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Forex Trading Basics

Forex Trading Basics
Forex Trading Basics
What You Need To Know Before Executing
Your First Trade
Coleen Powell
Forex Trading Basics
Table of contents
Section 1: The Forex Market
The Forex ...

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Forex Trading Basics

  1. 1. Forex Trading Basics 1
  2. 2. Forex Trading Basics FOREX TRADING BASICS What You Need To Know Before Executing Your First Trade by Coleen Powell 2
  3. 3. Forex Trading Basics Table of contents Page Acknowledgments Disclaimer Introduction Section 1: The Forex Market The Forex market 16 What is Forex trading? 16 What affects Forex trading? 17 What are the best times to trade? 18 What are the best months to trade? 18 Who is a Forex Broker? 18 How do I succeed in trading? 18-21 Trading internationally 21 Section 2: Candlesticks, Pips and Patterns Some Forex Terms 23 A pip: what is it? 24 What are Japanese candlesticks? 25 3
  4. 4. Forex Trading Basics Page Types of charts 25 The candlestick chart 26 A list of candlestick patterns 27-29 How to calculate pip value 30 How to determine position size 31 Leverage, Balance, Equity, Free Margin, Margin Level & Margin 32-33 Support and Resistance 34 What are trend lines? 35 What is consolidation/breakout? 35 Reversal patterns 36 What are forex technical indicators? 37 Moving averages 38 There are many ways to utilizing the moving average 39 MACD (Moving Average Convergence Divergence) 40 RSI (Relative Strength Index) 41-42 4
  5. 5. Forex Trading Basics Page Fibonacci Retracement and Extension 42-43 Types of orders 44-45 Section 3: Look! I'm trading! Getting started with your broker 47 Demo first 48 Upon starting a live account 48 Copying trades 49 Grouping trades 49 Trading do's and dont's 50-57 Road map to success 58-59 An indicator-free trading strategy for complete beginners 60-66 My personal favorite trading strategy for the more seasoned trader 67-69 Section 4: The Forextrepreneur in me Life as a Forex Entrepreneur 71-74 5
  6. 6. Forex Trading Basics Page List of resources for your further forex training development 75 List of brokers I recommend 76 About the author 77 6
  7. 7. Forex Trading Basics Forex Trading Basics Copyright © 2018, Coleen Powell First electronic publication: February, 2018 First updated: May 2018 All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. No part of this book may be scanned, uploaded, or distributed via the Internet or any other means, electronic or print, without the author’s permission. This work was written from the writer's personal experience and knowledge. Any resemblance to any other work would be purely coincidental. 7
  8. 8. Forex Trading Basics “The goal of a successful trader is to make the best trades. Money is secondary.” – Alexander Elder “Risk comes from not knowing what you’re doing.” – Warren Buffett “Luck is preparation meeting opportunity.” – Oprah “The biggest risk is not taking a risk. In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.” – Mark Zuckerberg “It is not the strongest or the most intelligent who will survive but those who can best manage change.” – Charles Darwin 8
  9. 9. Forex Trading Basics Acknowledgments My sincerest gratitude to everyone who supported me on my Forex trading journey. Thank you to my dear friend, Carol D. Cameron, who initially introduced me to network marketing. Because of her, I met Dolphy Blackwell and Shankie D. Chin who in turn introduced me to Paulet Lewis. It was my friend, Paulet, who introduced me to the fascinating world of forex years later, and along with her brother, Richard, introduced me to cryptocurrency trading. I will be forever grateful to them both. I owe great appreciation to Michael Webb, for his always loyal and unending support. Thanks also to my very wonderful students who inspire me even more than I inspire them. And special mention to Marcia, and her husband Richard of ExcursionOchoRios.net for helping me to see and realize new horizons and accomplish much more for my trading and coaching business. It is great to know that there are still such wonderful people in this world. 9
  10. 10. Forex Trading Basics Thank you also to my Facebook following and all those who came to me showing an interest in trading forex. This first edition is dedicated to all of you, as well as to all my readers. 10
  11. 11. Forex Trading Basics Disclaimer This book is not meant to be an official expert trading source. It is simply based on my own personal experience, and what I wished someone would have told me when I first began my Forex trading journey. Therefore, I will not take responsibility for any claims of trading losses as a result of your claiming to use this book as an official trading source. Trading is at best a risk. All trades should be entered into only after perceiving the right trading conditions with a planned trading strategy, and preferably with the assistance of an experienced trading mentor. No-one should start live trading with actual money without practicing on a demo account for a minimum of four to six months. I wish all traders, whether new or experienced, the greatest of success based on your individual goals. 11
  12. 12. Forex Trading Basics Introduction Welcome to the world of currency trading! When I began learning to trade Forex, it was difficult to say the least. I had no mentor, and information, although available, was scattered across the internet. Some information was absolutely necessary and eye-opening, others created short-term success and were unsustainable, while still others proved quite ineffective when it came time to trade. During my learning journey, I came across persons who really wanted to learn how to trade, but thought it either way too difficult and for the highly intelligent, very intellectual type, or not worth the time and effort. But, I believe blessings from above can only come when we open our hearts and minds to becoming a cheerful sharer of our knowledge. It is this belief that has led to me to meeting some of the greatest people in the world and to extending my coaching business. I believe that anyone who can read, has the patience and willingness to learn how to trade, can do so with the right tools. 12
