawn a resistance line that has its based on the left side of the chart. When price reaches this area from below, you would be looking for the market to either A. Retrace downwards from the line as we saw when price returned the first time. B. Break out through the line where we would either trade the break out or wait for a retest of that line on a lower time frame
- Trend lines are drawn by connecting two lows or highs and taking action on the third test of the line. When price returns for the third time, you can use various entry triggers such as a chart pattern to get on board the current trend or counter trend depending on how you draw your lines. Targets are usually the extreme prior to the decline in an uptrend or the extreme prior to the rally in a downtrend. Stops are objective because you can use the swing point for your stop placement.
- The red line on the chart shows a trend line that is used differently than the blue lines. These lines could be called counter trend lines because you are drawing, in this case, a line across the highs on a declining market in the context of an uptrend. What are these an excellent analysis tool? They can alert you to the ending of the corrective move and act as a trade trigger into the overall trend.
Number three is one of my personal favorite ways to trade and to give you a little more insight in this short beginners guide to Forex post, let’s dial into that area.
This is the same chart but on a lower time frame. The first chart was a daily chart and to get a better entry and stop, you may want to dial down to the four hour chart. Let’s walk through a few things that have occurred on this chart.
- The overall trend is up as shown by the blue trend line. We have drawn a corrective trend line in red.
- When the daily chart broke the red trend line, we dialed down to the four hour to get hopefully get a better entry and stop.
- We see that price broke above the recent swing high after breaking the corrective move down.
- Price has broken the corrective move in the same direction of the overall trend.
- You can buy into the market at the break of the high, use a stop order for your entry or even dial down to the 1 hour chart for a pullback entry.
- Your stop can go below the swing lows or just below the blue trend line.
This particular setup and trigger would have given you a trade with a maximum stop loss of 102 pips. So far, this pair has continued the up move for 732 pips from the break of the swing high. There is no immediate sign of the uptrend being broken.
When you learn about Forex trades online, most sites will talk about this indicator or that indicator. The fact is you can trade very well with just the three tools we have talked about. There is some discretion involved as to where you draw your trend lines from but the more experience you have, the better you become.
I hope you have enjoyed what I feel are some key points about Forex trading for beginners. As a Forex newbie, you have yet to develop bad habits that can affect you and your results. Ensure you find your information from reliable sources and most of all makes sense to you and is something that fits your trading personality. The best methods in the world won’t help you if it is not something that calls to you.
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