The Ultimate Beginners Guide

PipPhenes Inc. Forex Trading for Beginners: The Ultimate Beginners Guide

Forex trading for beginners can be especially tough. This is mostly due to unrealistic expectations that are common among newcomers. What you need to know is that currency trading is by no means a get-rich-quick scheme. On this page, you will receive an introduction to the Forex market, how it works, and key terminology, along with the benefits of trading different currencies.

We will cover how you can start trading (including choosing the best broker, best way to learn, best education and signal services, and other hands free trading options.), the fundamentals of risk management, the different ways you can analyze the Forex market, and an overview of the most popular trading strategies as well as our favorites. By the end of this guide, you will have the knowledge you need to start testing your trading skills with a free Demo account, or if you want to move onto a live account.

 

Quick Guide:

Broker: TradersWay (MT4.ECN, 200:1 Leverage, use MT4)

Signals/Education: Free: Telegram Paid: Membership Follow Along!

 

So, What is Forex?

Forex, or the foreign exchange market (also called FX for short) is the marketplace where currencies are traded. At its simplest, a foreign exchange transaction might be, for example, when you transfer your local currency to a new one for an upcoming holiday. Across the market as a whole, an estimated 5.3 billion USD is traded every day between governments, banks, corporations, and speculators. (This will soon be handled by cryptocurrency technology, if you want to capitalize on the tokenization of global funds join our Crypto-Based Hedge Fund: PlutusManagement.com We expect no less  than 30X for 2019, consider investing!)

Knowing how the industry is mapped out is important, because the collective combination of all participants creates the market you trade in. The relative weight of the trading party to the market is measured by how much money that party manages – from billion dollar hedge funds and investment banks, to private traders with a few thousand dollars in action.

Currencies are traded as pairs, and the movement of currency pairs measure the value of one currency against another. For instance, the EURUSD currency pair measures the value of the Euro against the US dollar. When the value of the pair increases, this means the value of the Euro has increased against the value of the US dollar. When the value of the pair decreases, this means the value of the US dollar has increased (or the value of the Euro has fallen).

Think of these trading pairs like a teeter totter. Just pretend that strength in the currency means heavy weight, and weakness in a currency means lighter weight. When you put these pairs on the teeter totter the strengthening currency will be the one to tilt the teeter totter and the weakening currency will be lifting the teeter totter.

By trading Forex and CFDs, traders can make a profit off of these currency movements.

 

 

 

 

 

 

Which Forex Pairs Can You Trade?

Forex currency pairs are known as majors, minors, and exotics.

Major currency pairs are made up of the most frequently traded currencies, which are:

  • USD - The US Dollar
  • EUR - The Euro
  • JPY - The Japanese Yen
  • GBP - The British Pound
  • CHF - The Swiss Franc
  • CAD - The Canadian Dollar
  • AUD - The Australian Dollar
  • NZD - The New Zealand Dollar

 

A major currency pair is one that contains any one of these currencies paired against the US dollar, such as the EUR/USD, USDJPY or the GBPUSD. Forex minors pairs made up of these major currencies that don't include the US dollar. These pairs include EURGBP, EURCHF, AUDNZD and so on.

Finally, exotic currencies are any currencies that we haven't already mentioned, such as the Hong Kong Dollar (HKD), the Norwegian Krone (NOK), the South African Rand (ZAR) and the Thai Baht (THB). Exotic pairs include one exotic currency and one major currency.

When learning about Forex trading, many beginners tend to focus on major currency pairs because of their daily volatility and tight spreads (we will get into these later).

How many markets you scan for opportunities is up to you, but do not limit yourself to just one instrument or one market (at first!). Market limitation can lead to overtrading, so make sure to diversify your interests until you find what works for you. After you figure this out, go deep, not wide.

 

 

 

 

What Are Forex Quotes?

When trading Forex, you'll see that both 'Bid' and 'Ask' prices are quoted. The bid price is the price at which you can buy the currency, while the ask price is the price at which you can sell it. If you are purchasing a currency in a trade, this is known as a long trade, and the hope is that the currency pair will increase in value, so that you can sell it at a higher price and make a profit on the difference.

If you are selling a currency in a trade, the opposite is true - the hope is that the currency pair will fall in value, so that you can buy it back at a lower price, which means you will profit on the difference.

The number quoted for these prices is based on the current exchange rate of the currencies in the pair, or how much of the second currency you would get in exchange for one unit of the first currency (for instance, if 1 EUR could be exchanged for 1.68 USD, the bid and ask price would be on either side of this number).

You can go deeper into these topics by checking out our Forex Investor E-Book ($27) Can get yours at https://pipphenes.com/

 

 

How Much Do Currency Values Change (Or, How Liquid Are Different Forex Pairs)?

If the way traders make a profit is by cashing in on the difference between the bid and ask prices of currency pairs, the next logical question is, how much can you expect any given currency to move?

This depends on how liquid the currency is, or how much of it is being bought and sold at any one time. The most liquid currency pairs are the ones with the most supply and demand in the Forex market, and this supply and demand is generated by banks, businesses, importers and exporters, and traders. Major currency pairs tend to be the most liquid, with the EUR/USD currency pair moving by 90-120 pips on an average day.

By contrast, the AUD/NZD moves by 50-60 pips a day, and the USDHKD currency pair only moves by an average of 32 pips a day (when looking at the value of currency pairs, most will be listed with five decimal points. A 'Pip' is 0.0001. So, if the EUR/USD moved from 1.16667 to 1.16677, that would represent a 1 pip change). The major Forex pairs tend to be the most liquid, and therefore provide the most opportunities for short term trading.