  13. 13. Forex Trading Basics Now, if I were to introduce the concept of Forex Trading to individuals, I had much work to do. So, aside from coaching individuals and/or groups, and offering online courses, what better way to have more people become aware of trading than through a book? And that is how the idea of this book was born. Forex Trading is a vast topic and individuals whom I met (who were working individuals leading busy lives)were urgently seeking a simple, easy to go to guide that could assist them on their road to trading success. Hence, you should consider this book as merely a stepping stone or introduction to Forex Currency Trading, and to point you in the right direction for you to start your own successful Forex trading journey. I have endeavored to keep this first edition short and to the point. Aside from the courses that we have available through our website, there are many more advanced resources, training websites and videos that are at your disposal to assist you in your continuing Forex trading education, a few of which are outlined at the end of this book. Happy reading and I hope you learn a lot through this short book that will help widen 13
  14. 14. Forex Trading Basics your understanding of trading and assist you on the road to trading success. 14
  15. 15. Forex Trading Basics Section 1 The Forex Market 15
  16. 16. Forex Trading Basics The Forex Market Whenever you exchange one country's currency for another country's currency, you are engaging in the global Forex Market (otherwise called the Foreign Currency Market). In existence since 1976, as we know it today, the Forex market is the most liquid market in the world. It has an average daily turnover of $5.3 trillion dollars, and operates in a decentralized environment. It has no central exchange, instead there are trading centers located in various parts of the world including New York, London, Tokyo, Hong Kong, Singapore, Paris, Zurich, and Frankfurt. The Forex market exists primarily because businesses from different countries around the globe need to trade with each other. Hence, the important need to exchange currencies. What is Forex Trading? The skillful prediction of price action in the Forex market. It's true that trading is the exchange of currencies at a price set by the major banks. 16
  17. 17. Forex Trading Basics However, for the average person learning to trade on their own, they must realize that trading is, in fact, a learned skill. The better and more advanced your skill and understanding of how to trade the Forex market, the more successful you will be. What affects Forex Trading? Simply put, businesses, governments, banks, corporations all carry on business, exchange currencies and make decisions that affect the forex markets. Banks, professional (and other) traders all make decisions to buy or sell in the market based on news events and other factors. Buying and selling is really a matter of psychology. When the buyers are in control, a trade is said to be bullish or trending higher and when sellers are in control, a trade is said to be bearish or trending lower. When there are few buyers or sellers in the market, then a choppy or sideways markets takes place or extremely low volatility. These are just some of the factors that affects trading and the pricing that we see on our trading charts. What we have to do as individual traders is study the charts for the story being told by our selected forex pairs. 17
  18. 18. Forex Trading Basics What are the best times to trade? In my experience, the best trading days are Tuesdays, Wednesdays, and Thursdays. The best trading periods are usually between 3am and noon EST while the London and New York sessions are open and mostly overlapping. What are the best months to trade? How I wish I had known this as a new trader! The months of the year to completely avoid trading are: June, July, and especially August. Months you would do well to trade: From September until the first two weeks in December, then around the second week in January until May. Who is a Forex Broker? Forex brokers are businesses that provide access to Forex trading platforms for individual currency traders. These traders use the online trading platforms to buy or sell currencies. How do I succeed in trading? Ever heard of the quote, if you fail to plan, you plan to fail? To be a successful trader does not 18
  19. 19. Forex Trading Basics only mean being able to catch a few pips, it means to be able to correctly predict the market's direction. To succeed in Forex trading, you must do the following: 1. Educate yourself. Familiarize yourself with the individual currencies and Forex pairs you intend to trade. Look for their back story from left to right. For example, are you aware of their price action, exhaustion points, support and resistance zones, volatility, momentum, and dominant trends? Do you know how to effectively use pending orders? Studying the market, requires extensive reading. Is that something you are willing to do? If so, then babypips.com, and Investopedia are great places to start. DailyFx.com is helpful with current happenings and events affecting the currencies. Also helpful are the wide variety of training videos on YouTube.com. 2. Design a personal plan, system of trading, or set of rules, that you will strictly adhere to. This must also take into consideration your schedule as we 19
  20. 20. Forex Trading Basics are all surrounded by an array of distractions. 3. Please take your emotions out of your trades. I think the biggest hurdle I had to conquer when first learning to trade was my emotions. It was paramount, in fact, crucial for me to take my emotions out of my trades, and it definitely was not the easiest thing to do. Good news is that you can learn to control, or better yet, get over this with time. The Forex market is impersonal, and does not care about your thoughts or feelings. So, determinedly adhere to your trading plan, set your pending order(s) and stop loss, and allow the market to do what it does best, that is, fluctuate or swing back and forth in waves until it hits your take profit. Have confidence in your chosen trading system and unless something goes awry, let the market take you out of your trades. 4. Lastly, but perhaps most importantly, you must adopt the correct mindset. Are you a decisively consistent positive thinker? Are you always hoping for the best against all odds? Are you persistent, 20
  21. 21. Forex Trading Basics determined and passionate about achieving your goals? Are you emotionally stable? Do you think outside of the box like an entrepreneur? If your answer to all the above questions are yes, then, welcome and congratulations because you have won half the battle and are well on your way to becoming a successful Forex trader. Note: This is also the time to realize that Forex trading is not for everyone. Trading internationally Not all countries allow individuals to trade Forex, and some brokers do not accept members from some countries. So, you will need to be aware of this when creating your Forex trading account. 21
  22. 22. Forex Trading Basics Section 2 Candlesticks, Pips & Patterns 22
