Forex Trading Guide

Forex Traders Guide -Forex Trading Briefly Explained at FxPros.net

Fx Traders Guide

They say that beauty lies in simplicity but unfortunately this is not true when Trading Forex. If you are seeking for something simple to trade you are probably in the wrong place. Online Forex trading looks easy but actually is the most complex type of trading in the world. There are hundreds of fundamental and technical variables, changing 24hour per day. So Forex is certainly not a toy, although it is advertised by brokers as one. 

Forex Trading Preface

Forex is the place to trade the global currencies. Currencies are basically exchange mechanisms used for the global trading of goods and services. Importers and exporters, large corporations, investors and banks are only some of the participants in the Forex Market. The Forex market operates like the internet, it is not centralized, and it exists in the electronic network of banks. Forex is a huge market with a daily activity turnover worth more than 3 trillion USD. The Rules of the game in Forex are different from those in stock-trading or of those of any other classic form of trading, but many similarities can be found too.

This article aims to uncover all major Forex fundamental aspects in order to achieve a successful long-term trading experience.

 

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What Distinguishes Forex from Classic Investment Types

Three factors mainly distinguish Forex from classic types of Investment: i) Liquidity ii) Capital Leverage and iii) Pre-Determined Loss Acceptance

1) High Liquidity

First of all it is the Liquidity. Forex is more liquid than any other market in the world and that is important as all orders can be filled at anytime. Furthermore, liquidity creates competition among brokers, so the trading cost is minimized (using an STP or an ECN broker). The trading cost in Forex Trading is mainly concern the spread between the ask and the bid prices. The spread may be as low as 5 pips on popular currency pairs, and that usually means 0.0005 of the arithmetic value of the exchange rate. It looks like a small brokerage charge but high leverage can make it really big. Some brokers are additionally charging trading commissions, but most brokers nowadays don’t.

2) High Capital Leverage

This is what made Forex popular among all traders. The leverage in Forex Trading can be up to 500:1, or even more. But here is a trap.

“Leverage looks like your friend but actually it is a friend and an enemy at the same time”.

As long as you are not a highly experienced trader, it is far better to use leverage no more than 50:1. Leverage more than 100 will increase your trading risk in a very unfavorable extend. Keep in mind that low spreads are found only on popular Forex pairs, the Majors (1) such is EUR/USD and GBP/USD, USD/JPY etc. Less popular assets, called the Minors (2), are provided in much higher spreads and that combined with high leverage may be bad news for any trader. Even-less-popular currency pairs are called the Exotic Pairs (3). The Exotic pairs are offered in extremely high spreads and therefore traders should generally avoid them. To provide an example, the following variable spreads are measured on a popular STP Forex broker (not charging commissions):

Table: Typical Spreads without Commissions charged

SYMBOL

CURRENCIES

SPREAD (Daily)

PIPS (Late Hours)

EUR/USD

Euro versus the American Dollar

from 1.6 pip

to 2.1 pips

EUR/AUD

Euro versus the Australian Dollar

from 3 pips

to 5 pips

NZD/SGD

New Zeeland Dollar versus the Singapore Dollar

from 35 pips

to 45 pips

Its is obvious that the less popular an asset is, the more expensive becomes to trade it, and the less Leverage you must use.

3) Pre-Determined Risk using Stop-Loss Orders

Placing the right Stop-Loss orders can make the difference in Forex trading. A stop-loss order predefines the maximum level that you are willing to risk in the market at anytime. So if EUR/USD is at 1.3000 and you thing that is going up, you buy it and at the same time you give a Take Profit and a Stop-Loss order. In the example:

Buy at 1.3000 | Stop Loss: at 1.2949 | Take Profit: 1.3150

Now using a simple equation it is possible to find out if this order is right. By dividing the Profit Potential which is calculated as 1.3150-1.3000=150 pips to the Loss Potential which is calculated as 1.3000-1.2949=51 pips, we get the profit to Loss Ratio, which in this example is 150/51=2.94.

This is a good P/L Ratio, as it is more than 2.5.

The Profit to Loss Ratio on your trades must always exceed the arithmetic value two (P/L ratio>2).

