Beginners Guide To Forex

Written By Marco Hering (FT)
Euro Session Trading Coach

How To Choose Your Broker

When getting started in Forex Day Trading you first my consider a Forex Broker. First of all you should get an idea how much time you want to spend on trading Forex, what you time horizon is and what goals you have. These decisions will have an influence on your choice of your broker. If you like to trade in short time frames and you have the time to be in front of your screens a couple of hours per day then your priority is to find a broker with tight spreads and fast execution orders. These kinds of brokers have the disadvantage that their spreads are often variable and might be widened in volatile market condition like during the announcement of news. If you trade in shorter time frames you usually want to be flat during the news since you trade often with a tight stop. Therefore for scalpers the widening of spreads for a few minutes is not really an issue since the time of increased volatility is often predictable if you look at the news calendar for the day. If you like to trade in a longer time frame or you don’t have the time to look at the charts all the time you should look for a broker with fixed spreads. These brokers don’t widen their spreads with increased volatility but have usually wider spreads during the regular market conditions. As a swing trader you don’t need to care to much about 1 or 2 more pips spreads since your trade frequency is muss less compared to a scalper and you also work with much larger target and stop levels. In general the cost of trading is muss less for a swing trader compared to a day trader. Look around in the internet to find a broker which fits you style the most. Brokers let you usually to try the charting software and trading platform for free on a demo account. Be aware though that actual execution of trades between the demo platform and the real money platform might differ. Nevertheless since you are new to trading Forex it is highly recommended to start you trading career with a demo account.

If you are just getting started in Forex Day Trading then chances are you have not yet Set up a demo account. This is easy. After registering at a broker of your choice you get and username and password and a download link for the trading platform software. With the demo account you can trade almost under real market conditions. The demo account also gives you the opportunity to play around with different chart templates and indicators.

Beginners Guide to Forex Charts

The charts are the most important tool of a trader except you trade strictly on a fundamental basis. Therefore setting up your charts in a way that you gain the important information out of price movements while not overloading your screens with information you don’t need is an important step to be become a successful trader. You have to find out what works best for you but for the start you should try to keep it simple. This means you should use a Bar chart or a Candlestick chart in whatever time frame you like. Popular time frames are the 5min, 15min, 1hour, 4 hour and the daily time frame. Your chart should also include the daily pivots for the day since these levels are static for the whole day and other traders watch these levels as well. I also recommend using at least one moving average. There is many possible setting for these MAs. You should again use settings which are popular. The more popular the higher the chance the Mas gets respected when the price touches the MA. A good choice is the 20 period Moving Average. If you put for instance the 20 simple MA or EMA at the 1 hour chart you get a line in your chart which shows you the average price over the last 20 hours. You will see that the 20 period MA often gets respected regardless of the time frame. As I mentioned earlier don’t try over complicating things first and do not add too many stuff at your chart. If you like you can add maybe one indicator to your charts as well. Popular indicators are the Stochastic, MACD histogram or Relative Strength Indicator. These Indicators can show you the strength of a trend or if a market is in oversold or overbought conditions. Keep in mind these indicators lag behind the price movement and mostly don’t tell you more that you already know by just looking at the chart. In higher time frames they can be useful tough and give an additional visual help. They can also be used to spot divergences about the price development and the momentum of the move. Nevertheless it is rarely a good idea to trade just on the behavior of a few indicators. As for a start one indicator is more than enough. Usually modern charting software offers a dozen of indicators. Just try out which one you like the best and try to stick with it. To master one indicator is better than to have five indicators on your chart which you don’t quite understand. In the end it is all about if you can really get additional information compared to a “naked” chart. Since this is a beginners guide to Forex I will stop here so as to not get in too much detail.

When is a Good Time For a Beginner To  Start Trading Forex?

Since this is a beginners guide to Forex I expect you are new, so there  is a very high chance that you are not successful at the beginning- even if you had some experience in trading other markets. Every market has its own laws and what may work in one market does not have to work in a different market. I highly recommend looking for some mentoring at the beginning of your trading career in Forex. The money you spend to get some education and to look over the shoulders of traders with experience is a much better investment than to just waste you money in the market. You might get lucky in the beginning on your own but it takes more than luck to be profitable over the long run. Trading is a complex “art” so you should at least have a basic understanding of what you are doing before you start. Read some books about trading in general and about the market you trade afterwards. You library should also include books about trading psychology, Money Management and Technical Analysis.