  23. 23. Forex Trading Basics Some Forex Terms Major currencies The eight most traded currencies are: USD, EUR, JPY, GBP, CHF, CAD, NZD, and AUD Minor currencies All other currencies are Forex minors Cross currency If neither currency in the pair is a USD, the pair is called a cross currency (eg. AUD/NZD) Base currency The first currency in any currency pair Quote currency The second currency in any currency pair, for example the JPY in USD/JPY. Bid price Shown on the left, this is the price at which the specified pair is bought in the Forex Market. It is the price at which the trader sells the base currency. 23
  24. 24. Forex Trading Basics Ask price Shown on the right, this is the price at which the specified pair is sold in the Forex Market. It is the price at which the trader buys the base currency. Bid-Ask Spread This is the difference between the bid and ask price Quote convention A specific format is used for expressing exchange rates in the Forex market, namely, Base currency/Quote currency, or Bid/Ask price. A Pip: What is it? The smallest unit of price for a currency used as the determining measurement for a value change between two currencies. Also, the last decimal place of a quotation is the pip. Whereas most pairs have up to four (4) decimal places, the Japanese Yen pairs have up to two (2) decimal places. For example, EUR/USD=1.8569, the '9' is the pip. 24
  25. 25. Forex Trading Basics What is a Pipette? A fractional pip or one-tenth of a pip. Eg. . 00001 USD=1 pipette What are Japanese candlesticks? Images used to describe price action for a given time period. These resemble a candle (hence the the term, 'candlestick'). They can be hollow or filled, with wicks or shadows attached. If the body of the candle is hollow, it simply means that the price closed higher than the open. If the body (otherwise called real body) is filled or black, it means that the price closed lower than the open. Types of charts There are three main types of Forex charts used by traders. • Line chart • Bar chart • Candlestick chart 25
  26. 26. Forex Trading Basics The Candlestick Chart This most popular Forex chart shows the high, low, opening and closing prices of a given time period. The wicks or shadows of the candlestick displays the high and low price of the day and their comparison to the open and close prices. Hence, the resulting shape of the candlestick. Financial analysts use the candlesticks to determine when to enter or exit a trade. The technique was developed in the 1700s in Japan. 26
  27. 27. Forex Trading Basics A list of Candlestick Patterns All candlestick patterns mentioned here can be found at Investopedia.com with their explanations and accompanying images. Please read through these reversal patterns prior to commencing trading. (Note: Traders should use patterns in conjunction with other patterns or technical indicators). • Bullish Belt Hold • Bullish abandoned baby • Bearish abandoned baby • Dark Cloud Cover • Upside Tasuki Gap • Downside Tasuki Gap • Bullish Homing Pigeon • Evening Star • Morning Star 27
  28. 28. Forex Trading Basics • Rising Three Methods • Red Candlestick (otherwise called black or closed candlestick) • Bearish Harami • Three Outside Up/Down • Three Inside Up/Down • Up/Down Gap Side-by-Side White Lines • Unique Three River • Short Line Candle • Advance Block • On Neck Pattern • Thrusting Pattern • Three Stars in the South • Hanging Man 28
  29. 29. Forex Trading Basics • Matching Low • Ladder Bottom • Bullish Engulfing Pattern • Counterattack • Real Body • Shooting Star • Hammer • Bearish Hanging Man 29
  30. 30. Forex Trading Basics How to calculate pip value Some believe that this is one of the hardest topics to grasp when learning forex trading, aside from learning how to use indicators. A pip is a unit of measurement used to calculate currency movement. In most pairs, the pip is the fourth decimal place and the fifth decimal place is a pipette or half of a pip. (Example: EUR/USD 1.23456, 6 is the pipette). However, in the Japanese Yen currency (JPY) the pip falls in the second decimal place and the pipette in the third. (Example: USD/JPY 109.254, 4 is the pipette). The fixed pip amounts as related to USD quote currency (eg. EUR/USD) are: $10 (standard lot) = $100,000.00 worth of currency $1 (mini lot) = $10,000 worth $0.10 (micro lot) = $1,000 worth For USD as a base currency, divide the pip value by the pair exchange rate to get the pip value. If the pair includes the JPY, multiply the result by 10. 30
  31. 31. Forex Trading Basics How to determine position size The formula is: Pips at risk X Pip Value X Lots traded = $ at risk. So, for example, your $ at risk is $30. Pips at risk is the number of pip difference between your entry point and your stop loss point or level. Say for example sake, 10 pips. Your Pip Value for example for a standard lot is 10. Then, your lot traded should be: $30/100 (10x10)= 0.30. So, you will need to calculate your position size as well as set your stop loss and entry point. Note: Babypips offers a handy pip value calculator as well as a position size calculator. Please see links below: https://www.babypips.com/tools/pip-value- calculator https://www.babypips.com/tools/position-size- calculator 31
  32. 32. Forex Trading Basics Leverage, Balance, Equity, Free Margin, Margin Level & Margin Leverage – Brokers offer leverage on all trading accounts opened. It allows traders to trade a larger amount than their actual account balance. For example, if you have $1000 in your account and your broker offers you 500:1 leverage then you are able to get leverage of 5 lots at $100,000 each or $500,000 in leverage. Traders usually give you a choice to select your preferred leverage from a list. So, once you decide the leverage it will automatically kick in for each trade. Balance – The equity + the unrealized profit and loss amount being actively traded. Equity – The value of a trading account during active trade. While a trade is open, the account equity = Trade Margin + Free Margin (referred to as equity on the MT4 platform). When there are no trades open, equity = free margin or amount of the account balance. Free Margin – Equity-Margin, or funds in an account that are available for trade. 32
  33. 33. Forex Trading Basics Margin Level – Equity/Used Margin x 100. Brokers use this to determine whether a trader can take on additional trades or positions. Margin – the money 'loaned' by the broker on a trade. Also considered to be collateral or leverage. These concepts are particularly important when trades are open. They are all wrapped together or intertwined. Profits and/or losses are unrealized until a trade is closed. That is when they become realized as they are added or subtracted from the account balance. When a trade is closed, the trader's actual equity becomes known. 33