■ Profit / Loss Ratio = {Potential Profit-Spread Charged}/{Potential Loss}

Forex Trading Tutorial

How you can Trade Forex Successfully

A general strategy to trade Forex is presented bellow. A trading strategy is simply a way to increase your odds when trading. In order to trade successful you will need 60%+ winning ratio. That means for every 10 trades the 6 are winning and the 4 are loosing. The trading strategy that is presented below is based on market research and the use of technical analysis. Here are all the four (4) steps to be followed at all the times:

Step-1: Use a Highly Regulated and Highly Competitive ECN/STP Forex Broker

Using brokerage reviews and comparisons, the suitable Forex Broker can be found. In a few words this is the profile of the ideal Forex Broker for an average trader:

i) ECN/STP Forex Broker not a Market Maker (that means direct order placement without intervention and execution delays)

ii) Highly Regulated by trustful authorities (for example MiFID, CFTC, FSA UK etc) and providing segregated accounts to its clients.

ii) Offering a wide variety of Forex pairs to choose & charging narrow spreads (For example EUR/USD spread no more than 1.2 pip and without charging commissions).

iii) Providing a Trading Platform with low slippage, which means fast order execution (absolutely important fact for day-traders).

iii) Offering many trading choices as many different platforms, automated trading, many fund methods etc.

iv) Offering a Trading Rebate using an Introducing Broker (IB), or a deposit bonus, or a match-up bonus or other.

v) Offering a micro-lot account, which is absolutely necessary for Forex beginners. A micro-lot is the best way to try a new broker or a new platform but even a new currency asset.

A BUILDER -FREE FOR CREATING MT4/MT5 INDICATOR

 

Step-2: Identify the Right Forex Pair to Trade using Technical Analysis

In order to identify the right Forex Pair among the tens of available pairs, you must take advantage of market research and technical analysis. Technical analysis is very important when trading Forex and therefore it is highly used by professional traders. Here are the key technical analysis tools of Forex Trading:

a) Support & Resistance Points -Define a possible reverse of the mid-term trend

b) Pivot Points -Defines a possible reverse of the short-trend

c) Trend Lines, (/) or (\) -Define a possible reverse of the short-term or the mid-term trend

d) Fibonacci Retracement -Define the correctional levels of the short-term or the mid-term trend

It is very crucial to start from an historic chart and pinpoint there the major support and resistance levels of a Forex pair. After you must also research a 1-hour chart and finally the 1-minute chart, to define the optimal entry and exit point levels at any specific trading time. Focus always on the correlations between the currency pair that you are trading with other related pairs. For example if you trade EUR/GBP you must concentrate on GBP/USD and EUR/USD also. These two pairs are more liquid than EUR/GBP and their performance will highly affect the performance of EUR/GBP at any given trading day.

If choosing the right pairs is proven difficult for a trader, then he may use a Forex Signal Service. These services are provided with a monthly fee. Some Forex Signal Services worth a try. » Compare Forex Signal Services at Forex Automatic

More advanced traders could also try a Forex Robot, but with extreme care and by testing this piece of software extensively on a demo account first. » Compare Forex Robots at FA

Step-3: Be sure that Upcoming News are not going to Disturb your Trade

This is very important. You can use an economic calendar to check the news. If you can not understand macroeconomics it is better not to trade 30 minutes before and 30 minutes after important news are released in the market. In the following chart you can see what happens on days when the news is good for a particular Forex currency (in this example the Euro Currency).

Chart: EUR/USD 3-days time frame

EURUSD CURRENCY PAIR

Step-4: Focus on the Mid-Term and Take Advantage of a Strong Trend

Many understand Forex as a gambling machine and that is why they end-up trade intraday and everyday. Trading Forex everyday incurs many risk hazards for traders and thus after sometime may lead them to total losses. The secret is to trade thinking the mid-term and acting in the short-term. It is always better to choose Forex pairs that are on-the-move on a monthly basis . In Forex trading you must always follow-the-trend, but not the short-trend, the mid-trend instead. Usually currencies are following certain cycles, and that is because Currency rates are highly affected by macroeconomic conditions. Historically speaking, the macroeconomic conditions of any economic zone have the tendency to make certain cycles. A regular macroeconomic cycle usually lasts 7 to 8 years. The best way to trade is to choose a pair using mid-term analysis and to pick your optimal entry/exit point levels using short-term analysis.

