Why novice traders should spend time learning forex
Many novices get involved in the world of online currency trading after attending some sort of introductory seminar. They get excited with what they perceive to be a get-rich-quick opportunity and start to trade forex without taking time off to first learn forex. Unsurprisingly, the probability that such a trader will become successful is low.
There are numerous websites providing free forex training tutorials. They cover technical indicators, fundamental indicators, how to red charts, trading systems and many other aspects of trading. There really is no excuse for the novice investor not learning the basics of the forex market before entering into a trade.
There are websites such as the Forex Factory, which specialise in providing forex training and vital tools to both novice and professional traders. Anyone new to the market is advised to study the basics of the market by checking out one or more of these sites before opening a demo account. Once you feel comfortable with the core principles of trading you are ready to open a demo account and start making ‘paper’ trades.
This is the point where you should start developing your own trading system; before, not after you make your first live trade. During this stage feel free to experiment with various systems. Try using different technical indicators and or combinations of them. Somewhere along the line you will learn which technical indicators work best for you.
Keep records of your demo trades. It is vital to learn what worked for you and what did not and to identify why.
Picture: MyTudut
The basics of an FX trading system
Without a trading system it’s very unlikely that even the best trader in the world would be able to make a profit consistently.
You don’t need a master’s degree to create a trading system. All it really comprises is a set of rules determining when to enter a trade, when to exit it again, how much to risk of a single trade and how many trades to have open at any given time. It will also cover issues such as stop losses, take profit levels etc.
Entering a trade could for example be based on the price trading above or below a simple moving average. It’s possible to use more than one technical indicator, but don’t overdo it.
Exiting a trade is actually trickier. Here you could have a rule that says you exit as soon as you have made a certain amount of profit or loss, or when the price breaks through a certain technical level, e.g. the moving average. Never cling to a losing trade: that is probably the downfall of more traders than any other single mistake.
How much to risk on a trade should depend on the size of your trading account. As a general rule, never risk more than between 2% and 5% of trading funds on any single trade.
Overtrading, i.e. making too many trades open at any given moment or making a multitude of trades per day is another common mistake made by novices. Have a rule in this regard and stick to that rule.
Stop losses should form an important part of your trading system. Don’t set them too narrow – that will kick you out of many trades that eventually turn out to be profitable. Setting them too wide on the other hand will expose your account to catastrophic losses.
Forex services and demo accounts can be very useful to both novice and professional traders and there is a wealth of knowledge available for those who put a bit of time in.
Picture: lastnychero
Software for FX Trading
Good software is not just an item to make life easier for the FX trader is is essential if you are to be a success. Looking at the reality software for trading is in many ways like having your own personal FX trader, except it is the software on the machine that is doing it on your behalf! If you want to make money online, and who wouldn’t, then there is software which is particularly designed to do the trading for you. With the FX market being a 24 hour operation you can choose when to do the trading at your most suitable time and it all takes the minimum amount of effort on your part.
There is a lot of this software available; the very best of course are designed by highly skilled and experienced Forex traders, and it has been designed to reduce the margin of error. B because the systems can be cleverly automated and programmed, you do not have to physically stand and watch the trade markets you will not miss out on the possibilities of a chance that may come up at some stage during trading day. Take your time and do take advice from experts in this field and you will be able to choose to trade FX accounts that can be programmed mostly on your exact instructions.
Is Forex trading for you?
Before opening a Forex day trading or swing trading account, a potential trader first has to ask him or herself whether he or she is really suitable for this type of trading, and what type of person has a better likelihood of becoming a successful Forex trader?
In the first place such a person should have access to some extra cash which he can afford to lose. Do not make a mistake: any type of Forex trading carries risk and it is unwise to trade with money that is needed to pay for food or other household expenses.
Secondly, the aspiring trader has to be able to read charts. By this we do not mean that one needs a PhD in statistics or mathematics, but someone who is not able to understand a basic candlesticks price chart and comprehend a number of simple technical indicators superimposed on such a chart will find it difficult to make good trading decisions.
