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Succeed in Forex Trading Without Trying
We mostly try too hard when starting out trading Foreign Currencies. It looks a real minefield, and it is! However, the thing to remember is that the more you do it the better you will get. The article gives you some tips on how to get up to speed trading Forex.
The great thing about Forex trading is that virtually all Forex brokers offer demo accounts with an imaginary balance of $5,000 or $10,000, so you can ‘play’ at trading Foreign currencies like the British Pound, Euro, Japanese Yen and Canadian Dollar without losing any money.
This is where you can test either your own ideas or Forex trading systems you buy, to see if you can trade successfully with them. However, there is much more to learn.
The most important point is to know how much you will put into your trading account once it goes live – that is, you start trading for money. Let’s say you decide to start small with $2,000. In all cases you should risk only 2% of your money on one trade. In this case, the amount would be $40, which does not sound much, but when you trade Forex, you get leverage of 50 to 100:1. This means that with $40 you are actually trading with $2,000 or $4,000. But what is most important is that you work out that 2% before every trade.
Next, you need to find out about Forex trading. You can buy books or courses, or buy a trading system. I recommend that you buy an e-book about Forex trading, and search for articles on the web before you start. Study it hard, just watching price action. Price action is the key to trading. Price action is about fast or slow moves, trending markets or consolidating markets.
If you buy a forex trading system be prepared to accept that it will not be the whole story, and may not make money itself. None do for any length of time.
Here are some things to learn about:
The currency pairs that are most actively traded – these are the Euro/USD, British Pound/USD, Aussie Dollar/USD, USD/Swiss Franc, USD/Japanese Yen,and USD/Canadian Dollar;
The value of a ‘pip’, the unit of measurement in a trade for each ‘lot’;
How to calculate risk;
The importance of moving averages;
Which indicators can help you judge the strength of a market.
Almost all trading systems are designed to work best when the market is trending – going up or down in an orderly fashion. If it is not behaving like this, it can be dangerous to trade, owing to ‘whipsaw’ effects.
Therefore, it is important that you can read trends, and judge what is happening. However, never try to forecast what the market will do. Instead, decide what is likely to happen – in both directions.
It is important to realise that you will lose money on some trades. The important thing is to make sure that your losses are small, and your winnings are long – you stay in the market as long as the trend remains in force. If you get it wrong, you bail out early. Within these parameters, always use the same percentage of your trading account to trade. Never double up because it looks a sure bet.
You will soon find that because you can see the charts all the time, it is easy to let your emotions rule your trades, rather than your system. Once you lose a couple of trades, you will worry when the next one does not go the way you want. the tendency will be to jump out with a loss. Once you start a trade, you need to stick with it so long as the reasons you entered are still valid. If not, close the trade.
You will make mistakes. You will invest more than you intended in some trades, you will get in and out at the wrong times. Make sure you review each trade and assess why it went wrong, so you can learn from it. You need to decide how much you want to make – 50 pips a week is realistic – and stick with it. Don’t be tempted to over-trade, or to increase the stake.
The way to avoid the emotional ups and downs that are likely in Forex trading is to get a system and stick with it. Let the system make the decisions, not you. That way, you will be trading the easy way.
A Simple Forex Trading System with Moving Averages
There are all sorts of systems you can have, from the simple to the complex. For example, you could have a system based on two moving averages. You would enter when one moving average (MA) crossed the other, and exit the trade when the cross-over was reversed.
However, as with any system you would need to be disciplined. You would have to go in when it said so, and exit when it said so. Is that it? It could be. I am not saying that this would be a good system, but with the right pair of MAs it could work, You might try the 5 and 20 MAs. In this case, you would set the 5MA to exponential, and the 20MA to simple, which means it would not respond so quickly so you would not be taken out with any small whipsaw.
You could then add some indicators. For example, if the stochastic indicator showed the currency was overbought – a sell signal – and the 20MA closed below the 5MA, then that would be the sell signal.
The point to remember with this approach is that price tends to go fairly closely with the 5MA, but goes away from the 20MA, either up or down, and then returns to it. Exuberance or despondency in the market result in it going away from the MA, and eventually, a more careful approach is adopted by traders, and the price returns to the 20MA.
Would this system work? I don’t know as I have not tested it. I am not suggesting that it would, and I am not recommending that you try it.It is just an example of a system. If you were to play around with different lengths of MAs you could probably find a practical and simple trading system. After a while you would learn its limitations, and would add comments to your journal, which you could then use to modify the system.
