The first thing to get out of the way with this article is that FOREX is not at all like picking stocks. Yes, it is possible to make money trading FX, but it is difficult, most people seem to take over a year to become consistently profitable. There are far more variables to consider when doing currency trading. It’s not microeconomics like when choosing a particular stock, its more like macroeconomics since you’re investing in an entire nation’s currency. You have to worry about interest rates, inflation but as well as the unfortunate fact that currency markets can be rather volatile. Additionally, you’re leveraged so even seemingly minor movements can get you stopped out if you are not paying close attention. You don’t have to deal with transaction costs so there’s no real downside to closing your positions.
Remember, one form of technical analysis is not a trading strategy. A trader should use a number of different kinds of technical analysis. Use more than just one technical tool, a decent strategy should contain at the very least, 2 different indicators. One indicator should be your leading indicator and the other one is a lagging one while 3 indicators will give you a slower signal but the data that you will get from it will be more precise.
Also keep in mind that old adage of “not putting all your eggs in one basket” do not get over confident on any one trade. No one has completely untangled the mysteries of the markets, more often than not “all or nothing” trades end up losing more often than winning. Stay at least relatively conservative. A great way to do this is to utilize stop loses, figure out your own risk tolerance and stick to it, don’t get overly greedy. You may miss out on a few trading opportunities, but you will also be protecting yourself from cataclysms.
There are essentially two strategies when trading FOREX. A very short term one that’s about 2 days or less which focuses on making very technical plays based on support and resistance levels of whatever currency that you are trading. It’s a pretty compelling way to make a few extra dollars.
However, the longer term one where you stay as long as I can hold it, which is usually about a week or so, perhaps longer is to identify actual trends forming. The long strategy tends to have a greater chance of success, for the average investor. Essentially, the first strategy has a way of losing me money or simply breaking even, whereas I get the majority of my profit from the second.
The FOREX market is easily the largest market in the world, and more and more individual investors are jumping into it. So, before you begin trading it, I’d recommend you begin your trades with virtual money and attempt to turn a profit for at least 2 months before you begin investing real, hard earned currency. Keep in mind how many variables can effect the relative value of currency, it’s a truly an immense number factor and I maintain that it’s impossible to really track all the factors, so (as with all investments) do your homework, it’s especially important when trading FOREX.
If I haven’t scared you away, here are a few links to check for further reading for the new FOREX trader:
First utilize the www.babypips.com since it has a tutorial system that you can check out. Babypips does seem to gloss over a number of important concepts, but does give a good overview of the different aspects of currency trading. I’d suggest reading through all of the lessons with your different strategies in mind, seeing how new information impacts what you’re trading strategy.
Once you’ve understood the basics from Babypips, I’d recommend check out www.metaquotes.com as well as www.ninjatrader.com.
If you learn best through discussion with other traders, than I’d recommend you head over to traderslaboratory.com/forums which is a highly regarded FOREX trading forum.
The FOREX markets can be a harsh for the new, individual trader. Still, once you get accustomed to how the large, central banks operate it is possible to make a good living. There is a tremendous amount of information out there for the new trader to digest, and be prepared to wade through a lot of garbage to find a few gems of information.
By. Ray Gonzalez