  34. 34. Forex Trading Basics Support and resistance Support and resistance is an accepted concept whereby price moves between predetermined price points, levels or zones. When price enters these zones multiple times without breaking through, it is said to have reached resistance (high price point) or support (low price point). For example, see diagram below showing price movement in between two red trend lines. The curvy red line is the moving average. Diagram 2-001 What are trend lines? Trend Lines are tools used in Forex for analyzing price trends. A trend line is a straight line connecting two or more price points or levels and then extends into the future to act as a line of support or resistance. Trend lines are found on trading charts. 34
  35. 35. Forex Trading Basics What is consolidation/breakout? Consolidation is a period of price indecision when the price generally goes in a sideways direction instead of up or down. A breakout is when price movement breaks above a resistance level or below a level of support. 35
  36. 36. Forex Trading Basics Reversal Patterns A reversal pattern is a recognizable change in price structure that identifies a reversal or correction in trend on a price chart. For example, in an uptrend, a series of higher highs and higher lows, reverses into a downtrend by changing to a series of lower highs and lower lows. The opposite is true in a downtrend whereby a series of lower highs and lower lows, reverses into an uptrend by changing to a series of higher highs and higher lows. Reversals usually happen rather quickly, but they can also occur over days or weeks of trading. Intra-day reversals are usually caused by news events. By watching the candlestick movements on a chart, traders can identify when a reversal is occurring. The candlestick represents the trading price range throughout the day, with the top being its highest price and the bottom being its lowest price. 36
  37. 37. Forex Trading Basics What are Forex Technical Indicators? Forex indicators are tools used on a candlestick chart for analyzing price movement. Four main types of indicators are: Moving average, Relative Strength Index, Slow Stochastic and MACD (Moving Average Convergence and Divergence). Fibonacci Retracements are also very popular indicators among professional traders. Below we discuss three commonly used indicators. You are welcome to use these strategies in your personal trading once you fully understand them. Indicators are oftentimes used in conjunction with each other for maximum profit benefit. Some indicators as those above-mentioned have been tried, tested and proven. These are still used in line with market sentiment or trading psychology. 37
  38. 38. Forex Trading Basics Moving Averages Moving averages "smooth out" price data by creating a single flowing line. The line represents the average price over a period of time. The trader determines which moving average he or she will use based on the his or her own trading time frame. Popular choices among traders are the 200-day, 100-day and 50- day simple moving average. There are many ways to utilize the moving average: 1. By examining the angle of the moving average. If it generally moves horizontally for an extended amount of time, then the price is not trending, but ranging. If it is angled up, an uptrend is occurring. Moving averages do not predict price movement, however, they do show what the price is doing on average over a period of time. 2. Price Crossovers are yet another way in which to use moving averages. For example, by plotting both a 200-day and 50-day moving average on your candlestick chart, a buy signal occurs whenever the 50-day crosses above the 200-day. However, a sell signal occurs when the 38
  39. 39. Forex Trading Basics 50-day falls below the 200-day. Time frames can be changed to suit your individual trading time frame. Note: When price crosses above a moving average, it may be used as a buy signal, and whenever price crosses below a moving average, it may be used as a sell signal. This method is likely to produce false signals since price is much more volatile than the moving average. Moving averages can also provide support or resistance to the price level. 39
  40. 40. Forex Trading Basics MACD (Moving Average Convergence Divergence) The MACD is: • an oscillating indicator • fluctuates above and below zero • follows the trend • a momentum indicator MACD strategies include: • looking at which side of zero the MACD lines are on. Being above zero for a sustained period of time means that the trend is likely up (watch out for buy signal) whereas being below zero for a sustained period of time means that the trend is likely down (watch out for sell signal). • While signal line crossovers provide additional buy and sell signals, a MACD has two lines, a fast line and a slow line. A buy signal occurs when the fast line crosses through and above the slow line. 40
  41. 41. Forex Trading Basics A sell signal occurs when the fast line crosses through and below the slow line. RSI (Relative Strength Index) The RSI is: • an oscillator, but because its movement is contained between zero and 100, it provides some different information from the MACD. • You can interpret the RSI by viewing the price as "overbought", and due for a correction, when the indicator is above 70, and the price as oversold, and due for a bounce when the indicator is below 30. In a strong uptrend, the price will often reach 70 and beyond for sustained periods, and downtrends can remain at 30 or below for a long time. Generally, overbought and oversold levels can be accurate, however, they may not provide the best signals for trend traders. A trader can choose to buy near oversold conditions when the trend is up, and take short trades near overbought conditions in a downtrend. 41
  42. 42. Forex Trading Basics For example, in an uptrend, a buy signal occurs when the RSI moves below 50 and then back above it. What this means is a pullback in price has happened, and the trader is buying when the pullback seems to have ended (according to the RSI reading) and hence the trend is resuming. 50 is used because the RSI does not typically reach 30 in an uptrend unless there is a potential reversal underway. A short-trade signal happens when the trend is down and the RSI moves above 50 and then back below it. We do not recommend only using one indicator by itself. Be sure to test out the indicators in your demo and prior to entering a live market. Fibonacci Retracement and Extension A famous Italian mathematician named Leonardo Fibonacci discovered the golden mean. Fibonacci Retracement levels are: 0.236, 0.382, 0.500, 0.618, 0.764. Fibonacci Extension levels are: 0, 0.382, 0.618, 1.000, 1.382, 1.618. Traders use Fibonacci Retracement and extension levels to predict resistance and support levels or zones and to decide take profit. 42