However, there are many opportunities among minor and exotic currencies as well, particularly if you have some specialized knowledge about a certain currency.

What is a Pip?

The unit of measurement to express the change in value between two currencies is called a “pip.”

If EUR/USD moves from 1.1050 to 1.1051, that .0001 USD rise in value is ONE PIP.

A pip is usually the last decimal place of a price quote.

Most pairs go out to 4 decimal places, but there are some exceptions like Japanese yen pairs (they go out to two decimal places).

For example, for EUR/USD, it is 0.0001, and for USD/JPY, it is 0.01.

What is a Pipette?

There are forex brokers that quote currency pairs beyond the standard “4 and 2” decimal places to “5 and 3” decimal places.

They are quoting FRACTIONAL PIPS, also called “pipettes.”

If the concept of a “pip” isn’t already confusing enough for the new forex trader, let’s try to make you even more confused and point out that a “pipette” or “fractional pip” is equal to a “tenth of a pip“.

For instance, if GBP/USD moves from 1.30542 to 1.30543, that .00001 USD move higher is ONE PIPETTE.

Here’s how fractional pips look like on a trading platform:

On trading platforms, the digit representing a tenth of a pip usually appears to the right of the two larger digits.

Here’s a pip “map” from babypips to help you to learn how to read pips…

 

 

 

What is the Forex Spread?

The spread, in Forex, is the difference between the bid and ask price of a currency pair. For example, if the Bid price of the EUR/USD is 1.16668, and the sell price is 1.16669, the spread will be 0.0001, or 1 pip. In any Forex trade, the value of a currency pair will need to cross the spread before it becomes profitable. To continue with the previous example, if a trader entered a long EUR/USD trade at 1.16668, the trade wouldn't become profitable until the value of the pair was higher than 1.16669.

In a currency pair with a wider spread, such as the EURCZK, the currency will need to make a larger movement in order for the trade to become profitable. At the time of writing, the bid price for this pair is 25.4373, while the ask price is 25.4124, so the spread is 0.0200, or 20 pips. It's also not uncommon for this currency pair to have movements of less than 20 pips a day, meaning traders will likely need to perform a multi-day trade to make a profit.

This means that low spread trading is often a priority for Forex traders, as their trades can become profitable quicker, meaning that they can make a high volume of smaller trades, rather than relying on larger trades to make money.

What are Forex CFDs?

If you've been researching Forex trading, you might have seen the term 'Forex CFDs' at some point. There are two ways to trade Forex: using CFDs or spot Forex (also known as margin). Spot Forex involves buying and selling the actual currency. For example, you might purchase a certain amount of Pound Sterling for Euros, and then, once the value of the Pound increases, you may then exchange your Euros for Pounds again, receiving more money back compared with what you originally spent on the purchase.

The term CFD stands for 'Contract For Difference', and it is a contract used to represent the movement in the prices of financial instruments. In terms of Forex, this means that rather than purchasing and selling large amounts of currency, you can profit on price movements without owning the asset itself. Along with Forex, CFDs are also available on shares, indices, bonds, commodities and cryptocurrencies. In every case, they allow you to trade on the price movements of these instruments without having to purchase them.

 

 

How Does Leverage Work in Forex Trading?

Along with being able to access a wide range of financial markets, another benefit of trading CFDs is that a trader can access a much larger portion of those markets, and increase their potential profits as a result. CFD contracts provide leveraged access to the market, meaning a trader can access a much larger portion of the market than what they would be able to purchase outright.

To use Gold CFD as an example, at the time of writing, to purchase an ounce of Gold you would need to spend 1,200 USD. However, with a leverage rate of 1:20 (which means a trader could trade up to 20 times the value of what they deposit), a trader could trade on the full value of an ounce of gold (equivalent to 1,200 USD), for a deposit of just 60 USD.

Similarly, if you wanted to purchase 3,000 USD with Euros, that would cost 2,570 EUR. With a leverage rate of 1:30, however, you could access 3,000 USD worth of the EUR/USD currency pair as a CFD with just 100 USD. The best part, however, is that the size of the potential profit a trader could make is the same as if they had invested in the asset outright. The risk here is that potential losses are magnified to the same extent as potential profits.

Forex Trade (1:20 leverage)

Traditional trade

You deposit

US $500

US $10,000

EUR/USD trade opens at 1.16766, closes at 1.16926, a difference of 0.00200

You make US $200, or 40%

You make US$200, or 2%

EUR/USD trade opens at 1.16766, closes at 1.16532, a difference of 0.00234

You lose US $234, or 46.8%

You lose US $234, or 2.34%

 

To see how different levels of leverage can affect your trading, take a look at our Forex leverage infographic below:

 

We suggest you use 200:1 or more AS LONG AS you use our recommended broker: TradersWay

You will get the lowest spreads, fees, and commissions in the industry. We have been with them for 12+ years now! JOIN THEM! Don’t get screwed again.