The ability to interpret technical indicators is another prerequisite if one wants to become a really successful Forex trader. Once again, there is no need to know every technical indicator in the book; it is sufficient if one understands a number of basic technical indicators really well and knows how to apply them under various market conditions.
Last but not least, the ability to control one’s emotions forms a very important part of the personality of all successful traders. People who make trades based on ‘gut feelings’ or emotions such as fear or greed usually find it hard to make profit consistently in any type of market.
The vast majority of successful Forex traders have a system and they follow that system rigorously. When the price of a currency moves in the ‘wrong’ direction, they do not allow fear to set them off-course: they keep on following the system and in the long run this pays off.
FX options compared to ordinary FX trading
For some reason many Forex traders consider trading FX options to be somehow ‘more complex’ and ‘more risky’ than trading ordinary Forex.
The truth is that, in many circumstances, Forex options could actually be more lucrative and involve lower risk than an outright Forex transaction.
Let us take the example of one of the simplest Forex options transactions a trader can enter into - buying a call option. In this case the trader pays a premium and if the price of that particularly currency exceeds the strike price of the call option at expiration, the trader gets the full benefit of the price increase.
With a put option, the situation is reversed. The buyer of a put option gets the full benefit if the price of the currency drops below the strike price of the option at expiration.
In the case of an ‘at the money’ call option, if the price of the currency is higher at expiration than now, the trader will benefit to the full extent of that increase (less the premium). This is no different from what would have happened if the trader had ‘gone long’ in an ordinary Forex transaction.
The difference is that, if the price of the currency moves the ‘wrong’ way, the ordinary FX trader stands to lose a potentially unlimited amount of money while the options trader can lose no more than the amount he or she paid for the option.
The same is true with short transactions. An FX trader who goes short on a currency can lose a potentially unlimited amount of money if the price of that currency goes up. A buyer of an ‘at the money’ put option on the other hand can only lose what he paid for the option, but he can benefit to the full extent if the price of the currency goes down as expected.
Automated forex trading
Automated forex involves automatically buying and selling orders using an underlying forex system. Once a laid-down set of criteria is met, the orders to buy and sell on the forex market are carried through. An automated forex trading platform removes the element of human psychology from forex trading.
There are two types of automated forex: fully automated and signal-based. A fully automated system uses a forex robot that draws on a computer algorithm to determine elements of an order such as price, timing or the quantity of the trade. The forex trading system also places the orders submitted automatically. The trader using the system works around the technical parameters of the forex platform, with all other aspects of control given over to the technology.
A forex trading system that uses signals in auto-trading mode draws on the manual execution of orders. A commonly used approach leverages a service, whereby, traders make strategies accessible to anyone interested in the forex signals. Traders then decide if they wish to carry through with trades, based on any of these signals in the context of their own forex accounts.
Unlike with a manual trading system, with an automated trading system, it is possible to execute more trades per market than it is possible for a human trader working on his own. Actions are reproduced across different markets and at different times.
A forex system using signals means traders use signals and previously successful strategies, in the hope they continue to generate profitable trades into the future. Automated forex opens up online currency trading to more people because traders must be experts or have the ability to devise their own strategies.
Is scalping a good idea?
The idea of scalping can be very tempting for new traders. Simply put, scalping involves hunting for large numbers of small pip profits. Scalpers typically aim for small profits of around five pips from each position. They usually close their positions less than a minute after opening them.
The strategy can produce high levels of profit over an extended period of time but this is far from guaranteed. There is usually less risk on each individual trade but the scalper needs to be successful with the majority to make the tactics worthwhile.
It is something of a grey area as to whether brokers themselves are welcoming towards scalpers. Many brokers allow people to open and close positions immediately but are wary of traders attempting to exploit the lag between an order being initiated and actually placed. Individuals who do this may have their accounts closed, suspended, or be hit by restrictions.
Many of the brokers that allow scalping, target successful individuals with increased spreads if they persistently make profits. They may also deprioritise the placing of their orders, or change quotes to slow progress.