  43. 43. Forex Trading Basics To measure the take profit for a bullish trend, use the Fib tool on the chart and measure from the highest high of a swing down to the lowest point of the same swing. Your profit would be equal to the wherever the next levels above the 100 would be, for example, 1.382 or 1.618 and the opposite in a downtrend. The Fib tool is to be used in conjunction with other indicators to help the trader decide on the most trade worthy and/or profitable trade. See example below. Diagram 2-002 43
  44. 44. Forex Trading Basics Types of Orders There are different ways to enter the Forex Market or execute a trade. Here we will discuss five (5) ways: • Market Execution or Instant Order – This type of order allows a trader to enter an order into the market immediately at the available price offered by the broker. • Buy Order – This type of order allows the trader to enter a trade based on the belief that the price is heading higher for a sustained period of time, whether a few hours, days or weeks • Sell Order – This type of order allows the trader to enter a trade based on the belief that the price is heading lower for a sustained period of time, whether a few hours, days or weeks • Buy Limit – This type of order allows the trader to use predictability in the trading process. Based on repetitive price movement between two price points (support and resistance), the 44
  45. 45. Forex Trading Basics trader can predict that when the price retraces to support, then price will head higher toward resistance levels. So, the buy limit is set to enter the market in the support zone and the take profit is set in the resistance zone. • Sell Limit – This type of order allows the trader to use predictability in the trading process. Based on repetitive price movement between two price points (resistance and support), the trader can predict that when the price hits resistance, price will then head down to the support zone. So, the sell limit is set to enter the market in the resistance zone and the take profit is set in the support zone. 45
  46. 46. Forex Trading Basics Section 3 Look! I'm trading! 46
  47. 47. Forex Trading Basics Getting started with your broker Before selecting a broker, it is best to do your research. Not all brokers are created equal. Therefore, you want to find out a broker's business location, and preferably, whether they are regulated. Some unregulated brokers may be cheaper and easier to help you get started on your trading, but are deceptive. So take your time to find a reputable broker such as Trader's Way. After signing up with your broker, you will need to download the Meta Trader 4 app onto your trading device, such as your smart phone or tablet. If you are using a computer, you may download the trading software provided by your broker or use their online web terminal to access your chart. You will receive an identification number and password from your broker to login to your account, as well as the brokers live trade and demo platform numbers for the Meta trader 4 app. 47
  48. 48. Forex Trading Basics Demo first Starting your trading with a demo account cannot be overemphasized. Opening and practicing on a demo account is like doing your practicals for a college course. The more you practice, the more experience you get, then the better and more skilled you become. For the average new trader, frequent, consistent practice for a minimum of four to six months is necessary. Trading practice trains the trader's perceptive skills, and with time he or she is able to observe patterns in price action that previously were unseen or undetectable. Upon starting a live account After many months of practice, and consistent profitability (with an approximate profit/loss ratio of 6:1 or higher) on your demo account, then the more seasoned trader can now embark on trading with actual money. The initial amount to start with in your trading account is based on you (how much of your discretionary funds you are willing to risk), and the rules of your Forex broker. Some brokers, such as Trader's Way allows traders to start with $10. 48
  49. 49. Forex Trading Basics Copying trades Some websites allow you to shadow or copy other successful traders. The aim of this opportunity is not for you to bypass learning how to trade the Forex market but instead to increase your trading experience, and hopefully, measure of success. There is usually a small fee. Grouping trades This is not recommended for beginners. There are brokers who allow traders to trade more than one account at the same time as a group. You will need to check with your preferred broker to find out if they allow this type of trading. 49
  50. 50. Forex Trading Basics TRADING DO'S AND DONT'S DO'S • Always prepare for trades before executing them. • Keep abreast of market trends and market direction for each currency pair you are trading. • Follow the story of the pair on the chart. Look for patterns. Examine support and resistance levels/zones for each selected pair and notice how price moves between these levels from left to right. • Go to Finviz.com, then the Forex tab and look for the strongest and weakest currency to pair during your scheduled trading session. • Examine the chosen pair on the candlestick chart. Look out for breakout candles. Look out for price action returning to hit the support or resistance at least twice before placing your trade. Add your preferred indicators if you 50
  51. 51. Forex Trading Basics like. What is the pair's general trend? Is it at a support or resistance zone or is it in retracement or heading for an extension? Are you unsure of it's next move and then prefer for a proper trade to clearly set up itself on the chart before you enter? What is it's volatility or momentum? What does your gut feeling or intuition tell you? Build your confidence. • For up trends, look for higher highs and higher lows. Trade bullish in an uptrend. Wait for retracement at least twice before entering trade. • For downtrends, look for lower highs and lower lows. Trade bearish in a downtrend. Wait for retracement at least twice after breakout candle. Trade bearish after seeing clear reversal followed by confirmation candle. • Look to buy in oversold conditions, and to sell in overbought conditions with the help of the RSI indicator. 51
  52. 52. Forex Trading Basics • Select a Forex pair with a low spread. A higher spread means it will take longer for you to achieve profit. • How much money do wish to risk on a trade? It should be less than but no more than 1 per cent of your account balance. For example, if your account balance is $3000, do not risk more than $30. • You will need to calculate your position size and set your stop loss and entry point. • If using indicators, decide your take profit after looking at your indicators such as your Fib and trend lines, MACD, and support/resistance levels. • Trade with the trend. If the trend shows bearish on the daily chart, examine the H4 (four-hour) chart and enter trade appropriately. Time it and enter in the direction of the trend. • In a downtrend, use your sell limit and/or sell stop pending orders. 52