A Summary of Essential Forex Terms

Before we move on, let's recap some of the key concepts covered so far with this list of key Forex terms:

  • Pip:A pip is the base unit in the price of currency pairs, or 0.0001 of the quoted prices. So, when the bid price for the EUR/USD pair goes from 1.16667 to 1.16677, that represents a pip change of one.
  • Spread:The spread is the difference between a currency pair's bid and ask price. For the most popular currency pairs, the spread is often low - sometimes even less than a pip! For pairs that aren't traded as frequently, the spread tends to be much higher. Before a Forex trade becomes profitable, the value of the currency pair must cross the spread.
  • Margin:Margin is the money in a trader's account. However, because the average 'Retail Forex trader' lacks the margin required to trade a high enough volume to make a good profit, many Forex and CFD brokers offer their clients access to leverage.
  • Leverage:Leverage is capital provided by a Forex broker to bolster their client's trading volume. For example, if you use a 1:10 rate of leverage and have $1,000 in your trading account, you can trade $10,000 worth of a currency pair. If the trade is successful, leverage will maximize your profits by a factor of 10. However, please note that leverage also multiplies your losses to the same degree, so it should be used with caution. If your account balance falls below $0, you may trigger a broker's negative balance protection settings (if trading with an ESMA regulated broker), which will result in the trade being closed. Fortunately, this means that your balance cannot move below $0, so you will not be in debt to the broker.

 

What Are the Benefits of Forex Trading?

Now that we've shared an overview of the Forex market, why might you want to trade Forex?

There are a number of reasons why people choose to start day trading. Some of these reasons might include the potential to earn extra money on the side from the comfort of their own home, the opportunity to learn a new skill in their own time, or even the dream of achieving financial freedom, and having more control over their financial future. When it comes to Forex specifically though, there are a number of benefits that make this financial instrument a very enticing one to trade.

If you would like to learn more about the differences between the Forex market and the Stocks market, why not check out our comparison article on the topic? And find out which market is right for you! Follow our trading daily on our Telegram Channel (Free)

 

Forex: The World's Largest Financial Market

Forex is the world's largest financial market, with over 5.09 trillion USD traded every single day. To put it in other words, in a single day, more money will be traded in the Forex markets than Japan's entire GDP! (Gross Domestic Product). Of these transactions, 254 billion USD is traded through CFDs and other derivative instruments.

Being the largest, most active financial market on the globe, it is also the world's most liquid market, meaning it is easy for traders to enter into, as well as exit trades, and for the most liquid pairs, they can do so at a very low cost (even less than a single pip!). This also means that the Forex market is very volatile, creating many opportunities for traders to make a profit on both the positive and negative movements of currency pairs.

Trade Around the Clock

Forex is the one financial market that never sleeps, meaning you can trade at all hours of the day (or night). Unlike the world's stock exchanges, which are located in physical trading rooms like the New York Stock Exchange or the London Stock Exchange, the Forex market is known as an 'Over-the-counter market' (or OTC). This means that the trades take place directly between the parties holding the currencies, rather than being managed via an exchange.

Consequently, the Forex market has never been restricted to the business hours of any one exchange.

However, since the Forex market is a global market, it means there is always a part of the world that is awake and conducting business, and during these hours their currencies tend to experience the most movement. For example, currency pairs involving the US dollar experience the most movement during US business hours (16:00 to 24:00 GMT), while the Euro, Pound, Swiss Franc and other European currencies experience the most movement during European business hours, (8:00 and 16:00 GMT).

By contrast, the Australian Dollar, the New Zealand Dollar and the Japanese Yen tend to be more active between 00:00 and 08:00 GMT. As a trader, this means you can trade whenever it suits you - if you work during the day, there will be currencies available to trade before or after work. If you have children but are at home during the day, you can simply choose a different currency. In the Forex market, you can trade 24 hours a day, 5 days a week.

 

 

BROKERS IMPORTANCE

Speculate on Rising or Falling Prices

One of the most common trading and investment philosophies is to 'buy low and sell high' - this is particularly the case with long-term investments, such as investing in stocks or bonds, which rely on the asset increasing in value. In the Forex market, you can also sell high and buy low. This way, you can potentially make profits on both downward and upward trends.

As mentioned earlier, in a long trade (also known as a buy trade), a trader will open a trade at the bid price, and will aim to close the trade at a higher price, making a profit on the difference between the opening and closing value of the currency pair. So if the EUR/USD bid price is 1.16667, and the trade closes at the price of 1.17568, the difference is 0.00901, or 90.1 pips. (When trading a single lot, that would make a 901 USD profit).

Traders can also make short trades (also known as sell trades), where they sell a Forex CFD at the ask price and, once the price drops, buy it at a lower bid price, and profit on the difference. In this case, if the GBP/USD ask price was 1.32265, and the trade closed at the price of 1.31203, the difference would be 0.01062, or 106.2 pips (which would amount to 1,062 USD in profit).

Low Costs of Forex Trading

Due to Forex CFDs being leveraged, traders can access large portions of the currency market at a very low margin - sometimes as low as 1/500th of the size of the market they want to access (based on a leverage rate of 1:500). There are few additional costs as well - most Forex trading accounts have little (or no) commissions, order fees, and account management fees. If there are any trading fees, these are usually a markup the broker has added to the spread. Lowest Spread Broker: TradersWay our Recommendation

Ease of Access

One of the greatest advantages of Forex trading is that it is one of the most developed financial markets in terms of technology. While many markets are accessible via old-fashioned trading platforms, there is constant competition in terms of the software available for trading the FX market.

The platforms offered by Traders Way include MetaTrader 4 (MT4) and MetaTrader 5 (MT5) and MetaTrader WebTrader. MT4 and MT5 are both available for Windows, Mac, Android and iOS devices (for iPhone and iPad). In addition, Traders way offers all these platforms straight from those links.

With access to all this software, Forex can be traded from anywhere in the world - and all you need is an internet connection. In fact, you can start trading in a risk-free environment now with a free demo account. Get a free demo account with us here: TW

How Can You Start Trading Forex?

If you're still reading, your next question is probably, "How can I become a successful Forex trader?"

