A Beginner’s Guide to Forex Trading
by Chris Capre
Trading Platforms & Charting
The market is flooded with a variety of currency trading platforms, but several factors need to be considered before choosing any one of them. These include fee structure, functionality, product quality, speed, types of services provided etc.
Trading platforms are basically software that help you to trade the market directly and do charting analysis in real time. Most brokers offer them free and they have various advantages.
Forex brokers allow clients to open a free demo account before ever trading live, which is great for you to explore and practice trading before you go live. The best way to choose a good trading platform is to try out the software during the trial period to make sure you are comfortable with it and it is user friendly.
While checking the efficiency or the suitability of a trading platform, one should look for following features:
- Key Features
The most important functions you will ever do on a trading platform are a) executing trades, and b) chart analysis. Thus, it is critical the platform is intuitive and user-friendly with a general ease of use, and that every thing makes sense when looking at it.
- Good Charts
Since most traders base their trading decisions on technical analysis, they prefer to use a platform which offers them good charts with a variety of options. This helps you in identifying trading opportunities and placing quick orders.
- Up Time
The efficiency of forex trading platform can also be judged by its up time record. A system which fails often will result in traders losing good investment opportunities. So opt for a trading platform which has a high up time during trading hours.
The rest is basically up to style and preference.
There are various types of charting styles and preferences, so let’s go through them so you can understand their differences.
These charts are generally used to provide a quick view of the overall market trend. These are highly useful in identifying support and resistance levels. They are created by connecting a line from the high, low or close price of one period to the next forming a line which represents the price movement over time.
These charts show us the price bar for a specific period of time. An individual price bar shows the open, high, low and close values of a currency pair. The bar in this case simply represents one segment of time which can be a day, a week, one hour, four hours or any other time period. These charts are also called OHLC charts because they indicate the high, low and close for a particular currency pair.
These charts provide the same information as a bar chart but the graphical format of these charts is more nuanced and unique.
Candlestick charts give what I believe is a more informative and graphical representation of the price action via the color of the candle (which represents the close) along with the wide part called its real body. This body represents the range between the open and close of that day’s trading. When this portion is filled with black it indicates the close was lower than the open. But if the body is blank or white, it means the close price was higher than the open. These colors can be tailored to your preference.
Candlestick charts are the most popular because of their simplicity and visual appeal. Good for beginners, these charts help in identifying the turning points like reversal of an uptrend or a downtrend.
I personally use candlestick charts in my trading as they most easily convey the critical information regarding the price action and movement over time.
How to Trade Forex Successfully?
Successful forex trading is the result of strategy, discipline and the ability to manage risk. Forex traders venturing into the market without any type of a strategy or plan are often find it difficult to profit or maintain any consistency.
The key to avoid this is to balance the three most important things regarding trading, they are;
If a trader can develop these three above, then most likely they will lead to more consistent trading and profits. But let’s discuss some tips to help you become a successful forex trader.
Top Tips on Successful Forex Tading
- Clear GoalsThe first step is to be clear about your goals. Goals have to be specific, measurable, and attainable. I actually discuss this in my article Setting Goals for 2013 on how to do this with forex trading.
But you must start by figuring out what trading system you will use to trade the forex market. Some people prefer to be more active, and thus prefer intraday forex trading.
In contrast, you might have a full time job and not a lot of time to sit in front of the screen. If this is the case, then I suggest Daily and 4hr price action strategies, which allow you to do set and forget style trading. This requires a lot less screen time, and is helpful for those who only have an hour or two to look at the markets.
- Type of Strategy
The next thing to decide is the strategy you would like to employ for trading the markets every day. The two that I recommend are;
- Price Action Trading
- Ichimoku Cloud Trading
Price action trading gives you the tools to read the price action in the market in real time, regardless of the time frame, instrument or environment. It is one of the most critical skills you can have to trade the forex market, and communicates whether the larger players are heavily buying, or selling, and where.
Ichimoku cloud trading is a trading system developed several decades ago that is designed to capture large trends, major reversals, and future support and resistance levels, so quite a comprehensive system.
- Once you have finalized which trading strategy you are going to use, and on what time frames, it is best to test your strategy on a demo account across various instruments. An example of a price action trading strategy is below.
- Building a Successful Trading Psychology
The next important thing is the trading psychology and the ability to control one’s emotions. A trader can have a successful trading system that makes money, but if he/she does not have the discipline to follow it, then they will lose money.
This requires patience, discipline, and focus. Luckily, these things can be built up over time as the mind has neuro-plasticity to it. But if you have a rule based system, yet are exiting too early or not following the rules, then you may want to consider some focused meditation or ERT training to help build the neural pathways for successful trading.
- Money Management
Controlling risk and managing your money will be critical to your success. This aspect of trading is essentially pure mathematics. If you can put the numbers in your favor, then you will find yourself in the best position to profit mathematically.
The most important mathematical rule for trading forex is the Risk of Ruin, which looks at risk three-dimensionally. This measures risk by accuracy, % equity risked, and overall payoff ratio.
To learn more about the risk of ruin tables you should know, click on the link to read an article on it.