What is a Disciplined Trader?
There is one thing that gets talked about a lot about Forex trading, and it is that you need to be disciplined when you trade. What does this mean?
Well, you probably think you lead a fairly disciplined life, but trading is different. The fact is that whatever method you use, you will have losses. What’s more it is not so unusual for two or three to occur in succession, and it may be after a good run.
At that point you will start to doubt your ability to trade successfully. The next thing you know is that you take a position, with a generous stop loss, which is of course, a prerequisite of a disciplined trader. Then, after heading in your direction for 10-20 pips, the price falls by 30 pips, which could be halfway to your stop. At that point, you think: ‘Well, I’ve just lost the full stop amount twice, I’ll cut my losses and close the trade.’
That was lack of discipline. You did not:
Wait till the end of the time frame to see what was happening;
You did not go back to the reasons why you took the trade, and check to see whether they were still valid.
This is essential if you going to be disciplined.
You check back an hour later, and find that the price has rebounded, but is still in negative territory by a few pips, or it might have gone positive a few pips. What do you do? You might be tempted to enter again, and chase the trade, or you might walk away.
Yes, it was a good idea to check back. In fact, it is a better idea to wait till the next day, then place the trade on a chart, which you can do in Metatrader 4 by clicking on the trade and dragging it to the chart you want. This is a good way to review the trade.
You should do this well after the trade has gone away, and when your mind is calm. Then you can see what went wrong, and learn from it. In fact, you might think that on reflection, the buy (or sell) signal was weak, that there was little momentum, etc, depending on the way you trade.
So how does a disciplined trader behave? First, he (or she) is careful to make sure that the signal to trade is a good one, and not ‘almost a signal’. If it is not good, don’t trade. There will be plenty more trading opportunities later. Remember, that your first goal is to maintain your capital. You should not trade for the sake of it, or because you have not traded for x days or x hours.
Also, if your trading system is based on trend following, you need to be good at recognising the signs of consolidation, which is not a good time to trade, and to avoid trading then.
Be disciplined during a trade
However, the biggest problems come during trades. Here’s another situation. You placed two trades, each for 1% of your account balance, and after a while, your first target of say, 25 pips was hit. At that point, many people are tempted to bring the stop of the other trade up to break even (the entry price), but this is not always a good idea. In fact, statistically, this is a bad idea, as it reduced profits. Why did you do it? Because, as an undisciplined trader, you are worried about losing money, and wiping out your profit.
Let’s say you leave the stop where it is, and then watch the price go back close to the entry point. What do you do then? The temptation is to close the trade and say: ‘Well, I’ve
made some profit, and there re still 2-3 pips left, so that’s ok.’
Actually, that is not OK because in order to win at forex trading you need some big winners, and the chances are that unless there has been a big change out there, the price will not go below the entry point by more than 10-20 pips, and will recover to give you a bigger win. Once again, lack of discipline conspired against you.
What does the disciplined trader do then? Whatever system he uses, he follows the rules exactly, if anything erring on the cautious side, unless he is very experienced.
He assesses the situation;
Calculates how many lots to trade;
Enters the trade correctly with the stop in the right place for his system;
Waits for the system to move to his target or stop.
Watch this video: Discipline in trading
When the first trade is successful, he leaves the stop where it is, either until the trade is finished, or perhaps until the price moves sufficiently for him to change the stop to a level where the difference between the stop and the price are the same as at entry. In other words, if he was using a 60 pips stop, he would move it 30 pips nearer the actual price when 30 pips in profit, and so on.
This is one more of those things in life which is simple, but not easy!
Forex Robots and Systems
To trade the forex markets you need a system. What is a trading system? Well, it could simply be that when the 5 day moving average crosses the 50 day moving average, going upward you buy, and when it crosses again going down you sell. This would be a very simple system, but it would not work as the signals to trade would be too late.
However, moving averages, which are the average of the last 5 or 50 days’ closing prices, are part of some systems. Systems are based on indicators like moving averages and a host of indicators developed by traders. Some of these are complicated, and some simple, and some have very long names. For example, the Stochastic indicator tells you when the currency is overbought or oversold, and also indicates when the trend is suspect. The theory here is that when the currency is overbought, it is time to sell, and when it is oversold, it is time to buy. This is in line with the motto ‘ buy low and sell high’, which is a good thing to keep in mind.