This is the main focus of the rest of this article - we'll outline not only how you can start trading, but also some of the most popular trading strategies for making a profit on the Forex market, which exercise risk management. The first step, of course, is getting set up to trade, which starts with finding the right Forex broker.

What is the quality of the broker's trading service?

The service of the broker you choose, and the platform they offer, is essential in ensuring that you achieve the best trading results. If you were trading on a system that was slow and regularly crashed, for example, you might not be able to enter or exit a trade at the price you want. Instead, it's important to look for a broker that offers high levels of liquidity, low spreads and the ability to execute orders at the price you want (or as close to this as possible).

Another element of the service provided is the margin requirements and level of leverage available. While there is no need to choose the highest level of available leverage when you start trading Forex, simply knowing that a broker offers the highest level of leverage approved by their regulator means that, as your experience grows, you can start to increase your leverage according to your preferences.

What is the cost of trading?

As Forex trading can be an income-generating activity, it's important to treat your trading as a business activity - one where you consider both how to maximize your income, how to minimize your costs, and how to minimize the risks. With this in mind, make sure to consider the costs of trading with any Forex broker, before you ultimately select one.

Areas to think about include:

  • The size of their spreads: We've already discussed how the size of the spread influences your potential trading profits, as any currency pair needs to cross the spread before a trade will become profitable. With this in mind, look for a broker that offers low spreads.
  • Commissions:Ideally you should choose a Forex broker that doesn't charge commissions, as commissions will cut into your potential profits.
  • The minimum deposit: Many Forex brokers will ask traders to make a minimum deposit when opening a live trading account, so it is best to find one with the lowest number of requirements. Traders Way offers a minimum deposit of $10

While searching for the cheapest Forex broker, it really comes down to a combination of spreads, execution quality, commission, and the minimum deposit. These should be the last points you consider when opening a long-term trading account. The best Forex broker for beginners depends on elements like the trading system, the quote feed, instrument portfolios, execution models, and the leverage offered.

What products and markets do they offer?

When choosing a Forex broker, obviously you will want to make sure they have access to a wide range of currency pairs, including majors, minors and exotics. But what about other financial instruments? If you are considering trading with a Forex and CFD broker, it's a good idea to look into the other instruments they offer as well.

This will ensure that if you decide to trade stocks, indices, ETFs commodities, cryptocurrencies and other instruments in the future, you won't need to find a new broker to do so. Traders Way, for example, provides traders with access to over 7,500 financial instruments, allowing you to create a diversified trading and investment strategy from a single platform.

  1. Which trading tools do they have available?

The quality of the trading tools a Forex broker offers can make a big difference to your trading experience. In most cases, the available tools will depend on the trading platform (or platforms) being used. For instance, Traders Way offers trading through the state of the art MetaTrader 4 & 5 Supreme Edition plugin, which include a range of custom tools and add-ons to improve your trading experience.

  1. Does the broker's offering suit your trading style?

It's important to consider whether a Forex broker and their trading platform will suit your trading style. For example, you might be interested in following a scalping strategy which involves making a high volume of small profits on small currency movements. In this case, you would need to ensure that any potential broker has minimum distance between the market price and your stop-loss and take-profit.  YOU CAN COPY US DIRECTLY BY FOLLOWING OUR TRADING SIGNALS! FREE: TELEGRAM PAID: WEBSITE

Or, if you are new to Forex trading, you might not be comfortable using the maximum leverage the broker offers. With this in mind, check whether the broker allows nominal leverage - where you can choose the amount of leverage you use in your trading, anywhere up to the maximum limit.

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How to Manage Your Risk When Trading Forex

Before you make your first trade, it's important to consider how to effectively manage your risk in the Forex market. As we've already discussed, trading Forex CFDs gives you the opportunity to trade using leverage, meaning you can use a relatively small deposit to access a larger portion of the market (up to 500 times the value of your account balance, if you're a Professional client). This then multiplies your potential profits to the same extent. However, it also multiplies your potential losses.

To use an extreme example, imagine holding an account balance of 2,000 EUR and putting all of that on a single trade. If the trade goes badly, you will have lost your entire investment, and because the Forex market can move very quickly, losses can also happen very quickly. This is where risk management is essential - to help you minimize losses and protect any profits you do make. The key areas to consider when managing your Forex trading risk are trading psychology, and money management.

We suggest you use 0.05 lots per $1,000 balance.

Use 200:1+ leverage, ONLY IF YOUR ARE WITH OUR BROKER & LINK! TW

Master Your Trading Psychology

While it might sound strange to discuss the topics of mindset and psychology in a guide to Forex trading, the truth is that these are some of the most important factors separating successful traders from unsuccessful traders.

Developing trading discipline and the ability to manage your emotions will help you remain cool under pressure, entre trades at the right time, and to know when to exit those trades - whether you are cutting your losses or taking your profits before the market turns.

Some key trading psychology tips to keep in mind include:

  • Stay calm:As exciting as trading can be, it is still stressful work. There will be a lot of setbacks on your way to the top. Emotions can force your hand to open a trade too early and/or close it too late. The main cause of stress for beginners in trading is the fact that some Forex trades will end in loss no matter what – it's just the way the market is. Just remember that war is not won with a single battle. Rather, it is overall performance that counts.
  • Understand your risk tolerance:Every person has a different level of risk tolerance, and this will influence the size of the chances they take, the losses they are willing to experience, and the psychological effect of them. To manage your stress levels while trading, it's important to consider your level of risk tolerance in advance and choose trading strategies that support this. 

