getting started: learn to trade forex in 7 steps · getting started: learn to trade forex in 7...
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Getting Started: Learn to Trade Forex in 7 Steps
Step 1 - Maximize Your ToolsFXCM provides multiple tools to help you become a better currency trader including free market news,
and real time charts. The most valuable tool, however, is the FXCM Demo account, which allows you to
test out strategies and learn from your mistakes without risking real money.
Step 2 - Risk ManagementEvery successful trader should know how much risk he is willing to take, and what profits should result
from the trade. This is the basis of every realistic trading strategy.
Step 3 - Two Ways to TradeThere are two types of traders, technical and fundamental. Both have a radically different approach to
making trading decisions. Click here to find out which camp you belong to.
Step 4 - The Basics of Technical AnalysisAll technical analysis starts with a few basic building blocks. With these as a foundation, you can start to
make sound trading decisions.
Step 5 - Applying Technical AnalysisFXCM provides tools for basic technical analysis. Test your knowledge of technical analysis.
Step 6 - Fundamentals Everyone Should KnowAll Traders should understand why economic releases, interest rates, and international trade are
important to movements in the currency market.
Step 7 - Psychology of Trading The biggest enemy to most traders is not the market, but themselves. Learn four basic trading principals
that will help you to avoid the four biggest mistakes that traders make.
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Getting Started: Step 1 of 7 FXCM provides you with access to a live trading platform with a virtual balance of $50,000. The account
looks, feels, and behaves identically to the real FXCM trading system including price action, and trade
execution.
How to Trade Your Demo
Use this time to make a plan.
1. Choose the right currency pair. Find out based on your risk parameters, which currency is best
suited for your trading style. Some may be too volatile and some to slow so decide which
currency pair is most appropriate for your strategy and time frame.
2. Decide on how long you plan to stay in a trade. If you are an inter day trader, what is the
average time of your trade, few minutes, couple of hours a full day, swing trade (couple of days
to a week).
3. Before you enter a trade you should also have clear exit plan. Place your stops and limits
accordingly.
4. Know how much you are willing to risk and how much you are looking to gain.
5. Keep track of important news and technical levels, which may be tested within your time frame.
Keep a Trade Log
A diary is a trader's best friend; it will show you what works and what doesn't. It will also keep you from
making the same mistakes, which is the reason most traders fail. The diary should have but not limited to
the following information:
1. Time and date you placed the trade.
2. A note describing your strategy and why you chose to enter the trade.
3. Why you exited the trade, and if it was at your stated stop or limit level or did you get out for
other reasons etc.
Keeping trade logs or a diary of all the past trades can help a trader recognize why some trades worked
and others didn't. Once you start recognizing successful patterns, you can rest assured they will develop
again, and when they do just be there to take advantage of it. This is made much easier to practice in the
currency market because of reliable technical patterns that consistently develop in this market.
Trading Tools
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The right trading tools can mean the difference between profit and loss.
Real-Time Charts
For currency trading, a crucial trading tool for capturing key entry and exit points is technical analysis.
FXCM offers a variety of free basic and advanced charts as well as professional chart at a discount to meet
the needs of all traders.
Charts Available: www.fxcm.com/charting_options_top.jsp
For guidance on using these trading tools, FXCM's team of charting specialists is available around-the-
clock to help you determine which charts are right for you.
DailyFX is Dedicated to FX News and Analysis
A diary is a trader's best friend; it will show you what works and what doesn't. It will also keep you from
making the same mistakes, which is the reason most traders fail. The diary should have but not limited to
the following information:
1. Current Market Reports - Read these weekly reports to gain a macro view of general trends in
currency market. This will help you to understand the underlying factors and current issues that
affect the movement in currencies. Fundamental based traders will particularly find this useful.
2. Daily Fundamentals - The Daily Fundamental forex report provides commentary on the most
important events that occurred in the past 24 hours and provides an outlook for the day ahead. It
also recaps the key economic releases and global market movements.