  53. 53. Forex Trading Basics • In an uptrend, use your buy limit and/or buy stop pending orders. • Use the buy stop and sell stop for breakouts and when anticipating news events. Research prior to news events so that you have an idea how the currency will be affected. What type of event is it? Will it cause low or high or no volatility? Is the currency likely to reverse in the opposite direction after seemingly jumping in one direction? Pay attention to news events! • Use the buy limit and sell limit to enter from retracement points if you discern a pattern of the price movement moving predictably between resistance and support, especially on the H4 or Daily chart, then that's a good time to use your buy or sell limit order. • When trading from reversal points, only do so after noticing confirmation candle. • Using meta trader 4 is great for on the go purposes. If you work from a home office, it may be advantageous to you to 53
  54. 54. Forex Trading Basics have a monitor or multiple monitors that may give a more close-up view of what is happening with a particular currency pair. You can also add indicators and alerts as you see fit. • Be disciplined and patient • Create a personal trading system and follow it strictly • Keep a log of all your trades, reasons entered, losses or profits gained • When trading small accounts, it is okay to take your profits in small increments • Make weekly, quarterly, annual projections • Trade the higher time-frames (H4, daily, weekly, monthly). Only use smaller time frames such as the five minute as entry point. • Choose the best days and times of the day to enter trades (eg. Tuesdays, Wednesdays, Thursdays 4 am. - 9 am. 54
  55. 55. Forex Trading Basics • Search for one (1) good trade per week or per month. Wait only on good trades or proper trade setups according to the rules you set. • Think of trading in terms of days, weeks and months INSTEAD OF only minutes and hours • Keep in mind that the most profitable and stress-free trades are done from the higher time-frame charts. Professional traders use higher time frames such as the monthly chart. • Trade during the months of September to December and January to May (excluding the major holiday periods) • Slowly compound your rewards. Trading is not about making money fast. Same as with driving, speed kills your trading account. • Keep increasing your trading knowledge for as long as you want to be a trader. 55
  56. 56. Forex Trading Basics DONT'S • Never enter a trade based on emotion or while you are unprepared • Do not try to catch every pip. • Do not get into the habit of trading only from smaller time-frames no matter how tempting without checking your higher time-frames first. You WILL suffer losses. The reason for this is that smaller time frames do not provide sufficient information to make proper trading decisions. • Do NOT trade a choppy market or when volatility is so low it is virtually a straight line. • Do NOT trade during the months of June, July and August or during the Christmas holidays. • Never jump back into the market after losing a trade. Stop trading for the remainder of that day. 56
  57. 57. Forex Trading Basics • Do not over-trade or jump in and out of the market. It causes anxiety and creates more and more losses. Trading higher time-frames prevents this. • Do not set your volume too high. The higher the volume, the higher the risk of losses. For example, if you have $300 in your account, your volume or lot size should not exceed 0.03. If you have $3000 in your account, your lot size should either be lower than or not exceed 0.30. • Do not forget to set your stop loss for each trade. This helps to prevent your account being wiped out should the trade go against your predictions. You should not lose more than 1% of your account in any one trade. 57
  58. 58. Forex Trading Basics Road map to Success What's the real secret to success in trading? It's hard to name just one thing. It is definitely more of a combination of things that contribute greatly to the success of a trader. But if I were to be so bold as to name one thing it would be being able to read the chart properly. Why? There are thousands and thousands of factors that affect price movement at any given time. It is your skilled ability to read how the chart is being affected from left to right that will determine your long-term success. The more skilled you get at reading the chart the higher your success rate will be. Also, try to be aware of what's happening with the currencies you trade regularly. Plan your trades. Plan under what circumstances you will enter a trade. Search for patterns in price movement. Increase your opportunities for trading success by trading the strongest currency and against the weakest. If you are a long-term trader, patiently trade the higher time frames such as the daily, weekly or monthly. If you are a scalper or day trader, use the daily and four hour chart religiously for support and 58
  59. 59. Forex Trading Basics resistance zones and use the smaller time frames for entry points along these zones. It is important too to trade momentum ahead of price. Momentum precedes price. Momentum is also greater during the sessions when the London and New York trading sessions overlap. Momentum is also higher when the strongest currency is paired with the weakest. Lastly, have a set of rules that you use to do your personal trades. Discipline is the most important quality, perhaps skill, to have when trading. Just as discipline makes you a better driver on the road, so does discipline increase your chances of trading success. Trading could also be likened to fishing. Do your research first so you have a better idea where to 'cast your net'. Write down your personal trading rules, your do's and don't s, and use them religiously. For example, trading only when a particular pattern is formed, and only entering the market upon seeing a confirmation candle. Write down your guidelines and use them as a trading bible. You may surprise yourself on how successful you become at trading. 59
  60. 60. Forex Trading Basics An indicator-free trading strategy for complete beginners Note: This strategy is mostly based on using support & resistance levels/zones, and reversal patterns to trade. This strategy can be used for both short-term trades as well as long-term trades Preparing for your trade IMPORTANT! How well you prepare for a trade determines your success rate or at least a 65% winning strategy. Proper preparation also greatly reduces risk. 1. Start your trade preparation near the beginning of the trading week, such as on a Sunday or a Monday afternoon or sometime before you start trading on a Monday or Tuesday morning. Decide whether you will be trading only events or normal trades or both. Determine this by looking at the week's Economic calendar. 2. Set your trading schedule such as 5 am to 9 am, determine your set volume such 0.01, determine your trading style and 60