    For instance, someone with a low risk tolerance would be more comfortable making lots of small trades over time and letting the small profits from each trade add up. By contrast, someone with a higher tolerance for risk would be more willing to make larger trades, with the opportunities for larger gains (but larger losses as well).
  • Set realistic trading goals:It's important to be realistic with your trading expectations, as this will help you assess the best times to open and close trades. Many new Forex traders have very high expectations about their potential profits, and this causes them to trade very aggressively, with large sums of money and fast decisions. Again, start small to test your knowledge and skills, and as you start to reliably achieve the results you want, you can set bigger goals.
  • Set your limits in advance:Before embarking on any Forex trade, you should have defined the price at which you'll open the trade, the price at which you will close it and take your profits, and the price at which you will close it, should the market turn unexpectedly, thereby cutting your losses. Then, once you have set those limits, it's important to stick with them! 

    Many new traders choose not to close a trade because the market is still moving in the direction, they want it to, only to then lose all of their gains when the direction suddenly changes. If your trade hits your predetermined target, close it and enjoy your winnings. If the market moves in the opposite direction, close the trade or set a stop loss so it will close automatically.
  • Prepare for the worst: While this might sound pessimistic, in Forex trading it is better to prepare for the worse than expect the best. There have been many times in history when financial markets and individual trading instruments have experienced sudden spikes or drops in value. By considering the worst possible outcome of a trade, you can take measures to protect yourself, should this happen, such as by setting a stop loss in advance.

 

 

 

 

 

 

 

 

Money Management in Forex

Managing your money in Forex trading comes down to the specific measures you use to increase your profits, whilst also minimizing potential losses. Successful Forex trading has far more to do with effective money management than having a handful of good trades and is one of the secrets that separates those who successfully trade FX over the long term, from those who give up after a couple of trades.

For the moment though, here are some money management fundamentals to guide your trading:

  • Decide how you will finance your trading in advance:Only one kind of money is good for investing, and that's the kind that you are willing to lose, and preferably without damaging your physical and/or mental wellbeing in the process. Every profitable trader is profitable in their own way, while every loser experience loss the same way. Remember, use every available opportunity to learn. It's a never-ending process!
  • Define your investment level:One of the most common questions about trading Forex is 'how much do I need to get started? For beginner traders, it's a good idea to start small and work your way up. Fortunately, many Forex brokers have reasonable minimum deposit levels for opening an account. At Traders Way for example, the minimum deposit amount is $10, however we suggest starting with $300 minimum after practicing with demo accounts... Calculate your risk: Make sure to calculate your risk before you trade. If the potential profits of a trade are smaller than the potential risks, the trade probably isn't a good decision. You can assess your risk with our free Forex calculator.
  • Determine the profits required to cover any losses: Along with calculating your risks before any trade, it's also worth calculating how much you would need to make to regain those funds in any future trade. It's often harder to earn money back than it is to lose it, simply because your remaining investment pool is smaller, which means you have to make a larger profit (percentage wise) to break even. 

    For example, if you invested 5,000 EUR and lost 1,000 EUR, you will have lost 20% of your balance, leaving you with a final balance of 4,000 EUR. To bring your balance back to 5,000 EUR, you will need to make a profit of 1,000 EUR. However, with a starting balance of 4,000 EUR (after the previous loss), there is now a 25% gain, rather than a 20% one.

Amount of account balance lost

Necessary return to restore original account balance

Percentage Difference

10%

11%

1%

20%

25%

5%

50%

100%

50%

75%

400%

325%

90%

1,000%

910%

  • Start with small trades: To help you manage your risk and preserve your capital, start by trading small sums of money, rather than taking big risks with a large portion of your account balance. For instance, in the previous example, if you put your entire 2,000 EUR account balance on a single trade, it would be easy to lose it all. 

    By contrast, if you just traded 20 EUR, a loss would not significantly affect your account balance. It would provide you with the opportunity to learn from your experience and plan your next trade more effectively. With this in mind, limiting the capital you are prepared to risk to 5% of your account balance (or lower) will put you in a better position to continue trading Forex (and improving your technique) over the long term.

 

Risk Management Tools and Techniques

Once you have mastered your trading psychology and money management, there are a number of trading techniques you can apply to further reduce your risk:

  • Diversify your portfolio:We all know the saying, 'don't put all your eggs in one basket', yet many new FX traders do this when it comes to their trading. Just as it isn't wise to put all of your funds into a single trade, relying on a single currency pair increases your level of risk, because if the pair moves in a different direction to what you expect, you could lose everything. Instead, consider opening a number of small trades across different Forex pairs. 

    You could even consider trading other CFD instruments as well, such as shares, indices, commodities, cryptocurrencies and more, as these will further diversify your trading portfolio.
  • Use leverage wisely:As we've already mentioned, Forex CFDs allow you to trade on a margin, or by using leverage. However, just because 1:30 (or 1:500) leverage is available, it doesn't mean that you need to use it. At Traders Way, while there is a maximum amount of leverage available to our clients, they are still able to choose the amount of leverage they use when they are trading, which may be anything up to that amount. 

    For instance, after assessing your risk, you might decide that the potential costs of trading with a 1:30 level of leverage are too great, and you are more comfortable with 1:5. Choosing a lower nominal leverage will help you to manage your risk effectively, especially if you are new to Forex trading.
  • Focus on the long term:The initial stages of your trading should be about preserving your capital – not trying to grow it. Minimizing risk is the primary objective. One way to possibly achieve this is by utilizing a long-term trading stance. 