3. DailyFX Technical Triggers - Study and spend time learning the multitude of chart patterns that
develop on a daily basis. Use DailyFX daily technical triggers to see which patterns developed in
the last 24-hours to identify bullish or bearish trends across the major currencies.
4. Bank Research - Make sure you read market analysis from major banks and find out where the
markets recognize support and resistance levels, which are readily available. You don't have to
necessarily always agree with them but its good to have them on your side! DailyFX provides link
to over 10 highest rates banks for FX research.
5. Daily Technicals - A technically trained trader can easily identify new trends and breakouts,
which provide multiple opportunities to enter and exit positions. As a result, t he currency
markets are the most technically traded markets in the world. The daily technical report
includes updated support and resistance levels, intraday probability bands, and pivot points on
the major currency pairs, which you can use to determine entry and exit positions.
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Getting Started: Step 2 of 7
FXCM provides you with access to a live trading platform with a virtual balance of $50,000. The account
looks, feels, and behaves identically to the real FXCM trading system including price action, and trade
execution.
How much do I believe the market will move and where do I want to take my
profit?
Limit Orders allow traders to exit the market at profit targets. If you are short (sold) a currency pair the
system will only allow you to place a limit order below the current market price because this is the profit
zone. Similarly if you are long (bought) the currency pair the system will only allow you to place a limit
order above the current market price. Limit orders help create a disciplined trading methodology and
enable traders to walk away from the computer without constantly monitoring the market.
How much am I willing to lose before I exit the position?
Stop/Loss orders allow traders to set an exit point for a losing trade. If you are short a currency pair the
stop/loss order should be placed above the current market price. If you are long the currency pair the
stop loss order should be placed below the current market price. Stop/Loss orders help traders control
risk by capping losses. Stop/Loss orders are counter-intuitive because you do not want them to be hit,
however, you will be happy that you placed them! When logic dictates, you can control greed.
Where should I place my stop and limit orders?
As a general rule of thumb traders should set stop/loss orders closer to the opening price than limit
orders. If this rule is followed, a trader needs to be right less than 50% of the time to be profitable. For
example, a trader that uses a 30 pip Stop/Loss and 100 pip limit orders, needs only to be right 1/3 of the
time to make a profit. Where the trader places the stop and limit will depend on how risk-adverse s/he is.
Stop/Loss orders should not be so tight that normal market volatility knocks the position out. Similarly,
limit orders should reflect realistic expectation of gains given the markets trading activity and the length
of time one wants to hold the position.
Getting Started: Step 3 of 7 There are two basic approaches to analyzing the currency market, fundamental analysis and technical
analysis. The fundamental analyst concentrates on the underlying causes of price movements, while the
technical analyst studies the price movements themselves.
Technical Analysis
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Technical analysis focuses on the study of price movements. Historical currency data is used to forecast
the direction of future prices. The premise of technical analysis is that all current market information is
already reflected in the price of that currency; therefore, studying price action is all that is required to
make informed trading decisions. The primary tools of the technical analyst are charts. Charts are used to
identify trends and patterns in order to find profit opportunities. The most basic concept of technical
analysis is that markets have a tendency to trend. Being able to identify trends in their earliest stage of
development is the key to technical analysis.
Fundamental Analysis
Fundamental analysis focuses on the economic, social and political forces that drive supply and demand.
Fundamental analysts look at various macroeconomic indicators such as economic growth rates, interest
rates, inflation, and unemployment. However, there is no single set of beliefs that guide fundamental
analysis. There are several theories as to how currencies should be valued.
Technical Analysis or Fundamental Analysis?
Most traders with FXCM abide by technical analysis because it does not require hours of study. Technical
analysts can follow many currencies at one time. Fundamental analysts, however, tend to specialize due
to the overwhelming amount of data in the market. Technical analysis works well because the currency
market tends to develop strong trends. Once technical analysis is mastered, it can be applied with equal
ease to any time frame or currency traded.