  61. 61. Forex Trading Basics trade set up. Stick religiously to your choices. 3. Each morning before you begin trading, go to finviz.com and go to the Forex tab. Then, look for the strongest currency and the weakest currency and trade that pair. 4. Before entering the trade go the daily and 4hour charts to determine where your resistance and support levels or zones are and where price action is. 5. When the trade comes in line with the trade setup you are looking for enter from the 5 minute chart. Be sure to determine your take profit which should be at the next level of support or resistance depending whether the trade is bearish or bullish. Also, be sure to set up a stop loss of at least 10 to 15 pips. The stop loss will ensure that, if anything goes wrong, your account will remain intact. Note: Depending on the pair, best times to trade are usually during the London and New York sessions (best time period between 3 am - 61
  62. 62. Forex Trading Basics 2 pm EST). But trading opportunities can also arise during the Asian session. Best days of the week to trade are Tuesdays, Wednesdays, and Thursdays. 6. If trading events, make a note of the days and times that various events of high importance will affect your chosen currencies. You can do with the help of the economic calendar on DailyFx.com. 7. You may also check DailyFx.com for recently updated individual pair resistance and support levels, pair trends and volatility, popular market sentiment, and analyst news and picks. (You can compare the support and resistance zones with your own analyses). This gives you an idea of where the pair (or its action) is in terms of price, its most likely market direction, and overall trend. The volatility helps you to determine momentum. Be mindful that low volatility is difficult to trade. Personally, I prefer volatility to be between 10 and 25 per cent. I have found some pairs easier to trade than others, such as the USD/JPY, I have also 62
  63. 63. Forex Trading Basics found it helpful to read the analytical articles (about the pairs I am interested to trade) written by ForexLive currency strategists and instructors, as well as looking at the DailyFX Forex Economic calendar for the upcoming week. Using the demo to practice Check the higher time-charts of the pair to see if the trend aligns, for example, are the Monthly, Weekly and Daily charts all trending up or in a bullish direction or are they bearish? I encourage you to go to Finviz.com and look for the strongest and weakest currency, then pair and trade that pair. Where is the pairs' price action in terms of resistance and support zones, and reversal points on these higher time-frames? Are there any detectable patterns? Watch out for breakout candles, wait for price action to return to the previous resistance or support at least twice before entering the trade from the smaller time frames such as the five minute chart. Look for consistency of price movement and a signal that something is about to change. Is the 4hr chart at a point of reversal, and confirmed to also be moving in the direction of the general market trend for that particular pair? If yes, then it's now time to set up your demo trade. 63
  64. 64. Forex Trading Basics Set up the trade on your demo account. To execute your trade or pending order. Include, of course, your volume (which you should keep low, and this depends on the amount of money in your account. Keeping your volume low protects your account from heavy losses in the event that a trade goes against you), your stop loss and your take profit. You may simply set your take profit at the next resistance level (in uptrend) or support level (in downtrend). You may use the Fibonacci tool in helping you to decide where to set your take profit or you can set it based on the nearest support or resistance level on the chart you are using. Double-check your reversal points to ensure that they are clear and defined, and based on your support and resistance zones. Transitioning to a live trading account Only trade on a live account after many months of consistent profit on a demo account. This will make things a lot easier on you and prevent unnecessary losses. Learning to trade is like learning to drive a car. You need tons of practice because each time you go behind the wheel you put your life and that of others at risk. In trading, however, your money is at risk if you don't learn how to trade correctly. 64
  65. 65. Forex Trading Basics Exiting the trade It is best to let the market take you out of the trade by hitting your take profit. But since this is not ideally always the case, you may exit the trade as soon as you are comfortable with the profits made. Then, do not re-enter the trade. Fight the temptation. Relax from trading for the rest of the day. Over-trading will allow your emotions to take over your trading, and that is a recipe for trading disaster. Never enter unplanned trades and never be in a haste to trade. It is better to watch and analyze the market and wait for that one good trade for the month or the week than getting anxious and impatient which in turn leads to over-trading. 65
  66. 66. Forex Trading Basics Extra trades Additional trades can be used when setting up the same trade. For example, when trading an event, an extra trade can be set up with a higher take profit in case the price action goes even higher than expected. Keep a written record of all your trades and the reasons you entered each trade. This will reinforce your market analysis skills. Note: Doubling or tripling your trades, otherwise called batching, is best left to very advanced traders, especially since this practice significantly increases the risk of losses or even the risk of wiping out your account completely if done incorrectly. 66
  67. 67. Forex Trading Basics My personal favorite trading strategy for the more seasoned trader 1. Read. Become aware of monetary and other policies as well as bank decisions affecting your selected currency. This can be easily done by reading the latest news on ForexLive and keeping abreast of the economic calendar for each week. Your goal is to understand the pair you wish to trade. Each pair moves differently as if having its own personality. Understanding how your pair moves and the story it is telling you is crucial to your success. 2. Do your research and individual currency analyses for the currency or currencies you intend to trade. 3. I go to FinViz.com and then the Forex menu to find the strongest and weakest currencies to pair them for trading. 4. Follow the story of the chart from left to right. Look for relevant signals or patterns after price keeps hitting certain price zones or levels repeatedly (resistance or support). Use the higher 67