    What casual Forex trading beginners often fail to realize is that the most successful traders try to make a return on their investment based on long-term trends. They often hold their orders open for weeks, months and even years at a time. This way, Forex works as an investment rather than a lottery.
  • Use a stop loss:A stop loss is tool that traders use to limit their potential losses. Simply put, it is the price level at which you will close a trade that isn't moving in your favor, thereby preventing any further losses as the market continues to move in that direction. You can also use a stop loss to conserve any profits you might have already made - the tool to achieve this is known as a 'trailing' stop loss, which follows the direction of the market. 

    For instance, if you opened a long trade on the GBP/USD currency pair, and the pair increased in value, the price limit at which the trade should close (the stop loss) would climb alongside the price of the currency pair. If the value of the GBP/USD then started to fall, the trade would be closed as soon as it hit your stop loss, preserving any profits you had made beforehand.
  • Continue your Forex education:The markets are constantly changing, with new trading ideas and strategies being published regularly. To ensure you continue to develop your trading skills, it's important to stay on top of your trading education by regularly reviewing market analysis and by learning new trading strategies. For more trading education, take a look at our Forex videos, which are designed to grow your knowledge as you start and continue to trade.


 

 

 

 

 

 

 

 

How to Analyze the Forex Market

While some new Forex traders might experience beginner's luck and open a trade on the right currency pair in the right direction, this luck rarely lasts. For long-term trading success, a trader needs to be able to make informed trading decisions, and these decisions are a result of analyzing the market.

Analysis is absolutely vital to trading. Charts are helpful for both short and long-term trading. You should be looking at daily, weekly, and monthly charts. Fortunately, there are a number of different approaches to Forex analysis, which means every trader can find the right approach for them. The three broad categories of Forex analysis are fundamental analysis, technical analysis and wave analysis.

Fundamental Analysis

This form of analysis involves look keeping track of real-world events that might influence the values of the financial instruments you want to trade. For instance, the value of the Australian Dollar might fluctuate following a Reserve Bank of Australia interest rate announcement, which will then affect the movements of all currency pairs including the AUD.

The seven economic indicators that have the greatest impact on the Forex market are:

  • Gross domestic product (GDP)
  • The number of jobs outside the agricultural sector (known as Non Farm Payrolls, or NFP)
  • The rate of unemployment
  • The index of industrial production
  • Retail sales
  • Orders for durable goods
  • The interest rates of national banks (such as the European Central Bank or the US Federal Reserve)

There are then three possible scenarios following an economic publication or announcement:

  1. No reaction, implying that the market had anticipated the announcement
  2. A strong movement in accordance with the economic data that has been made public (so if the announcement shares positive news, the instrument affected by this news will increase in value)
  3. A strong movement against the economic data shared

The challenge is assessing which outcome is the most likely, and then opening a trade accordingly. A good starting point for this trading approach is first being aware of upcoming events that may affect the Forex market (refer to a forex calendar for the latest events) and second, looking at the effect similar announcements had on different currency pairs in the past. You can learn more about fundamental analysis in our “Everything You Need to Know Ebook”

Technical Analysis

While fundamental analysis focuses on what is happening in the real world, including economic, political, and business news and events, technical analysis largely focuses on what is happening in trading charts.

Trading charts simply chronicle the price movements of different trading instruments over time, which allows traders to identify patterns in price movements and make trading decisions based on the assumption that these patterns will repeat in the future. For example, one trading chart format is the candlestick chart, which is formatted to emphasize high and low price points for certain time increments (these increments can be set by the trader in their trading platform).

The trader can then see:

  • The opening price for the period
  • The highest price point for the period
  • The lowest price point for the period
  • The closing price for the period

This information can then allow traders to make judgements regarding a currency pair's price movement. For example, if a Japanese candlestick closes near the highest price for the period, that would imply that there is a strong interest on the part of buyers for this currency pair during that time period. A trader might then decide to open a long trade to take advantage of that interest.

Over time, common patterns emerge in the movement of the charts (and the formation of different candlesticks), which can then be used to predict potential future price movements and make the best trades based on these predictions. You can learn more about trading with

Wave Analysis

Wave analysis, also known as Elliott Wave analysis, is a well-known method that analyses the price chart for patterns and the direction (trend) of a financial instrument. The method is based on historical movements in market prices, with the belief that history repeats itself. The reason for this is due to market sentiment, meaning that the market as a whole moves as a herd, and reacts in a similar way to similar events and announcements.

In the Forex market, these reactions involve buying and selling currencies, which causes the prices of different currency pairs to fluctuate.

The theory follows sequences of five waves, or five up and down price movements which are then countered by a corrective 3 wave pattern in the opposite direction. The 5 impulsive waves are with the trend, whereas the 3 corrective waves are counter trend. In an 'up' move, there will be three up waves (movements 1, 3 and 5) and two down waves (movements 2 and 4).

In a corrective down move, there will be 2 waves down (A and C) and 1 wave up (B). In a down move, the instrument will make 3 waves down which are separated by 2 waves up. The corrective up wave will have 2 waves up and 1 wave down. Following this, the instrument will make a 'down' move, with three down waves being separated by two up waves.

While this pattern does not take place every time prices move, traders can use this method as a guideline for whether or not to enter into or exit a trade by taking the following steps:

  1. Determine how you will generate the Elliott Wave count, keeping in mind that the approach must be consistent for all 'up' and 'down' movements.
  2. Wait for a wave to begin. In many cases it is wise to wait until the end of the third or the beginning of the fourth movement in the wave, to ensure that the instrument is following the Elliott Wave price pattern.
  3. Use a secondary indicator (or indicators) to confirm the trend.