Getting Started: Step 4 of 7
The Basis of Technical Analysis explains trend analysis and how to use basic trend following techniques.
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Chart 1. What is Market Trend?
Trend is simply the overall direction prices aremoving -- UP, DOWN, OR FLAT.
Chart 2. Types of Trends
The direction of the trend is absolutely essential to trading and analyzing the
market.
In the Foreign Exchange (FX) Market, it is possible to profit from UP and Down
movements, because of the buying and selling of one currency and against the
other currency e.g. Buy US Dollar Sell Japanese Yen ex. Up Trend chart.
Up Trend
As the trend moves upwards the US
Dollar is appreciating in value.
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Down Trend
As the trend moves downwards the US
Dollar is depreciating in value.
Sideways Trend
Prices are moving within a narrow
range (The currencies are neither
appreciating nor depreciating).
Chart 3. Trend Classifications
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Chart 4. Information About Trendlines
The basic trendline is one of the simplest technical tools employed by the
trader, and is also one of the most valuable in any type of technical trading.
For an up trendline to be drawn, there must be at least two low points in the
graph where the 2nd low point is higher than the first.
A price low is the lowest price reached during a counter trend move.
Drawing Bullish Trendlines
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Chart 5. Trend Analysis and Timing
Markets don't move straight up and down. The direction of any market at any
time is either Bullish (Up), Bearish (Down), or Neutral (Sideways). Within
those trends, markets have countertrend (backing & filling) movements. In a
general sense "Markets move in waves", and in order to make money, a trader
must catch the wave at the right time.
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Chart 6. Drawing Trendlines
Chart 7. Trendlines I
Drawing Trendlines will help to determine when a trend is changing.
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Chart 8. Trendlines II
Trendlines show support boundaries under prices. These boundaries may be
used as buying areas.
Chart 9. Trendlines III
Temporary trendline penetrations are not as significant as a close beyond the
trendline.
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Chart 10. Channel Lines
When prices trend between two parallel trendlines they form a Channel.
When prices hit the bottom trendline this may be used as a buying area and
when prices hit the upper trendline this may be used as a selling.
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Chart 11. Find Price Support Levels
Price supports are price areas where traders find that it is difficult for market
prices to penetrate lower. Buying interest in the dollar is strong enough to
overcome Selling interest in the dollar keeping prices at a sustained level.
Chart 12. Finding Price Resistance Levels
Resistance is the opposite of support and represents a price level where
Selling Interest overcomes Buying interest and advancing prices are turning
back.
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Chart 13. 50% Retracements
Chart 14. 33% and 66% Retracements
There are also 33% and 66% Retracements.
Getting Started: Step 5 of 7
Currency charts can be used on an intraday basis (5-minute, 15 minute), hourly, weekly, or monthly basis.
The chart you study depends on how long you plan on holding a position. If you are trading with a few
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hours in mind you may want to look at 5-minute or 15-minute charts. If you plan on holding a position for
a couple of days, you may want to look at an hourly, 4-hour or daily chart. Weekly charts and monthly
charts compress price movements to allow for much longer-range trend analysis. Therefore, these
currency charts give the technical trader a longer-term context in which to conduct trades.
Test Your Skills
Look at the 5-minute, 15-minute, and one-hour currency charts and find support and resistance lines for
the EUR/USD. You will notice that once a major support or resistance line is broken, markets tend to
trend strongly in that direction.
Getting Started: Step 6 of 7
Currency prices reflect the balance of supply and demand for currencies. Two primary factors affecting
supply and demand are interest rates and the overall strength of the economy. Economic indicators such
as GDP, foreign investment, and the trade balance reflect the general health of an economy and are,
therefore, responsible for the underlying shifts in supply and demand for that currency. There is a
tremendous amount of data released at regular intervals, some of which is more important than others.
Data related to interest rates and international trade is looked at the closest.
