Trading Tips for Forex Beginners

Basic Trading Tips (Forex Beginners)

Forex trading is a highly complex activity. Here are some simple trading tips from FxPros.net:

Forex Trading Tip 1: “Know what you are trading”

The market behavior of all Forex pairs is not the same. Some currency pairs are much more volatile and trend more aggressively than others. Furthermore, currency pairs often trade within specific seasonal patterns. For example, during April, the British Pound against the US Dollar tends to appreciate more than 80% of the time.

» When to trade Forex

Table: Forex Currency Pairs & Volatility

Knowing the special features of each currency pair can make a significant difference. That is why it is better to trade a couple of Forex pairs rather than 8–10 pairs. Knowledge is power when trading Forex.

• Forex Trading Guide on FxPros.net: » Forex Trading Guide

Forex Trading Tip 2: “Follow the trend”

There are two main types of trends in the Foreign Exchange market that you can trade:

(i) Macroeconomic trends (lasting from many months to many years)

Following the macroeconomic trend is the wisest approach for any long-term Forex trader. Major central banks such as the FED, BoJ, and ECB have the monetary tools to control these macro trends. Never trade against the intentions of a major central bank.

• When you open a long-term position in the Forex market, you are exposed to the overnight rate (SWAP)

• Find a broker that offers the most competitive overnight rate for the pair you want to trade

(ii) Speculative trends (lasting from a few days to many weeks)

Speculative trends are very common in the Foreign Exchange market. Identifying the right timing to trade a speculative trend is difficult; therefore, use tight leverage when entering the market and exit your positions using trailing stops.

• Speculative trends are common in ranging markets

• Technical analysis is the best tool to identify speculative trends. However, when there is a major fundamental change at the macro level, avoid using technical analysis and trade using fundamentals only.

» Identifying the Forex Trend

Forex Trading Tip 3: “Always use a Stop-Loss order – it is your trading shield”

If you trade intraday, a stop-loss order can minimize your potential total loss. Unexpected news can create extreme volatility in the market. If you are trading with leverage and without a stop-loss, you will likely lose your entire capital over the long term. Trading without a stop-loss is like going to war without a shield. Additionally, any technological failures, such as a PC breakdown, can lead to severe losses without a stop-loss in place.

• A stop-loss is very important, but keep in mind that brokers often use stop-hunting techniques

• The best way to deal with this is to (i) limit your trading leverage and (ii) use very wide stop-loss orders

Forex Trading Tip 4: “Trading Leverage is not an opportunity, it is a liability”

Forex beginners often see trading leverage as a gift from their broker. In reality, high capital leverage is more of a liability than an opportunity. Using leverage increases trading risk and also raises trading costs. Don’t forget that trading is not free—you are paying either high spreads, trade commissions, or both.

If you are a beginner and use high leverage, you will probably lose your capital within a few months. High leverage forces traders to place stop-loss orders close to the current price, making them very vulnerable to market volatility. High leverage should be used only on special occasions when the probability of success is high.

• Again, don’t forget that brokers often use stop-hunting techniques

• Limit your trading leverage to a level where your position is not vulnerable to unfavorable intraday volatility

Forex Trading Tip 5: “Accept only trades offering a high Profit/Loss Ratio”

Money management is crucial when trading Forex, especially when selecting trades based on potential profitability. The Profit/Loss ratio, also known as the Reward/Risk ratio (RR), is essential.

If you choose trades with a low Profit/Loss ratio (e.g., P/L = 1), you will likely lose money in the long run. For example, suppose you executed 100 low-reward trades as follows:

• 52 winning trades

• 48 losing trades

If your Profit/Loss ratio was P/L = 1, you would still lose money. This is because you pay a spread or commission on every trade, and the total cost of the spread over 100 trades would exceed the profit from just 2 trades (52–48). It is far better to wait and execute only trades with a high Profit/Loss ratio (P/L > 3). This is especially important for currency pairs with high spreads (minors).

Forex Trading Tip 6: “Run your profits: Professional traders make 80% of their profits from 20% of their trades”

Continuing from the previous tip, Forex traders should run their profits and cut their losses. When a trade is highly profitable, there’s no need to close it immediately. Running your profits means trading along with the trend.

• Remember: professional traders make 80% of their annual profits from just 20% of their trades

• You don’t need to be right most of the time to succeed. If you run your profits, being right only a few times can still yield strong returns

• Use a trailing stop to secure a large portion of your profits without closing a winning trade too early

Forex Trading Tip 7: “Accurately identify major Support and Resistance levels”

Accurately identifying key support and resistance levels is critical to optimizing your decisions. Currency pairs often accumulate and slow down when approaching major support and resistance areas. Volume activity typically increases near these levels. Always identify and respect major S&R levels when placing pending orders. Use the monthly, weekly, and daily charts to look left and find these levels.

• Investigate the Monthly, Weekly, and Daily charts (ignore lower timeframes)

• Focus on Monthly and Weekly closing prices—lower timeframes are less significant

• Prioritize closing prices (body of the candle/bar) over the wicks

• For moving averages, focus on SMA(21), SMA(55), and SMA(200)

Forex Trading Tip 8: “Choosing the best time to trade”

Certain hours see overlaps between Forex sessions. During these hours, volume increases, offering better trading opportunities. Refer to the table below for the two major Forex market time zones.

Forex Sessions Overlap

(i) When both the European and American markets are open (between 8 a.m. and 12 p.m. EST), trading GBP/USD, EUR/USD, and USD/CHF can yield better performance.

Other good times for trading include:

(ii) 1 a.m. to 3 a.m. (EST), when the European sessions are starting and the Asian sessions are closing.

(iii) 7 p.m. to 10 p.m. (EST), when the Asian and Australian sessions overlap.

Most Volatile Days of the Week

Some days of the week are more volatile than others. Generally, volatility in the Forex majors tends to peak in the middle of the week, particularly on Tuesday and Wednesday. Mondays are typically static, while Fridays are also low in volatility, as most Forex traders prefer to close their positions before the weekend.

■  Forex Trading Tips

G.P. for FxPros.net (c)