Owing to the complexity of these systems, many people are tempted to buy ‘black boxes’ which just tell them to ‘Buy now’ or ‘Sell now’. These robot systems seem like a good idea, as you don’t have to know anything, or understand anything, and just make the trades. That would be fine if all trades were successful but they are not.
The simple reason these robots fail is that they are tested over short periods, so they take into account a tiny fraction of the possible moves that the markets can make. Although they may work for a few weeks or even a couple of months, after that they are unlikely to do so, and you will be lost because you don’t know how to trade.
Yes, you do need a system, and you can buy one, but it will not be a black box or robot, but a system you can learn and understand, so that when it does not work, you can adjust your method accordingly.
You need to be careful not just with forex robots but also with trading systems, because unless they include some form of help or training they too will not help you succeed. What you need to trade the forex markets successfully are:
A system that tells you when a trade is possible;
Training how to use it, which you can learn yourself or from the seller of the system.
Note that a good system tells you only when a trade is possible, and with some you will need to check various indicators yourself to decide a trade is possible. In either case, you have the final say in whether a trade is placed. Any other way of trading is like entering the lottery.
Rules of Money Management
Money management is the most important part of trading. Without it, you can lose your cash in no time flat. It requires discipline, but once have the idea in your head, you will see that money management is really very simple. The idea is that you trade a small amount of your money each time, and have a stop loss set such that you only lose a small amount. This is applicable to all forms of trading, from forex trading through stocks to betting on horses.
The important things you need to know about are:
Stop losses
Your ‘Bank’
Risk/reward ratio
The 50/50 rule
What is a stop loss?
A stop loss is a price at which you will sell if the price goes against you. Let’s say that you decide to buy the GBDUSD at 1.5341, expecting the pound to go up. You look at the chart and find that previously the price bounced off 1.5300, which is 41 points or pips below your entry price, and you set the stop at 1.5297. If the price breaks 1.5300 your position will be closed for a loss of 44 pips, or $44 at $1 per pip (click here for more information on pips).
In fact, the order may be filled at about 1.5294 to 1.5297, but the point is that you would lose about $45, instead of winning $45 or possibly $66 had the price gone your way. To prevent your money going too fast, you want to be able to trade at least 30 times, and preferably 50 times losing every trade before you get cleaned out. You use money management to achieve this.
Here’s how:
To limit your losses to 2% of your bank, which is what we call the size of your account. To risk $40 you need a bank or account of $2,000 (40/2000= 0.02 or 2%). If you choose 3%, then you could risk $60, and to risk any more would be risking too much. Many experienced traders risk only 1% per trade, although they may have two or three trades open at the same time, which is not recommended for beginners. Also, do not start with too large a bank,as you will be tempted to risk more each time, and can end up losing a lot more than you intended.
Also, to start with, only risk as much as you can afford to lose. Most definitely DO NOT borrow money to trade forex.
$1,000 or $2,000 is plenty to start with.
Risk/reward ratio
So now you have set up your account at a suitable trader, and are ready to trade. Now you need to assess the likely risk/reward ratio of a trade. First, you set your stop at a suitable level. This will be below support of you are buying, or above resistance if you are selling.
Let’s say you decide on a stop that risks 40 pips at $1, for $40 for a $2,000 bank. So what profit are you looking for? Basically, you should be aiming for 40 pips. This means that you should have reason to think the price will move 40 pips in your direction. For example, if you are buying, and there is a lot of overhead resistance 20-30 pips above your buying price, then that would not be a good bet. You would need to see whether you could set your stop higher, or miss that trade.
The reason that a risk/reward ratio of 1 is ok is that you will be using the 50/50 rule.
The 50/50 rule
Another good rule of management is that once you are on a winning trade, you sell half your position (size of trade) when your profit equals your risk. So, if you risked 40 pips, when you are up 40 pips, you sell half your position, and then move your stop loss to break even, which is the price at which you entered the trade (1.5341 in our example above). This means that you cannot lose on this trade, and are assured that you keep the profit on half your position. Here is the example:
Enter at: 1.5341
Stop at 1.5297
Sell half at 1.5381
Reset stop to 1.5297 (1.5301 if you want to be sure that the second trade would sell with zero loss, allowing for the broker’s spread)
Then let the trade run, raising the stop every time the price improves by 40 pips. Or you could sell when the price declined for three bars or use some other method. The important point is that this is all done according to a Money Management Plan that is set in stone.
