4 forex trading tips to help get you started
Get down with the basics
This is such an obvious suggestion that it shouldn’t even be listed here, yet believe it or not, there are traders out there who can’t tell the difference between a market and a limit order, can’t find support/resistance zones and that they shouldn’t be trading with 500:1 margin.
Therefore, if you want to save yourself a lot of headache, it’s best to familiarize yourself with how the market works and all the forex jargon and terminology. Keep in mind that while there are several paid courses out there, most of the information can be found online.
For example, CM Trading clients get access to a regularly updated education portal along with weekly online seminars presented by expert traders and market analysts. Here you can learn what forex is and how it works, as well as the different trading strategies you can employ to predict the market.
Clients who prefer a more hands-on learning experience can also take advantage of the comprehensive one-to-one coaching sessions on how to approach trading. All these are available for free to all clients regardless of account type.
Understand the risks
The majority of beginner traders make a small deposit into a trading account and buy into unnecessary large and unsustainable positions which can only result in a blown account in a matter of days.
This is a numbers game and as such, you can’t expect to be correct every time. If you are risking your entire account with every trade, you won’t be able to sustain a losing streak which is a common risk for even the most experienced of traders. You may win big a couple of times but eventually you will make a few bad calls and lose everything.
Basic risk management rules dictate that you should never risk more than 2% of your account on a single trade and this is especially true for beginners. It’s best to take it extremely slow and only start risking higher amounts of capital when you’ve found a strategy that provides you with consistent results. Only then should you start trading with larger lots because otherwise, you are just taking a gamble with your money when you should be focusing on finding ways to mitigate risks.
Consider the following example:
You open a new trading account and make a deposit of $1.000.
If you risk 2% on each trade, you are effectively risking just $20 every time you open a position. This means that even if you are wrong 10 times in a row, you will only lose $200 and still have plenty of capital to continue trading and recover.
On the other hand, if you risk 5% with larger positions, you stand to lose more than $500 if the market moves against you for 10 consecutive trades. That’s half your trading capital not including any trading costs you may incur during this period. A substantial amount that’s going to be much harder to recover and usually results in riskier trades and larger positions.
Thankfully, you can find out more about how higher lots affect your trading by opening a demo account to practice with virtual money. Trading on demo profitably for more than a few hundred trades is a good sign that you are fluent enough to proceed trading with real money and increase your exposure to risk.
Try out different strategies and forms of market analysis
Forex traders can employ several different methodologies to conduct their market analysis. Each has its own benefits and drawbacks, but thankfully they aren’t mutually exclusive, and some prefer to mix and match some elements from each one in order to identify new opportunities.
On one camp, you have the fundamental traders who use fundamental analysis which involves keeping up with the latest trends and economic developments on a global scale. For example, traders who trade the GBP pairs, watch closely any news on Brexit because of how these announcements can affect the performance of the pound. Every time Brexit is mentioned in the news, the market becomes extremely volatile and other currencies are affected as well.
Trading fundamental events such as these are quite risky, however, as they tend to move the markets considerably – sometimes to the upside or the downside according to the market sentiment.
The other method, which is extremely popular with traders of all levels, is referred to as technical analysis. Technical analysis utilizes historical data and common price patterns to predict where the market will move next, as well as the probable momentum.
Technical traders employ various technical indicators which are available on the trading platform to monitor key patterns on the price chart which may reveal the new market direction. However, this methodology isn’t always reliable as you may be interpreting the data incorrectly which can lead to further confusion and financial loss.
Despite the disadvantages, however, technical analysis remains one of the most widely popular trading methods of market analysis as it has been proven to work by successful traders around the world.
The third and final method provides a simpler approach to market analysis and is referred to as price action trading. Price action trading generally means trading solely by taking into account the past price performance of an asset in order to identify new opportunities. However, most price action traders usually utilize a few basic technical indicators to inform their next move.
This is an extremely subjective view of the market and traders using price action trading strategies tend to disagree completely at any given moment. The opposite is true for technical traders, as certain indicators usually may lead them to reach the same conclusions.
If you are serious about trading, it’s highly recommended that you become fluent in all the above concepts and try to incorporate them into your trading sessions to better understand how they can benefit your strategy.
Trade on the right timeframe
If you didn’t know already, you can change your viewpoint on the chart by switching up the timeframe. In the MetaTrader 4 (MT4) trading platform, you can choose between 9 different timeframes – from 1 minute up to 1 month.
So, when you are watching the price chart, each bar or candlestick represents the price change for a specific period of time. Lower timeframes like the 1 minute or even 1 hour will be quite erratic as the market moves drastically in such a short timeframe. Therefore, if you want to have a clearer view of where the market you’re trading is going, it’s best to also have a look at higher timeframe even if your strategy revolves around the shorter ones.
Some strategies like scalping, which focuses on short-term profits, lend themselves perfectly to shorter timeframes, but as already mentioned it’s always good to know the general direction of the market. Short-term strategies like scalping are quite unforgiving sometimes and they require a lot of practice to provide results.