Interest Rates
If the market has uncertainty regarding interest rates, then any bit of news regarding interest rates can
directly affect the currency markets. Traditionally, if a country raises its interest rates, the currency of
that country will strengthen in relation to other countries, as investors shift assets to that country to gain
a higher return. Hikes in interest rates, however, are generally bad news for stock markets. Some
investors will transfer money out of a country's stock market when interest rates are hiked, believing that
higher borrowing costs will affect ballance sheet negatively and result in devalued stock, causing the
country's currency to weaken. Which effect dominates can be tricky, but generally there is a consensus
beforehand as to what the interest rate move will do. Indicators that have the biggest impact on interest
rates are PPI, CPI, and GDP. Generally the timing of interest rate moves are known in advance. They take
place after regularly scheduled meetings by the BOE, FED, ECB, BOJ, and other central banks.
International Trade
The trade balance shows the net difference over a period of time between a nation's exports and imports.
When a country imports more than it exports, the trade balance will show a deficit, which is generally
considered unfavorable. For example, if US consumers wanted Japanese products, major automobile
dealers might sell US dollars to pay for the import of Japanese vehicles with yen. The flow of dollars
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outside the US would then lead to a depreciation in the value of the US dollar. Similarly if trade figures
show an increase in exports, dollars will flow into the United States due to inreased confidence in the
economy and then the value of the US dollar would increase. From the standpoint of a national economy,
a deficit in and of itself is not necessarily a bad thing. However, if the deficit is greater than market
expectations then it will trigger a negative price movement.
Getting Started: Step 7 of 7
Four Principles for Becoming a Better Trader
Trade With A DISCIPLINED Plan
The problem with many traders is that they take shopping more seriously than trading. The average
shopper would not spend $400 without serious research and examination of the product he is about to
purchase, yet the average trader would make a trade that could easily cost him $400 based on little more
than a “feeling” or “hunch.” Be sure that you have a plan in place BEFORE you start to trade. The plan
must include stop and limit levels for the trade, as your analysis should encompass the expected downside
as well as the expected upside.
Cut Your Losses Early and Let Your Profits Run
This simple concept is one of the most difficult to implement and is the cause of most traders demise.
Most traders violate their predetermined plan and take their profits before reaching their profit target
because they feel uncomfortable sitting on a profitable position. These same people will easily sit on
losing positions, allowing the market to move against them for hundreds of points in hopes that the
market will come back. In addition, traders who have had their stops hit a few times only to see the
market go back in their favor once they are out, are quick to remove stops from their trading on the
belief that this will always be the case. Stops are there to be hit, and to stop you from losing more then a
predetermined amount! The mistaken belief is that every trade should be profitable. If you can get 3 out
of 6 trades to be profitable then you are doing well. How then do you make money with only half of your
trades being winners? You simply allow your profits on the winners to run and make sure that your losses
are minimal.
Do Not Marry Your Trades
The reason trading with a plan is the #1 tip is because most objective analysis is done before the trade is
executed. Once a trader is in a position he/she tends to analyze the market differently in the “hopes”
that the market will move in a favorable direction rather than objectively looking at the changing factors
that may have turned against your original analysis. This is especially true of losses. Traders with a losing
position tend to marry their position, which causes them to disregard the fact that all signs point towards
continued losses.
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Do Not Bet the Farm
Do not over trade. One of the most common mistakes that traders make is leveraging their account too
high by trading much larger sizes than their account should prudently trade. Leverage is a double-edged
sword. Just because one lot (100,000 units) of currency only requires $1000 as a minimum margin deposit,
it does not mean that a trader with $5000 in his account should be able to trade 5 lots. One lot is
$100,000 and should be treated as a $100,000 investment and not the $1000 put up as margin. Most
traders analyze the charts correctly and place sensible trades, yet they tend to over leverage themselves.
As a consequence of this, they are often forced to exit a position at the wrong time. A good rule of thumb
is to trade with 1-10 leverage or never use more than 10% of your account at any given time. Trading
currencies is not easy (if it were, everyone would be a millionaire!).
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