Trading Tips for Forex Beginners

Basic Trading Tips (Forex Beginners)

Forex trading is a highly complicated game, these 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 very aggressively, compared to others. Furthermore, currency pairs trade within specific seasonal patterns. For example, during April, the British Pound against the US Dollar tends to appreciate more than 80% of all time. » When to trade Forex

Table: Forex Currency Pairs & Volatility

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

Find the most complete Forex Trading Guide on the web: » 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 (that last from many months to many years)

Following the macroeconomic trend is the wisest thing 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 the broker that offers the most competitive overnight rate for the pair you want to trade

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

Speculative trends are very common in the Foreign Exchange market. Being able to identify the right timing to trade a speculative trend is difficult, therefore, use tight leverage when you enter the market, and exit your positions by 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 only using fundamentals.

» 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 the potential of your total loss. Unexpected news can create extreme volatility in the market. If you are trading using trading leverage, without a stop-loss, in the long term, you will probably lose all your total capital. Trading without a stop-loss is like going to war without a shield. Furthermore, any technological inefficiencies, like for example a PC breakdown, can lead to extreme losses without a stop loss.

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

-The best way to deal with this situation 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 see Trading Leverage as a gift from their broker. In reality, high capital leverage is more a liability than an opportunity. The use of capital leverage increases trading risk and at the same time widens 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 you use high leverage you will probably lose your capital in a matter of a few months. High capital leverage forces traders to place their stop-loss orders close to the current price and that makes them very vulnerable to market volatility. High capital leverage should be used only on special occasions when the probability of winning is high.

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

-Limit your trading leverage to a point that 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 very crucial when trading Forex, especially as concerns the selection of trades based on their potential profitability. The Profit/Loss ratio can also be described as the Reward/Risk ratio (RR).

If you choose trades with a low Profit/Loss ratio (for example P/L= 1) you will probably lose money in the long run. For example, let’s suppose you have executed 100 low-rewarded trades in a certain period as follows:

- 52 winning trades

- 48 losing trades

If your profit/loss ratio was P/L=1 you have lost money. That is because you pay a spread or a commission in every trade you execute, and the price of the trading spread in 100 trades will be larger than the profit of 2 trades (52-48). So it is far better to wait and execute only trades with a high Profit / Loss ratio (P/L>3). This is especially valid for currency pairs that are offered in high spreads (minors).

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

In continuation of the previous tip, Forex traders should run their profits and cut their losses. That means when a trade is highly profitable, you don't have to close it. Running your profits means that you trade along with the trend.

-Remember that professional traders make 80% of their annual profits by 20% of their annual trades

-You don't have to be right most of the time to beat the market. If you run your profits you can be right only a couple of times and still make a lot of money

-You can use a trailing stop to secure a great portion of your profits without having to close early a winning trade

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

Being able to accurately evaluate the master support and resistance levels is crucial to optimizing your decision-making process. Currency pairs tend to accumulate and move slower when reaching major support and resistance levels. In addition, volume activity tends to increase near major S&R levels. Identify and respect the major support and resistance levels when entering your pending orders. To identify major support and resistance look left by using the monthly, weekly, and daily charts.

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

• Focus on the Monthly and Weekly closings, lower timeframes are far less important

• Focus on closing prices of months and weeks (body of the candle/bar), not on the wicks

• As concerns moving averages, focus on the SMA(21), SMA(55), and SMA(200)

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

There are certain hours when the Forex sessions overlap. During those hours, the volume increases by offering greater trading opportunities. In the table below you can see the two Forex Market time zones.

Forex Sessions Overlap

(i) At times when the European and the American markets are both open (between 8 am to 12 am EST) trading GBP/USD, EUR/USD, and USD/CHF can lead to better performance.

Other good times for trading include:

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

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

Most Volatile Days of the Week

Some days of the week tend to be more volatile than others. In general, volatility in the Forex majors tends to be larger in the middle of the week, especially as concerns Tuesday and Wednesday. Mondays are static. Fridays are also weak in terms of volatility, as most Forex traders choose to close their positions towards the weekend.

■  Forex Trading Tips

G.P. for FxPros.net (c)