Once you have taken these steps, you can enter into a trade with more confidence. If you would like to learn more about wave analysis, please join our free channel: t.me/pipphenes

6 Popular Forex Strategies

Now you know the what, the why, and the how of Forex trading. The next step to to create a trading strategy. For beginner traders, the ideal scenario is to follow a simple and effective strategy, which will allow you to confirm what works and what doesn't work, without too many variables confusing things. Fortunately, banks, corporations, investors, and speculators have all been trading the markets for decades, which means there is already a wide range of Forex trading strategies to choose from. These include:

  • Scalping: Scalping is a trading strategy that involves buying and selling currency pairs in very short increments - usually anywhere between a few seconds and a few hours. This is a very hands-on strategy that involves making a large number of small profits until those profits add up.
  • Intraday:Forex intraday trading is a more conservative approach than scalping, with trades focusing on daily price trends. Trades may be open anywhere between one to four days, but usually focus on the major sessions for each Forex market.
  • Swing: Swing trading is a medium-term trading approach that focuses on larger price movements than scalping or intraday trading. This means that traders can set up a trade and check in on it within a few hours, or a few days, rather than having to constantly sit in front of their trading platform, making it a good option for people trading alongside a day job.
  • Hedging:Hedging is a risk management technique where a trader can offset potential losses by taking opposite positions in the market. In Forex, this can be done by taking two opposite positions on the same currency pair (e.g. by opening a long trade and a short trade on the GBP/USD currency pair), or by taking opposite positions on two correlated currencies.

 

To Conclude: Our Top Forex Trading Tips For Beginners

We have covered a lot of information in this article so, we'd like to conclude with an overview of our top Forex trading tips for beginners. If you take anything from this article, it should be these following tips:

Do Your Research

Generally speaking, the less you know, the more at risk you are, and there is no limit to how much you can know or risk. An endless amount of information is available on the internet free of charge, like:

  • Educational videos on Forex exchange trading for beginners
  • Educational articles and tutorials
  • Forex trading seminars for beginners and professionals
  • Forex trading webinars

If you want to know how to learn Forex trading as a beginner, simply read as much as you possibly can, and always analyze what you read – don't just take information in good faith.

Test on a Demo Account or With Simulation Software

Every broker offers a demo account – whether you are a beginner or not, test every new strategy there first. Keep going until the results are conclusive and you are confident in what you are testing. Only then should you open a live account and use your strategy in the smallest volume trades available. Be sure to treat your demo account trades as if they were real trades.

Don't Overcomplicate Things (KISS – Keep It Stupid Simple)

Don't overload your charts with indicators, or your strategy with handles or switches. The more complicated your trading strategy is, the harder it will be to follow, and the less likely it is to be effective. To find out how well a strategy performs on average in different markets, you need to carry out the necessary back testing and research.

Keeping it simple can be a real challenge, especially considering the multitude of supporting tools you can apply to your charts. Just remember – it's not about the number of tools at your disposal, but it is about being able to use a few tools in an effective way.

Be Careful in Volatile Markets

Volatility is what keeps your trading activity moving. However, if you're not careful it can also completely destroy it. When volatile, the market moves sideways, which makes spreads grow and your orders slip. As a beginner Forex trader, you need to accept that once you are in the market, anything can potentially happen, and it can completely negate your strategy.

For example, the crisis with the Swiss Franc in January 2015 ended business for many traders and brokers within hours of its occurrence. Traders Way have helped to minimize volatility risk for you by offering a package of advanced volatility trading settings to help you avoid the reefs of the financial markets.

The Trend Is Your Friend

Whether you are a beginner trader or a pro, it is best to trade with what you see and not what you think. For example, you might think that the US dollar is overvalued and has been overvalued for too long. Naturally, you will want to short, and you might be right eventually. But if the price is moving up, it does not matter what you think. In fact, it doesn't matter what anybody thinks – the price is moving up and you should be trading with the trend.

The Trade Is Open Until It's Closed

A regular Forex trading beginner concentrates on opening a trade, but the exit point is equally important. If your trading strategy does not consider the mechanism of closing a deal, it's not going to end well, and you're much more likely to suffer heavy losses.

Write Everything Down

A novice Forex trader must develop the mindset of a business owner. Every business requires a business plan, constant monitoring, and regular auditing. Jumping ahead without plans and processes is a sure-fire way to fail. Starting a trading journal is an absolute must.

Everyday, be sure to write the following:

  • Points for further research
  • Reasons to open or close a trade
  • Your achievements and mistakes

Keep your journal handy as a point of reference when analyzing your activity. A journal ensures none of your actions are in vain. Analysis of good trades will boost your trading confidence and motivate you to push harder and go further. On the other hand, analysis of bad trades will help you to extract value and improve.

Or join an experienced team of profitable traders (us) and watch what we take, why we take it, experience the market like we do!

See our products and services: PipPhenes.com

And more importantly follow our free channels: T.me/PipPhenes

Join a great brokerage: TradersWay

Other articles:

How To Cope With Losing Streaks - As an FX Trader

In trading, consecutive losses are very common and some traders do not take it at heart. Instead, they try to make the best out of it, learn, adjust their strategy or money management plan if needed and just get on with it. It is not always that easy, however, to have this attitude. It is not unlikely, if you ever had a number of consecutive losing trades, to have thought that you are an incompetent trader or that you are possibly not fitted for live trading.

You may have experienced anxiety, disappointment, and anger at yourself or anyone else that is involved (such as your broker or the market). This is a natural human reaction that has a chemical basis; a losing streak activates the production of cortisol, our body’s stress hormone. While cortisol’s primary function is to prepare our body to cope with danger by increasing glucose, the prolonged exposure to it that comes in tandem with losing streaks will render us anxious or even sad.