“Thinking Like an Investor while Acting Like a Trader”

Take advantage of a Long-Term Forex Trend

If you research many long-term charts you will find that many pairs are following a certain long-term pattern. For example the currency pair EUR/TRY (EURO against the Turkish Lira). As the Turkish inflation is about 6.5% and inflation in Eurozone is about 1.4%, EUR/TRY has a bullish long-term tendency. But it is not moving straight forward, instead it fluctuates in a certain uptrend channel, moving up and down. You must buy a pair that has already reached the low limit of its cycle. Here is the historic chart of EUR/TRY using MetaTrader4.

Chart: EUR/TRY Historic

EURTRY CURRENCY PAIR

 

The Two Forex Analysis Methods

As in every other financial market, Forex market analysis is based on two methods: the fundamental and the technical analysis. News is incorporated in Fundamental analysis.

1. Fundamental Analysis

This type of market analysis is based on demand and supply market figures. It is mainly used by mid-term or long-term currency investors. This type of analysis does not take into consideration the short-term currency fluctuations which are seen as the ‘Market Noise’. The fundamental analysis is mainly including macroeconomic factors such are:

i) The level of interest rates (very important).

ii) The trade balance and the current account balance.

iii) The GDP, national budget and the public debt to GDP (very important).

iv) The national income, money supply, consumption, private investment and the unemployment rate.

v) The domestic industrial production, retail sales and the level of factory orders.

vi) The volume of consumer and mortgage credit.

vii) Inflation indicators (very important).

2. Technical Analysis

This type of market analysis is based on historic data such are closing prices, open prices, high/low prices and volume activity. Popular technical analysis tools in Forex Trading include Moving Averages, the RSI index, MACD and the Fibonacci Retracement. Technical Analysis aims to define the master trend of the market which may be either being bullish, bearish or neutral. Automated Forex trading uses also technical analysis. Automated trading is achieved using Forex Robots which are also called Expert Advisors.

Forex professionals are using both fundamental and technical analysis to forecast future market movement, it is highly recommended for every trader to do the same.

 

Final Thoughts

Most new traders think that they can become rich in a matter of weeks. Actually they usually loose all their funds in no-time. Every trader should always:

1) Checking the spread and be sure about it before buying or selling any Forex Currency

2) Learning about the time of important upcoming news, and mainly avoid them

3) Not using more leverage than it can really be afforded (50:1 is great)

4) Knowing the crucial Support & Resistance Levels and placing orders by respecting them. (That means Target-Profit before Resistance and Stop-Loss after support)

5) Never forgetting to place a stop-loss, the extend of what is coming is simply unpredictable

6) Seeking movements that last a couple of days, not intraday

8) Using a Profit/Loss Ratio more than 2

7) Taking nothing for granted, researching and double-checking any information or Forex trading signal

It is better to avoid trading live, place your orders and go spend some time with your family and friends. Trading live will lead you to execute a great number of trades each day. You don’t need many trades to make good money, you just need one.

 

Broker Ratings: » Enter FxPros Ratings Section

Find more: » Forex Trading Tips | » Fx Market Statistics | » Choosing Fx Pros | » Forex FAQ for Traders

 

Broker Reviews:  » XEMarkets | » RoboForex | » Dukascopy | » Iron Fx

 

■ Giorgos Protonotarios, Financial Analyst 

FxPros.net Trading Guide -Copyright (c) 2013

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They say that beauty lies in simplicity but this is not true when Trading Forex..

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» Forex Glossary

» FAQ for Forex Traders

» Choosing Forex Brokers

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» Volatility Factor Review

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Forex Historical Statistics:

» General Statistics

» Market Volatility

» EUR/USD

Important Forex Trading Tips

1: Trade Forex at the Right Broker (best ECN / STP)

2. Know What you are Trading

3: Lean about Important Upcoming News

4. Identify and Respect Support & Resistance Levels

5. Use always a Stop-Loss and Respect Support Levels

6: Follow the Trend or Trade the Range (Choose Wisely)

7. Adjust your Leverage according to the Current Market Volatility & Liquidity Conditions

8: Execute only Trades Worth the Risk (High Profit / Loss Ratio)

9. Choose Trading at Times When the Trading Cost is Minimized (Tight Spreads)

10. Run your Profits and Cut your Losses (Statistically the best Trading Strategy)

G.P.

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