Recommended literature is:

Reminiscences of a Stock Operator by Edwin Lefevre

Market Wizards: Interviews with Top Traders by Jack D. Schwager

The New Market Wizards: Conversations with America's Top Traders by Jack D. Schwager

Technical Analysis of the Financial Markets by John J. Murphy

Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude by Mark Douglas

Trading Risk: Enhanced Profitability Through Risk Control by Kenneth L. Grant

I have to admit there are no really good books about trading Forex out there at least any I know of. Most books are more or less an introduction to the currency markets. I heard this following book is a good one for beginners but I did not read it myself:

Day Trading in the Currency Markets by Kathy Lien

Basic Trading Strategy For Forex Beginners

Since this is a beginners guide to Forex, I will keep this strategy simple. There are basically two different approaches to trade. You do either stick with the trend also known as trend following  or you try to fade the trend also known as counter trend trading. Trading with the trend seems like logic choice at a first glance. Newton’s first law of motion, “An object in motion will stay in motion unless acted upon by an outside force.”, can also be applied to trading. A price which moves in one direction will stay in the same direction unless a “force” will push it in the opposite direction. The “forces” in our case are traders who take trades against the trend. Once these counter trend trades overweight the other traders than the price will reverse in the opposite direction. You never know when that will happen though but you always have to pick your side unless you stay out of the market. Therefore you have to make sure that you don’t pick a bottom or a top of a move. A simply strategy to trade with the trend without fearing to pick exactly the end of a move is to wait for retraces in ongoing trend and then enter a trade in the direction of the trend. Let’s say the price made lower highs and lower lows in the 15min chart then you don’t sell the new low. You wait for the counter trend traders to push the price up again. We don’t know how far they will push up the price but since we want to trade with the trend we assume they will not push the price above the last swing high. The 20 period Moving Average I mentioned earlier is often a good place to enter the market. Sometimes the MAs might not be hit and you might miss a move but there is always the next opportunity waiting. But being patient pays off mostly and you minimize you risk if you put your stop just behind the last swing point. As for a target you can use the pivot levels. I recommend to put the stop at break even if the price reached the previous low or high of the trend or take some profit in case of a double top/bottom-.There are more advance strategies to find reasonable target levels like Fibonacci Levels but for the start we keep it simple. If you getting familiar with the basic strategy there is always time to add more advance stuff later, as I mentioned with a beginners guide to Forex I will keep this basic.

When should a Beginner in Forex  Move to a real Money Account?

If you have built some confidence trading your demo account then it is time to move to a real money account. The psychological demand is of course much higher compared to a demo account. Remember as a beginner in Forex Trading this is only a guide and It is important that you learn to control your financial risk as soon as possible. It is always important to keep in mind that you don’t have any influence on the movement of the price. Even the term “trader” is now common I think the term “risk-manager” would be more fitting in the financial markets. A trader outside of the financial markets knows the price differential of his buying price for a product and the selling price in advance. We as “risk- managers” don’t have that luxury. We take a bet on the further price development. But what we want to have in common with a trader outside of the financial world is to know how much a trade will cost us in the worst case scenario. Risk control is the only thing we have really an influence on and therefore it should be our priority. If you start to trade your own money and therefore risking your own money you should always make sure that your trading career should not depend on a single trade. It should also not depend on a few bad or good trades but thousands of trades. A single trade will often depend on a good portion of luck. It is like a poker hand. Even with the best hand you sometimes lose and with the worst hand you sometimes beat pocket aces. In the long run a good hand will have an edge above the average or below average hands. You just have to make sure that you are still in the game to take advance of your good hands. It is the same in trading. Make sure that you stay in the game and that a few losing trades don’t hurt you. The best setup sometimes fails but over the long run it can make you a nice return if you have still enough money to bet. There a very highly mathematical theories to optimize your betting size on each trade but for a beginner I recommend you to use a fixed risk of your trading balance. Depending on your risk profile I recommend to risk about 0.5% of your account balance per trade if you like to trade conservative. If you have a smaller account or if you trade more aggressive to maximum risk should be 2% per trade. If you following the advices in the beginners guide you should not burn your account but I still recommend your first real money account should be relatively small compared to your total wealth. It should not exceed 10% of your total savings. We want to make sure that even a total loss of your account would be not the end of the word. It is very important that your mind is not troubled with financial problem when you are trading and that you can sleep well. Never risk money you can’t afford to lose. I tried to make this beginners guide to Forex easy and I hope this has helped in getting you started in Forex Day Trading.

If you are interested in taking the next step to learn in our Forex Trading Room and Forex Signals  I would like to mention that the U.S. session Coach (BT) is keen on posting all of his Forex Day Trading Trades taken in the Live Room for public view and is tracked and verified by a third party website. Join our Twitter.