Now that we know what Forex market is about and what influences the currency fluctuations, lets talk about the different ways of trading successfully. In order to discover what is a Forex trading strategy we need to understand the different tools and ways of trading on the market. We will also talk about different sites and services a beginner to Forex trading has at his or her disposal!
In the last article we introduced the Forex market, please make sure you read the article What Is The Foreign Exchange Market About before continuing with this one!
Common Forex Trading Techniques
Like with the equities market, the retail Forex market benefits from fundamental analyses, where traders use the economic announcements, economic growth and financial strength to evaluate the value of the given currency. There are literally thousands of different strategies for currency trading based on fundamental date, but to give a basic idea we will examine closer the Forex carry trade.
Forex Carry Trade
In this strategy the buyer is investing in currency offering higher interest rates and selling currency with lower interests, basically you are borrowing and low rate and reselling at higher, capturing the difference in the rate as a profit! This strategy also often helps the higher currency rise in value as money flows into it. For instance if an interest rate is near zero, you can borrow this currency for no interest for a certain duration and convert it into local currency for gaining by the increase in this currency’s interest rate. Due to leverages upto 10 times of the investment typical to forest markets, the return on 3% yearly gain would amount to 30%, so if you invested 10.000EUR, you would have gained 3.000EUR in 1 years time!
This of course is a simplification not taking into account the appreciation of either of the currencies. Because of the appreciation, the exchange rates between the currencies fluctuate, complicating things. Due to the fact that carry trades are longer in duration they are more vulnerable for a lot of changes in the economical climate. This means that in fact investors can often with their own herd behaviour appreciate the currency and hence eliminate the yield!
Second tactic I will talk about in principle is technical analyses, which simply means that you are making predictions of the currency rate fluctuations, by reading the historical data, performing so called technical analyses of the wast amount of statistical date available, creating charts and indicators. We will cover shortly the two most common analyses techniques:
- Minimal Rate Inconsistency – almost elliminated today due to advanced computer programs
- Trend or Range – analysing historical trends. Most common technique today
To be able to predict the future fluctuation of the currencies, you need a lot of experience and statistical knowledge. I have been performing technical analyses for years and have masters in mathematics, with strong economical and statistical back ground, til I am no expert at this. There are plenty of great tutorials available and I have no intention on writing my own, just make sure that you read at least several instead of relying on single source of information. Things to pay attention to are stochastics, moving averages, and convergence divergence, Bollinger Bands and Fibonacci retracement. I might write a basic tutorial covering these analysing techniques at later stage.
Starting With Forex Trading
Before making your first trade, you of course need to setup a Forex trading account! There are several different ones to consider and there are several factors which you need to consider. I will introduce you the things to look out for, however not recommend a particular service or trader, as I believe it’s best that you take your own time checking them up instead of rushing into things!
Opening an Account
My advice is to take your time and looking around, select the correct company, there are many reputable ones out there, so make sure to go for a well established one instead of the one promising too-good-to-be-true returns. What ever you do, never ever trust a company that is offering a robot to do all the trades for you. This is complete nonsense. There is no such thing ans 100% accuracy, not even 80-90% one, think about it yourself for a moment, don’t throw your hard earned money away. I am planning on reviewing few of these Forex trading robot scams in the next months, stay tuned.
If your trader is telling you, you need to invest more in order to make profits, take caution! This is a trick used often by scammers, who will run away with your money. The truth is that you need around 200 EUR to get started, but if they try to shame you into paying more money stating that this is a ridiculous or insignificant amount of money, back away! You can start off with a smaller amount of money no problem, it will just take longer.
Things to consider when you are selecting a company to do your Forex trading with:
Levarage is the ability to control a much larger amount of capital than you are investing yourself. In practice the higher the leverage the company is offering the higher the risk involved! There are several factor which determine the leverage normally ranging from 50:1 to 250:1, it all depends on the level of the account you have, in other words how much money you have invested for your trading account.
What does this mean in practice? Well, if you have a starter account with 200EUR, the company is lending you 50 times that amount, summing up to you controlling 10.000EUR. If you have a platinum account with 50.000EUR on it, you might be able to control 12.5M EUR of funds! This also means that with Forex trades you have a very low margin, for small trades only around 2%, compared to 50% on the normal equities trading, This makes Forex market very advantageous for smaller traders, as you can make large gains with relatively low amounts. This also means you can easily loose more than you invested when the trade turns against you. It is therefore important as a beginner to have a protection against for the account going into negative. More about this later.
Fees and Commissions
Most Forex trading is done commission free, which is an other advantage when compared to equities trading. How come you might ask? Well, you are not actually using a broker as such, but a market maker company, who is making money each time you trade! In fact they are not offering you the every point for the differences of bid/ask prices. This, called currency pair spread, is the biggest differentiation between the companies, even few pips (0.001) difference will become important over time.
Most of the companies today offer training in Forex, which is great! Make sure though that you don’t follow it blindly and don’t make it the main deciding factor when choosing the trading company. There is also plenty of training available which doesn’t bind you to some company. Furthermore you will actually learn more from pros, who are often happy to share their knowledge on forums and social media groups.
If you are a complete beginner, I would never select a company that doesn’t have a demo account! Even if you have done your analyses and studies for several months, it’s still important to use a demo account in order to realise how fast you can actually loose everything, so you are not tempted to gamble large amount of money you can’t afford to loose in hopes of getting rich soon. Patiencec does it. Practice with a demo account from few months to half a year.
How to Trade Forex
So now that you have an account, lets examine what you can do with it. You basically have three options:
- Buying and selling currency pairs – most common
- Purchasing derivatives tracking movements of specific currency pair – more advanced technique where you purchase a right to purchase currency at a set rate.
- Futures contract – most advanced technique where you create an obilication for buying currency at a certain point in time.
You can open several types of orders:
- Market order – purchase currency by trading on the market
- Limit order – certain entry price
- Take profit order – closing the order at the certain profit margin and locking in the profits.
- Stop-loss order – deciding in advance what loss is tolerable before the position is closed in order to prevent larger losses.
Basically this is very closely related to that of equity trading! It’s important to understand the different types of orders before making your first trades.
My Forex Trading Advice For Beginners
If you take your time to read these two articles and learn about the Forex trade. I am sure you will see some positive results sooner or later. Study the market and reading about the economics news without making trades. Sign up for several signal services by experienced traders and see how these match with your own predictions. Always check up the final results and determine if your trade would have been successful. Start your own trade journal, it will be your best analysing tool for years to come! Take an advantage of your demo account, make sure you test different types of trades and orders before going for the real thing. If you want to gamble, go to Vegas!
It is easy to loose a lot of money really fast and therefore more patient you are, more you will benefit later on. I have been trading on the forex online for more than 5 years now and before that offline for more than 10 years. In my 15 years I have made a lot of money and lost a lot too. I have learned to wait for the right moment and not rush into any trades that I feel insecure about. I always trust my gut feeling and this is something you only develop over time. My motto is now and has always been: Never place more trades than what you can afford to lose! Take this as your golden advice, good luck to your first trades.
Last but not least, I warmly recommend to read my top picking for any Forex trading book: Market Wizards: Interviews with Top Traders – Jack D. Schwager
If you want to try some other options to make money online legally, take a look at here for my recommendations: Start Making Money Online