  68. 68. Forex Trading Basics time frames such as the H4 and the Daily chart as the resistance and support zones on these charts are more significant. 5. Some individuals only trade the weekly or monthly chart. This requires great discipline and patience. For this you would check the full capacity level of a pair by checking its height and depth over the past several years, research what is happening with the pair, check support and resistance levels, then check the chart at the beginning of the month during the first week or ten days. Also, check your trade at the end of the month. 6. Decide the amount of money you are going to risk (less than or no more than 1% of your account value), your entry point, number of risked pips (to determine stop loss), pip value and lot to be traded, and write them down. Decide your take profit and write that down also. 7. Wait for the confirmation candle, then enter the market, preferably using a pending order. If you are confident of 68
  69. 69. Forex Trading Basics the direction in which it is headed (based on your research and your gut feeling), then go ahead and use either the buy or sell order. If you see it retracing before it heads in the favorable direction, then you may use the appropriate buy or sell limit order instead. 8. Be patient. Your trade may take from a few minutes to a few days to play out in your favor. Don't give up too quickly. Allow the market to take you out, hopefully profitably. If you lost a trade, cut your losses and look for a more profitable trade. You are aiming for a 65 to 75 per cent success rate. Not a 100% success rate. Some failing trades are inevitable. The more you learn to read the charts and exercise discipline when executing your trade, the higher your success rate will be. 69
  70. 70. Forex Trading Basics Section 4 The Forextrepreneur in me 70
  71. 71. Forex Trading Basics Life as a Forex Entrepreneur Trading Forex full-time requires working smartly and skillfully. Fortunately, today's forex entrepreneur can have more than one business, or other additional employment, since the flexibility of trading via one's smart device allows one to trade easily and on the go. However, keep in mind that the Forex market is unpredictable and without emotion. The market does not care what trades you picked today. Therefore, your success rate will increase significantly if you adjust your approach to trading. You should never trade by just looking at the chart and simply jumping in, or try to recoup losses by constantly increasing your volume. That would be gambling, and that means even greater risk. Instead you should put high priority on preparation and analysis. Follow the story of the pair when reading the chart. Stick religiously to your preset trading style and setup. When you are satisfied with the conclusions you have drawn and written down your trading predictions with your set rules in mind, then and only then, do you enter the trade. There are times when trading might require odd or late hours of work, watching the charts, 71
  72. 72. Forex Trading Basics and an extra amount of patience. Some people find larger or multiple monitors helpful, and even color-coding candlestick charts. Whatever works for you. You might have to trade despite distractions, and it can only help to schedule your time, if possible, around important activities. Even harder is that some persons close to you may not take your trading seriously, and think you are embarking on a hobby or simply wasting your time and energy. You have to teach persons by example. When persons realize that you are taking this seriously, and when they realize that you are earning real money so that you will be able to pay the bills and more, they will take your choice of being a trader a lot more seriously. Forex Trading is a serious skill with a steep learning curve. A great advantage of trading, however, is that you can trade from anywhere. You are not tied down to one location. All you need is an internet connection and a smart device to execute your trades. Be sure to treat trading as a business. Set your monthly, quarterly and yearly projections, 72
  73. 73. Forex Trading Basics and when withdrawing money set a budget. You do not want to withdraw so much that you hurt your account and have to rebuild from scratch. Some individuals think mistakenly that being a Forex Trader means fast money, and living the hype life, but that is simply not true. The reality is it that it may take weeks, months, even years for you to make serious money with Forex Trading, but the more disciplined a trader you become, then the greater your rewards will be. Your aim should be to get consistent small rewards which will slowly add up or compound over time. So focus on becoming a skilled and disciplined trader who takes the time to prepare carefully before each trade. This only happens with practice, time, experience and patience. Pack along a great deal of patience because there are times when you may have to wait on price action for days even weeks before it gets to the point where you want it to be in order for you to enter the trade. If you eventually get rich from trading, that's great. But, keep in mind that with greater wealth comes greater responsibility, and our focus 73
  74. 74. Forex Trading Basics should always be on what we can do to help others. I wish you great success (and lots of fun) in your trading! 74
  75. 75. Forex Trading Basics List of Resources for your further Forex training development Xtreme Trader (on Facebook & YouTube) Finviz.com Babypips.com ForexLive.com Investopedia.com DailyFx.com Mataf.net Tradeciety.com YouTube.com 75
  76. 76. Forex Trading Basics List of brokers I have used Trader's Way Axitrader 76
  77. 77. Forex Trading Basics About the Author Jamaican-born writer, Coleen Powell, enjoys trading Forex and is presently a Forex Trading Coach. Coleen is also the Founder of Saffrion Webb books and ReadimadeNation. Please feel free to join her Facebook group @earnonlineja where she posts about how to earn online, trading forex, and related subjects. **** Thank you for taking the time to read "Forex Trading Basics-What You Need To Know Before Executing Your First Trade." If you enjoyed it, please consider telling your friends or posting a short review. Word of mouth is an author's best friend and greatly appreciated. You would also be helping others to learn the right approach to trading as well. Thank you. - Coleen Powell 77
  78. 78. Forex Trading Basics Have feedback or suggestions and would like to contact the author? Please send an email to earnonlineja@gmail.com or visit our website at https://learnforexja.weebly.com 78