Below are eight tips for successful trading by
forex beginners who are still unaware of the essentials and formalities of trading. After reading this you can also read basic forex jagons that must be known by every forex beginner and a beginner’s guide on- what is forex?
These tips don’t need to be learnt from a reputable online forex tutor and they remain true to every trader that has had success in trading forex online.
1. Trade only trending markets
Strong trending markets offer the highest opportunities of reward to the forex beginner. They have long term benefits that can run for weeks or even months. If you get a single trend right, your only worry will be money management. And the greatest fun will be those moments each week or month when you lock in profits by moving stops to sensible points within the trend.
Look at the NZDUSD weekly chart below.
Traders that discovered the downtrend and sold at point A made a fortune for over six months. The greatest thing about trends is that they have minimal penalties if you execute at the wrong time. As long as you practice good money management and give your trade room to breathe both for the stop loss and the margin call, you will be able to benefit from such trends. From the above chart you can see that the market has never moved back to point A so that even if you entered the trade and never observed the market for weeks, you would still log on and smile at the site of a growing account.
2. Assess your risk reward for every trade you enter
How much are you bound to lose in a trade? How much are you bound to make in a trade? You should always ask yourself those two questions in that sequential order. Determine how much you may lose if the trade goes wrong. This should be the first thing you do for every trade. Identify your possible entry point for the trade and the ideal support or resistance that will act as a stop loss. The pip distance between the possible entry and the possible loss point should be divided with the real dollar amount you plan to risk in the trade. This is called position size.
Position size = Real dollar amount
Real Number of Pips
The answer above will determine the number of lots that you should trade.
Lots X Pips should give you the real amount you will make if the trade works or the real amount you will lose if the trade fails.
You determine the profit pips by subtracting the possible entry point with the possible profit point. You determine the loss pips by subtracting the possible entry point with the possible loss point.
Risk reward in itself is not mathematics. Simply look at your chart and find a region where the market has failed to go past either to the upside or the downside. If you are selling, the distance between the support (take profit) and the sell point should be double the distance between the resistance (stop loss) and the sell point.
Similarly if you are buying, the distance between the Resistance (take profit) and the buy point should be double the distance between the Support (stop loss) and the buy point. Risk reward is determined more through observation than by calculation.
Illustration
Point A is your possible selling point. Point B is your possible stop loss point and point C is your possible take profit point. The risk reward is good. The trade can be taken if the set up is available. Through position size you already know the amount you are bound to make or loss. And by the way, position size is the only thing that enables you to take any trade with the same dollar amount no matter the pip difference.
3. Trade only the daily charts, weekly charts and monthly charts
If you want to have a stress free trading life then you will have to heed to this. This is especially the case if you are a beginner. The lower timeframes look attractive, but they are the golden path that leads to self destruction. Timeframes below the daily chart are full of deceptive set ups and traps. They are bursting full with all the noise associated with data streaming from the commercial quarters of the world on almost daily basis. I cannot promise you that you will make money trading forex, but I can bet my head that you will find peace trading the higher timeframes. It is true that you can trade also the 4 hour chart, but only with the required mastery of the candlesticks and the trend direction of the daily chart. Personally I trade the 4 hour chart occasionally after major breakouts on the daily, weekly and monthly charts. But if you don’t know that stick to what I say. You will soon discover that strategies like channel trading and retracements work best on the weekly and monthly charts. And you only need two channels and two retracements on the weekly or monthly chart to make profits that will cover the next five months. Consider that to a lower timeframe trade who is glued to his screen falsely believing that the more trades he takes, the more money he makes. Come home to the higher timeframes.
4. Under-trade
If you are trading the higher timeframes it follows suit that you are not over trading. Similarly, if you are trading the lower timeframes then you surely are entering and closing an unreasonable number of trades per day. Ideally in a single month you should have a maximum of three trades. I say so because legitimate trades, however perfect the strategy, do take long to play out n our direction. With patience they work out. Under-trading implies treating the markets with contempt. Please read a lesson that forex beginner’scan learn from murphy’s law to understand what I am talking about. Most trades taken on the lower timeframes never really grow our accounts. As a matter of fact they deplete our accounts. Think of the commissions, the spreads and the occasional slippages that you have to pay on every new trade. They never enrich you. They enrich the broker. It is the reasons why brokers have come up with ingenious ways to enable you trade on smart phones. Mobile trading benefits your broker as it drains your account. I did an analysis on the NZDUSD daily chart for the entire 2014 and discovered that with a small sell strategy you will have taken only 12 trades for that whole year where 9 were winners and 3 were losses. But on the lower timeframes you’d have probably blown up your account before the 12th trade. Make a decision now.
5. Practice good money management
This is in a way tied to the point on risk reward already discussed above. Unsound money management is perhaps the single greatest destroyer of forex beginner’s trading accounts. And it comes in various outfits- like adding another position to a losing trade, or risking more on the next trade to recover the loss occasioned by a previous loss or risking more as a result of profits made from a previous trade. The urge is to cover lost ground or to double what has just been made. But as experience shows, that rarely works. Decide on the amount you will risk for every trade you take and stick to that. If you are comfortable losing 10 dollars per trade let it be so. You will never be certain with any trade set up and money management should safeguard you on the many or few occasions that you happen to be wrong. If warren Buffet gets it wrong sometimes, who are you to think you have a shield against losing trades. Practice good money management.
7. Trade only the best currency pairs
Know your currencies. Forex is not a sphere of anything goes. What are the high volatility currencies? What sought of news or data affects them? Are they trending, ranging or just choppy. Stick to them when they are trending or ranging. Ignore them when they are choppy. As a rule of thumb stick to the 7 dollar paired currencies. They are called the majors and they include EURUSD, GBPUSD, NZDUSD, USDJPY, USDCAD, CHFUSD. Find out the co-relation between certain pairs like EURUSD and EURCAD, USDJPY and CHFJPY and EURJPY. These will help you make sound trading decisions. Because you are trading the USD, get to know of the NON FARM PAYROLL that comes out on the 1st Friday of every month. Assess the housing market figures in the USA and the job data in all other major economies. It is your game. You should know its rules.
We hope that these tips have further opened your eyes in the tangled web of the online forex market. We practice what we preach and whatever we have stated above is what we employ in our daily assessment of the market movements. At times we deviate, just like the backsliding faithful. But the good thing is that we are always fats in finding our way back home to sensible trading before we are wound up in the cyclical web of loses and endless emotions. Join our club.
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