Forex Trading Guide

Forex Traders Guide -Forex Trading Briefly Explained

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 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.

 

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 any time. 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 includes the spread between the ask and the bid prices and trade commissions. 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.

“Trading leverage looks like a friend but actually most of the time is an enemy”.

As long as you are not a highly experienced trader, it is far better to use leverage no more than 30:1. Leverage more than 30 will increase your trading risk to 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 any Trade Commissions charged

SYMBOL

CURRENCY PAIR

SPREAD (pips)

EUR/USD

Euro versus the American Dollar

from 0.8 pip

to 2.0 pip

EUR/AUD

Euro versus the Australian Dollar

from 1.4 pip

to 3.0 pip

NZD/SGD

New Zeeland Dollar versus the Singapore Dollar

from 20.0 pip

to 35.0 pip

It is obvious that the less popular an asset is, the more expensive becomes to trade it, and the less Leverage you must use. Also, keep in mind that brokers often use stop-hunting techniques. Limit your trading leverage to a point that your position is not vulnerable to unfavorable intraday volatility

3) Pre-Determined Risk using Stop-Loss Orders

Placing the right Stop-Loss orders can make a difference in Forex trading. A stop-loss order predefines the maximum level that you are willing to risk in the market at any time. So if EUR/USD is at 1.3000 and you think 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 below. A trading strategy is simply a way to increase your odds when trading. The trading strategy that is presented below is based on market research and the use of technical analysis.

Here are all four (4) steps to be followed at all 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 from & Charging narrow spreads (For example EUR/USD spread no more than 1.1 pip without charging commissions).

iii) Providing a Trading Platform with low slippage, which means fast order execution (an 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.

 

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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. Focus on the monthly and weekly closings, and on closing prices of months and weeks (body of the candle/bar), not on the wicks

 

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 a historical 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

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 FxPros

Step-3: Be sure that Upcoming News is 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 every day. Trading Forex everyday incurs many risk hazards for traders and thus after some time 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 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) Unemployment reports (very important)

iii) Inflation indicators (very important)

iv) The GDP, national budget, and the public debt to GDP (important)

v) The national income, money supply, consumption, and private investment

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

vii) The volume of consumer and mortgage credit

viii) The trade balance and the current account balance

 

2. Technical Analysis

This type of market analysis is based on historical 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.

-Technical analysis is the ideal tool to trade both trending and ranging markets

-When there is a major fundamental change in the Macro level avoid using technical analysis and trade only using fundamentals

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. » More on technical analysis

 

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Final Thoughts

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

1) Check the trading spreads and overnight rates you are paying, before opening any Long/Short position on any Forex pair

2) Monitor the time of important upcoming news, and mainly avoid to trade 30 minutes before and after the news

3) Don't use high trading leverage (5:1 is great)

4) Identify key Support & Resistance Levels and place orders by respecting them (place your orders 10+ pips before/after key Support/Resistance levels)

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

6) Seek price movements that may last for a couple of days, don't focus on intraday trends

8) Use a Profit/Loss Ratio of more than 3

7) Take nothing for granted, research and double-check 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 a couple trades.

 

Broker Ratings: » Enter FxPros Ratings Section

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

Broker Reviews» AXI Forex Review | » FXTM  | » RoboForex | » Dukascopy | » IronFx

 

■ Forex Trading Guide

G. P.  for FxPros.net -Copyright (c) 2013

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Forex Historical Statistics:

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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)

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