In this Blog, we will be taking a deep dive into how to start Forex Trading. We receive hundreds of emails and questions from you guys asking how you can start Trading the Forex Markets. So we thought we’d create this post as a general guide to help you start your Forex Trading Journey. Below are the sections this post will be split in to, feel free to navigate your way to the one which suits you most:
- Analysis of the Market
- How to read a Quote
- Starting Trading
- So to start off with, the basis for all Trade Setups and Ideas comes from a kind of analysis. This can either be Fundamental or Technical. While a large proportion of the forex market’s activity is dominated by currency exchanges between large international banks, A small minority of the market’s activity is utilised by forex traders who attempt to take advantage of the price fluctuations that exist between currencies, with the hope of making a profit. As mentioned above, there are two main types of Analysis, and we will cover both of these below:
1a: Fundamental Analysis
Forex Trading Fundamental Analysis involves studying the economic calendar, news events, government data releases and policies as well as the intrinsic value of currencies. Common things to look at while conducting Fundamental Analysis are:
- Inflation Rates
- GDP Figures
- Interest Rates
- Balance of Payments Deficit
- Fiscal and Monetary Policies
- How interventionist government policies are
How a Government handles a country’s current account, inflation rate, interest rate and financial policies are the driving factor behind how strong/weak a currency can look on a global stage against the others. There can also be considerable market moves when news and other economic information is released. Many traders utilize this information and data to inform and aid their trade ideas, and therefore inform their trading decisions.
1b: Forex Technical Analysis
Forex Trading Technical analysis involves the study of current and historical price action over time, and the practice of trying to use this data to predict what might happen next. The most common Technical Analysis Tools are;
- Chart Patterns
- Moving Averages
- Stochastic Indicators
- Point and Figure Charts
- RSI Indicator
- Elliott Wave Theory
- MACD Indicator
- Fibonacci
Traders in forex trading markets can use many of the same western technical analysis techniques as other markets, including trading patterns like wedges, triangles, channels, double tops and bottoms and head and shoulders. Forex traders also are able to use eastern technical analysis techniques, such as identifying patterns on candlestick charts, particularly for short-term term trading and identifying key turning points. Some of the more popular forex candlestick patterns used for analysis include dojis, hammers, hanging man, morning and evening stars and engulfing candles.
2: How to Read a Forex Quote
An exchange rate can be difficult to understand at first, but it’s easy once you understand how to read it!
An exchange rate is one currency measured against the other, so, lets use GBP/USD as an example here. At the time of writing this, the GBP/USD Rate is 1.3925. This means that 1 Pound Sterling will buy you 1.3925 US Dollars.
In the Forex Trading Markets, the Base currency is always quoted first. This is known as the Base Currency. In the example above, GBP (Pound Sterling) is the Base currency and USD (US Dollars) is the secondary currency. The secondary currency is often called the Quote Currency.
3: How to Start Trading Forex
3a. Developing your Trading Plan
A trading Plan is paramount to your success in the Markets. The key to your success comes from having an Edge in the Markets, which is a way to repeatedly beat the odds with the same method, which leads to consistent profits over a long period of time, and ultimately financial independence. It is important as a successful trader to adhere to your pre-set rules. This will help to protect you from yourself. Very often, your emotions will tell you to do something controversial or contradictory to what your trading plan states. Traders that adhere to their trading plan are better able to resist the emotional temptations that are present in speculative markets. Following a trading plan can also help you to reduce stress, maintain objectivity and learn from your mistakes when learning to trade forex.
When you create your Trading Plan, ensure it answers the following questions:
- Are you comfortable holding risk open overnight?
- What are your preferred Trading Times?
- What is your Risk Appetite?
- What are your Profit Targets?
- What are your Stop Loss Rules?
3b. Develop a Risk Management System
One of the more common mistakes made my new traders is not following a Risk Management System. This is the fastest way to blow all of your money. The volatility that exists in this market, which is the largest in the world, means that price can swing from one direction or point to another within a matter of minutes, and sometimes seconds. This can play on a Traders emotions which leads to over-risking, over-trading and ultimately failure. 90% of traders will fail at this mark, so if you can create and stick to a Risk Management System, you’re already more than one step ahead of the rest. When you create a Risk Management System, you should consider the following:
- How do you apply and distribute Risk within your strategy?
- What is your minimum viable Risk to Reward for a Trade to be Valid?
- How well protected are your Stop Loss levels?
3c. Know which Markets you want to trade:
There always have been and always will be winners and losers in the markets. However, successful traders shift the balance of probabilities in their favour by continually gaining knowledge about the markets within which they spend so much of their time. Knowing the characteristics of the markets within which you trade can really improve the edge you have over other traders and therefore the market as a whole. Sometimes, sticking to a few currency pairs and really getting to know the way they move can be advantageous, this can also help shift the odds in your favour. Before placing a trade in the Forex Markets, you should ask yourself:
- What are the Fundamental Factors driving this currency? Do I understand them?
- What are the underlying time zone characteristics?
- What are the key Economic Events that relate to this pair? Always be sure to check the economic calendar before entering a trade to make sure you are aware of high impact news, and can therefore manage risk accordingly.
Summary:
Assuming that every trade with no preparation, prior research or strategy will be profitable, will place more risk upon an already risky environment. Whenever trading, as well as having a well-versed strategy in place, risk management tools like stop-losses should be implemented to prevent significant losses.