Foreign exchange, known as FOREX is a global market for currency trading, and is the largest and most liquid financial market in the world, with trillions of dollars traded each day. For this reason, many of us choose to trade forex over other financial instruments. Maybe you heard about forex from a friend, or maybe you have seen YouTube adverts about trading the forex market, and made you want to look into what trading is about. If you want to know more about how to start in forex trading, I have outlined 10 steps that can help anyone looking to start their journey as a currency trader.
Imagine you get on a ship that is going to navigate in the ocean. But there is no destination, so the ship will keep roaming with no clear direction, potentially ending up on a deserted island. Would you pay to be on that ship? Me neither.
Same goes with trading. You cannot trade without a clear trading plan. A trading plan will enable you to build the discipline to respect a certain set of rules that are defined by yourself. These rules will specify entry requirements, exit requirements, stop loss requirements, what indicators you will use, what time frames you will analyse the charts on and so on. For example, some people will only put on a trade once a certain setup has occurred, like a break or bounce from a zone, trend line, or they notice a certain price pattern like a flag or triangle.
Trading is complex, and all these rules need to be in place in order to have a systematic and non-emotional approach to the markets. The less discretion you use the better. Some traders call these rules ‘’mechanical’’ due to the fact that there is no discretion at all. If your rules are fulfilled, the trade will be executed and left to play out.
Back testing is very important, because this is how you can find out relatively quick if your strategy is profitable or not. You should use your strategy on the currency pair/s you want to trade, the time frame you want to trade, and the indicators, entry signals, exit signals etc. from your trading plan. Over 100 trades, you can then find out if you shall be profitable or not. What is important is to be honest with yourself but also realistic. You need to ask yourself whether you would let that trade really run for a 1:5RRR (Risk/Reward). Or will you stop it for a 1:1RRR just to see that after you closed the position, it may have gone a lot further? These are issues that every trader faces because we all struggle with emotions and psychology from time to time.
Forward testing is also good, and more realistic to being in a trade due to prices moving in real time but obviously it will take a much longer time to do the 100 test trades, so most people will prefer back testing in order to get the quicker results and to see if there is an edge or not in their strategy.
Once you have your back testing complete and you have a trading plan with a set of clear rules, now it is time to start trading in real time. But it’s really important that you do not jump straight into the market with a live account, and use a demo account also known as ‘’paper trading’’. Trading is a skill that takes a long time to develop, and starting to trade with real money too soon can have pretty devastating effects on your account. If you ask most traders, they will tell you that they lost a few accounts until they started being profitable, so demo trading is a good way of not losing money due to inexperience and it’s a good way of building up your confidence to execute trades and practising discipline which can be a challenge for many.
Most traders in the beginning of their journey will focus on many forex pairs due to the desire of being constantly in a trade, in most cases no matter the outcome. I would advise anyone that starts out in forex to focus on solely one FX pair, in order to learn it. You can choose a pair that involves a currency you are familiar with, preferably a major FX pair in order to have sufficient liquidity. After you learn one pair and are familiar with it, you can explore additional options, although most people I know only trade 3-4 pairs as it is hard to keep track of a lot of pairs. It’s also useful to look at fundamentals like reading and checking news that involve the currency you are trading and also to check the economic calendar in order to be aware if any major events that can affect your trades.
Trading psychology is probably the most important thing in trading. Simply put, you cannot be a successful trader if your psychology is not right, if your mind is not in the right place, and if you let emotions take over. We as humans are driven by two strong emotions: Fear and Greed.
Although not many will realise, people are driven by fear on a daily basis. No one enjoys waking up early in the morning, brushing their teeth, getting dressed and having breakfast all in the time frame of 30 minutes, and then sit in busy traffic for another 30 minutes to be at a job that makes them unhappy. I am sure that this is not the case for everyone and there are people out there that do enjoy their jobs, but I am just giving you an example that I find more common these days.
So why do people work at a job they do not enjoy? It is because of fear. Fear of not being able to pay their bills and fear for all the consequences of not paying their bills of course, which we all know might be very severe.
Same goes in trading: emotions and fear can influence our trading in negative ways, can create bad habits such as taking profits very early, not letting our trades run, fear of entering trades, as well as moving our stop loss away from the price in the hope that the price will eventually go in our direction, gamble after a sequence of lost trades and so on. We as traders need to understand that the market does not owe us anything, so if we lose a trade, it is simply because we were wrong and we need to move forward without being affected by the loss.
The market is an environment where anything and everything is possible, and our minds are not built to cope with such an environment, because we are brought up knowing that there are limits for everything, and we need to respect rules, defined by someone for us. In the market, there are no limits.
This is why it is so difficult for many people to stick with their rules, and understand that anything can happen during a trade, so going into a trade they need to acknowledge the fact that prices can go either way because every moment in the market is unique!
Do not forget that the simplest definition of a successful strategy is how you perform over a sequence of trades. You will have winning streaks as well as losing streaks. Winning streaks tend to make people feel overconfident, losing streaks tend to demoralise traders, so you need to know that your edge will be successful only in the long run, and in the short run it might not. Trading is like gambling, but you are the casino! A common mistake is changing your trading strategy too often and not allowing sufficient time for the sequence to play out.
A last thought on psychology is that a winning trader needs to have a winner’s mentality and to be a positive person overall. Physical exercise and sport in any form has a major contribution to your trading, so it is highly recommended that you work out on a daily basis in order to keep a healthy body and mind!
Joining a community can always help, in order to learn from other people, exchange ideas and maybe get feedback on your trade set ups from more experienced traders. This can accelerate your learning process, as you gather experience and advice from other people, and also you will get a boost of confidence seeing and knowing that there are people who were struggling just like you may be, but they have since overcome these obstacles to become patient, disciplined and consistent.
Networking is a great thing to do for you to develop as a trader, but just be cautious who you are listening to. Make sure they know what they are saying and that there is proof they are profitable because nowadays there are many ‘’get rich quick’’ schemes that can trick people into paying out money for a ‘holy grail’ strategy that can make you profitable overnight. There is no such thing.
This is a very normal and common question for all beginning traders. Due to the fact that there are so many brokers out there, it can be quite overwhelming to choose one if you don’t know what to look for. To ensure your money is as safe as possible, I strongly recommend choosing a broker regulated in the UK by the Financial Conduct Authority (FCA), and one who is a member of the Financial Services Compensation Scheme (FSCS). In the UK, FSCS will provide protection up to £85,000 in case the broker goes bust.
Other things you will want to check will be brokerage fees, commissions as well as spread on the pair(s) you would like to trade. Are there any deposit fees? Or any withdrawal fees? Do they offer a demo account for you to practise your strategy?
Another important thing to check is the leverage they offer, whether its 50:1, 100:1, etc. This is important because, with a deposit $100 and 100:1 leverage, you can hold positions up to $10,000. Leverage is a great way to increase profits, but it can always work against you as well, so keep in mind that risk management will be key in your successful trading journey.
You will want to make sure the customer service they offer is good, and that they offer live chat, or 24/7 phone support as there are times when you will need them. Also make sure you are familiar with the platform, as not all trading platforms are the same. Some brokers use MetaTrader, MT4 or MT5, other develop their own platforms, or use TradingView or C trader, etc. This is something you will want to make sure you are ok with.
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