I’ll start by shortly explaining who I am. My name is Steve and I have been trading currencies for 3 years now, and last two and a half of them – quite successfully. It took quite a lot of learning and surprisingly, the most important things I had to learn weren’t even about Forex. Instead, I had to learn about my own psychology and how to apply this to trading. So this forex trading tutorial will deal both with technical and psychological aspects of trading, because my firm belief is that they are equally important.
There is a famous saying in Forex community – “any idiot can read a chart”, and this is something I can only agree with – the technical side of trading is dead simple. What makes people lose money, it is their greed in one form or another.
I can’t stress this enough – there is absolutely no need for you to lose any money trading currencies. Period.
Let’s get on with our tutorial.
First, some basics
Forex, as you probably already know, is a global market where companies, banks and people exchange currencies. The size of this market is enourmous – the volume of all the trades is around 4 trillion dollars every day! Technically, though (if you are going to quote me on this) you should know that retail Forex traders (like you and me) trade spot FX market, which is around 1.5 trillion. Make no mistake.. this is still huge. For example, the NYSE (New York Stock Exchange) market volume is 74 billion. Way less.
Forex trading, in essence, is the simultaneous buying of one currency and selling of another. We trade through brokers, and we trade in pairs. For example, EUR/USD, AUD/JPY and so on. Basically you buy or sell a pair of currencies. Exchange rates fluctuate all the time based on which currency is stronger at the moment – ie, if a dollar gets stronger the EUR/USD exchange rate falls – since you now need less dollars to buy euros.
We, Forex traders, make money by predicting those movements. For example, if I believe that over, let’s say, a day, the dollar will get stronger (which would mean the EUR/USD rate falls) I’d sell the EUR/USD short – in essence, that means I’m selling something that I don’t have, borrowing money (against my trading capital) and counting that the exchange rate will fall just as I predicted. When it comes time to close the trade, and the exchange rate has actually fallen, it is time to collect the profits.
Market analysis
Of course, to make any predictions you have to analyse the market. Now this might sound scary, but in fact don’t oversweat this, at least in the beginning. It is perfectly possible to make money with very simple support/resistance trading, you just have to understand that you won’t be 100% right and there will be losing trades. The key is to plan your risks accordingly.
There are three types of market analysis, and while there are people that swear by each one of them, I sort of think that you should at least know all of them. Here they are.
1. Technical analysis – the theory behind it is that traders can look at the historic price movements, and predict what will the market do in the future. We use charts to do technical analysis, and while there are a lot of complex patterns, I believe that the more complexity, the less likely the trade will work.
2. Fundamental analysis – means that a trader analyzes the economic, social and politic forces that determine the supply and demand of an asset. An example would be, if you see that the economy is bad in the United States, you could deduce that the dollar would get weaker on foreign currency exchange markets, and buy EUR/USD.
3. Sentimental analysis – if you thought that the previous two were esoteric, this one will take the crown Sentimental analysis means that you analyze the market sentiment – for example, if all traders think that dollar will go up, it actually will go up because all the traders are selling eur/usd, thus increasing the demand for this asset, and it will have nothing to do with any technical support/resistance or any fundamental data.
As I said though, you have to sort of keep the big picture in your mind. Myself, I basically trade according to technicals, and keep an eye out for fundamentals – news releases, economic data and so on. Also I check trader sentiment every now and then because there is no point in going against the wave.
Ok, so how do you actually spot the trades worth entering in?
This, of course, is the million dollar question. If anyone knew this for sure, they would be very very very rich. And the world as we know it would’ve collapsed. However, since this is a forex trading tutorial, I feel that I at least should offer you information on what I, personally, do.
I trade simple support/resistance, and I usually wait for some sort of confirmation. The idea behind support/resistance is that, for some reason (could be fundamental, could be sentimental..) a certain price point gets resisted (if the market goes up) or becomes support (if the market goes down). Once the price reaches that point, I watch very carefully – and if I get my confirmation (very simple – watch for more than one time of the price resisting/bouncing off a certain level) then I know it is time to enter the trade.
Believe it or not, I’ve made some decent money using this strategy There really is nothing more.
Now you may wonder why such a primitive strategy works? The answer is simple.. and yet complex at the same time. Because it deals with who you are as a human being.
Trading psychology – managing your risk and exiting trades at the right time
The trading psychology is a subject that will make or break you as a trader. At all times, you should remember at least these things. They are really important.
Manage your risks. Never, ever, risk more than 2% of your trading capital on any single trade. I actually like to keep it at 1% but I think that 2% is acceptable as well. Remember, this comes from someone who does actually makes money trading Forex! So if you are not making any money now and are thinking of risking 50% on each trade.. well go away and never trade forex, at least until you reconsider. That is simply reckless trading and a sure way to lose your capital.
By risking 2% on each trade I mean that your maximum loss if the trade goes south should be not more than 2% of your capital. The trade going south is determined by your stop loss – something you should always use. I usually place the stop loss around next significant support/resistance zone, and size my position accordingly.
However, it is funny that I find the losing trades pretty easy to manage. What came hard to me was managing winning trades. I mean, how do you actually know when it is time to take your profits and close the trade? I can’t even count the times when I lost money just because I was too greedy and thought the trade would run some more – just to watch my profits disappear because market decided to go the other way!
Nowadays I just wait till the trade goes in profit and market stabilizes there, and then I move my stop loss to a break-even point. That means that even if the market goes against me I won’t lose a single cent of my trading capital.
Remember – your trading capital is your life and you should protect it. A break-even trade is a win in my book.
The greed is something you will probably find very hard to manage at first.. Remember to be calm about everything – thats why I’m telling you to risk no more than 2% of your trading capital on any trade – this will make you calmer and also allow room for error – because all we, as forex traders, can hope for, is that our winning trades will exceed our losing trades, and our trading capital will grow.
Conclusion
This forex trading tutorial is by no means complete. You should seek other resources, and learn as much as you can about it.
Always remember, that currency trading is a high risk investment. I don’t say this for legal reasons. I genuinely don’t want you to lose your money. Start with a demo account, these are free. Only when you feel ready, you should graduate to real account.
Guys, let me repeat this one more time. This is high risk stuff, and this is not a get rich quick thing. I wish you all the profits, but please understand that these come with work and caution! Good luck!