How To Make Money As a Forex Trader
You have decided you want to make money as a Forex Trader, so how do you go about it? First you need to learn all you can about Foreign exchange currency trading, and you can do that on this blog.
Secondly, you need to find a method or system to trade with. The reason this is essential is that you then follow rules, before you place a trade. Otherwise, you can get into the situation where you have not seen a suitable trade all day, so you just bet on one currency going up on the spur of the moment. That’s a sure way of losing money.
The golden rules of Forex trading are:
You need to learn how to trade
Every trade you place must follow money management rules so you don’t lose all your money. With a good money management system you can have 10 or 20 losing trades and still have some money left. Also, you should trade with money you can afford to lose. Don’t borrow to trade. It is far better to start with $1,000 of your money than with $5,000 you borrowed. If you borrow money, and start losing you will be under pressure to get it back, and that is also a recipe for disaster.
You can learn Foreign exchange currency trading by trial and error on a demo account, which will not cost you anything, but it will take long time. The obvious answer is to either buy a system which helps you learn, or buy a training course. To turn yourself into a seasoned trader you will probably need to do both.
The most important points are:
1.If you have a forex trading method you MUST follow the buy, stop and sell signals you get.
2.You should study the long-term trends in the currency pair you are trading to see what might happen. You do not try to forecast what will happen, but be ready for what might happen, which is very different.
For example, say that the GBP has been going down steadily for a week, but that it had been going up slowly for 5-6 weeks previously. What is going on? You would need to look further back, possibly in the weekly charts, to see whether the pound was in a long-term uptrend, or whether the recent downtrend was a return to a previous downtrend.
Then you would need to see whether there was a pattern in the trends, such as a tendency for the price to go up by, say 100 pips, over a day, and then to go down 50, then up another 100 and so on.
If you had a forex trading method that was recommending you open a trade at a point which seemed logical, then it might be good to open the trade. On the other hand, if this seemed to be going against the pattern, you would want to do some thing different, like stay out of the trade!
Remember, the first thing you need to do when foreign exchange currency trading is to conserve your capital, and that there are always opportunities coming up every day and usually every hour!
The Currencies to Trade to Make Money
There is a huge number of ‘foreign currency pairs’ you can trade. In fact, the whole system of Forex trading has been set up so that businesses in any recognised country can exchange their currency for another currency. It is all about international trade and making that practical.
With such an array of possible trades, it might seem difficult to choose which currencies to trade. In fact, you will get best results by trading the major currencies, because you want the maximum liquidity, which means that you can fill your trade easily.
When you decide to sell the pound against the US$ you are trading the GBPUSD currency pair. Not all currency pairs are created equal, and in addition to doing better trading the major currencies than the minor, exotic ones, there are some major currency pairs that are better than others. The main currency pairs are:
EURUSD
GBPUSD
USDCHF (Swiss Franc)
USDJPY
USDCAD (Canadian Dollar)
AUDUSD (Australian Dollar)
At certain times, each foreign currency pair races off to make a series of good trades, but day in, day out, the GBPUSD is the best currency pair to trade. This is because there is plenty of movement each day, despite the fact that the EURUSD accounts for the largest amount of currency traded.
What you want is a foreign currency pair that has a large average daily movement, and generally the GBPUSD has about 20 per cent more pips in the range traded each day than the EURUSD.
If you are trading from the USA or Canada, you will do well to trade the USDCAD because virtually all the trading is done during the New York session.
Other currency pairs that can be profitable are:
GBPJPY
EURJPY
CADJPY
AUDCHF
London is still the forex trading centre of the world, now backed up by Frankfurt, Germany, in almost the same time zone. All the big international banks maintain offices for forex trading in London, whether their head office is in New York, London, Paris, Frankfurt, Los Angeles, Tokyo or Toronto. If you are in Europe, then the GBPUSD and EURUSD and EURJPY are good currency pairs to trade.
How many should you trade? To start with, trade no more than two pairs, and until you are very experienced it is best to stick to three or four pairs. Also, it is a good idea to stick with currencies of the countries that are in a similar time zone to you. In Asia, this would be the USDJPY and AUDUSD, for example.
However, you need to look carefully if you want to trade minor currencies or cross trades. For example, the ‘spread’ between the buy and sell price for the EURJPY can be 5 pips, and for some of the lesser currencies – lesser in trading volume – the spread can go up to 8 or 10 pips, which mean you need to make 20 pips for a small 10 pips profit. So be careful with minor currency pairs.