While scalping is undoubtedly an effective tactic for some, it is certainly not a guaranteed strategy for earning profits and requires a great deal of willpower and unfaltering knowledge of the markets. Websites like www.forexsignalgenerator.com can help scalpers identify opportunities.
For the above reasons, it is not recommended for beginners to try scalping at first. Almost all successful scalpers are experienced traders who have the knowledge and confidence to succeed.
The opportunities and pitfalls of trading on margin
Someone who wishes to travel overseas and who needs foreign currency would go to his or her local exchange office, pay in the required amount of local money and then receive the amount of foreign currency which corresponds to the current exchange rate.
In the world of Forex trading this does not happen. This is because of the principle called ‘leverage’ which is also known as ‘trading on margin’. Let us explain.
With a Forex transaction which is leveraged at 50:1, the trader only has to put down 1,000 GBP to trade an account worth 50,000 GBP. If the same trade is leveraged 100:1, the trader can trade with 100,000 GBP by only depositing 1,000 GBP. Some online Forex brokers even offer trades with a margin of 400:1, which means that with 1,000 GBP the trader can manage a Forex trade of 400,000 GBP.
This sounds wonderful, doesn’t it? Take the example of a trade leveraged at 100:1. If the price of the currency only moves 1% in the right direction, the trader will make a profit of 1,000 GBP.
However, what many novice traders forget is that it works both ways. With the same trade leveraged at 100:1, if the price of the currency moves 1% against the trader, he or she would make a loss of 1,000 GBP. Another way to put this is that this trader would lose 100% of the initial deposit.
The higher the leverage, therefore, the less adverse movement in the price of the currency is required in order to wipe out the trader’s initial deposit. Of course, if the price goes in the right direction, the profits would also be much higher with a high-leverage trade.
For novice traders, it is probably wise to steer clear of very highly leveraged trades. These traders are more likely to make mistakes and with higher leverage these mistakes will cost them much more than with lower leverage trades.
How to use Bollinger Bands for more successful Forex Trading
Even if you use the service of a professional advisory facility such as the Forex Factory, you will still need some knowledge of technical and/or fundamental indicators in order to become a successful trader.
Whilst the simple moving average is sufficient for many novice traders, you could most likely enhance your chances of success significantly if you combine this with another technical indicator. Our recommendation in this regard is the well-known Bollinger Bands.
These bands are actually quite easy to read. The way they work is this: when the market becomes very quiet, the lines start moving closer together and form something that looks similar to a tunnel. When the market becomes very active with large price movements, the Bollinger Bands move further apart.
One of the most popular ways to use Bollinger Bands is the famous ‘Bollinger Bounce’. The underlying premise here is that when the price of a currency reaches the upper or lower band, it usually bounces back to the middle. So if you have a range-bound market with narrow Bollinger Bands and the price of the currency hits the upper band, there is a very high likelihood that it will bounce back and move towards the middle of the bands.
Bollinger Bands can also be used to do ‘breakout trades’. This is when the price reaches the boundary of the bands and does not bounce back as expected, but break out of the bands. This is usually a signal that we can expect higher highs or lower lows.
Forex software and information
At a time when electronic trading is ubiquitous, investors require the necessary tools to help them analyse a plethora of market information, and to respond to the information in a profitable way. forex trading software facilitates timely and effective currency trading.
A quick search of the internet shows all of the various online forex systems available for investors to download.
Many platforms provide access to a forex demo, so investors can actually try out the software system for themselves before committing to it. Investors should ask themselves, before they sign up for a particular platform, what their exact needs are, and at what the level of expertise and experience they consider themselves.
In terms of forex indicators or charting software, installing one system alone is generally not enough for an investor seeking to analyse all market indicators. In an overall sense, software allows the forex trader to conduct timely trades in response to changes in the market. The software facilitates both timing and precision efficiency. Using the online trading platforms, a trader is able to combine charts and indicators to help in creating strategies. The forex signals on each chart meet at a point at which they agree on a potentially profitable trade.
Software also helps a trader conduct a detailed analysis of winning and losing trades for future reference.
The best forex software incorporates robust security features to protect accounts from unauthorized access, and therefore, providing investors with peace of mind.