Anxiety and sadness will then work as “containers” for negative thinking. Suddenly, we see the world through those black glasses and we may engage in various unhelpful thoughts: “ I am a loser”, “ I will never make it”, “Should have never traded”.

But what happens as you think in this manner? Your anxiety, disappointment and anger increases and with them comes a lot of confusion, feeling scattered, unsure, lacking in confidence and belief.

There are some typical ineffective behaviors that traders may then fall into such as

  • Overtrade to reduce losses
  • Revenge trade to get back at the market
  • Become extremely risk-averse and trade too small or not trade at all
  • Give up and close the trading account

Escaping The Vicious Cycle Of Losing Streaks

If you do engage in some of the ineffective behaviors mentioned above, it is likely that you will end up trapping yourself in a vicious cycle. This is because risky trading behaviors such as overtrading or revenge trading are likely to make you lose again and, therefore, evoke the same unpleasant emotions and unhelpful thoughts that led you to it.

vicious-cycle1

In order to exit the vicious cycle of losing streak psychology:

1. Become aware of the emotions that have emerged. Ask yourself: What am I feeling? Am I disappointed? Anxious? Am I Angry?

2. Understand the thinking pattern that accompanies these emotions. What is your mind telling you? Is it pulling you down, sabotaging you or maybe intimidating you?

Typical thoughts following a losing streak would be:

  • I am a lousy trader. Should have given up long time ago
  • My strategy must be wrong; I have been wrong all the way
  • I cannot afford to just let it be. I must make back the money I lost
  • It is just embarrassing to have lost more than half of my balance

3. Are you about to make trading decisions according to what you are feeling or thinking? Is this the best way to trade? Has this helped you to succeed in the past?

4. You can choose to break the cycle. Having unhelpful thoughts and emotions is very different from acting on them. Remember that if you act on them, you maintain the vicious cycle.

Instead of acting on your thoughts, keep your purpose in mind and act according to your goals:

  1. Examine if there are aspects of your strategy & methodology that need to be changed. You may opt to do so by going back trading on a demo for a while. But while demo can provide you with valuable insights about your strategy, it cannot simulate real market conditions; your psychology is going to be completely different when you trade live.
  2. Take a look at your risk/reward ratio. Are your stop losses too narrow or too wide? It often takes the time to determine the best ratio and you may have to be wrong before you get it right.
  3. When you trade, focus entirely on the present moment. Your mind may attempt to remind you of the past, or scare you with negative future possibilities. You must learn not to buy into it, because if you do, you will end up back in the vicious cycle. Your focus must be what’s happening in the market now.
  4. Keep educating yourself on trading. You could attend webinars, read online tutorials or join relevant forums.
  5. Exercise patience. You may be in the right way to achieve your trading goals and it could be that it just hasn’t happened yet. Be patient, have belief and don’t buy into negative self-talk.

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What Can We Expect in Q4

October marks the beginning of the calendar fourth quarter. Investors have been on a wild ride in 2018, but U.S. stocks have performed well overall. However, a lot could change in three months time.

Key Themes

Russell Investments recently outlined what it sees as the key themes and catalysts for investors to watch in Q4. At the top of the list of market themes are the international trade wars, the U.S. Federal Reserve, China’s economic stimulus and the strength of the U.S. dollar. Russell said in its outlook there's a low risk of a U.S. recession, and Europe also appears poised for improving growth.

China and other emerging markets have been major weak spots in recent months. Russell said EM stocks are oversold, but the ongoing trade war may prevent a bounce-back in the near-term.

U.S. Earnings Slowdown

The U.S. economy is firing on all cylinders, but Russell said the 9-percent year-to-date rally in the S&P 500 is finally triggering some overbought indicators in the U.S. market. In addition, Russell said U.S. companies have an exceedingly high bar to clear to beat earnings expectations in the third and fourth quarters. At the same time, borrowing costs and wages are marching steadily higher, creating an earnings headwind.

“A slowdown in earnings growth will take away one of the main supports for U.S. outperformance relative to other markets,” Russell said in the report.

Other Asset Classes

For the first time in a long time, Russell said fixed income investments are starting to look appealing as well, especially the 10-year U.S. Treasury rate of around 3 percent.

On the currency front, Russell said there will likely be more upward pressure on the U.S. dollar in 2019, but the Japanese yen is currently 20 percent undervalued relative to purchasing power parity.

Will we see the start of the biggest economic mess ever? 

Will we see war and famine? 

Time will tell, but for now:

LET MAKE SOME MONEY Q4!

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Forex Trading Ultimate Beginners Guide

Instructions for trading PipPhenes Inc. Signals 

 
Few Important Tips:
#1 Always use proper risk management & account management!

What does this mean?

For us, since we are swing traders; meaning we trade Daily & Weekly timecharts. Our trades tend to be 50-200pip SL and 200-500pip TPs (Big longer term trades basically) It means you need to use small lot sizes!  (0.05 for every $1000 BALANCE is the highest we recommend) (Per trade we signal)

 

#2 You must use a legitimate brokerage. 

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 Brokers to potentially avoid: 

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JPM

 

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Forex is short for foreign exchange, but the actual asset class we are referring to is currencies. Foreign exchange is the act of changing one country's currency into another country's currency for a variety of reasons, usually for tourism or commerce. Due to the fact that business is global, there is a need to transact with other countries in their own particular currency.

After the accord at Bretton Woods in 1971, when currencies were allowed to float freely against one another, the values of individual currencies have varied, which has given rise to the need for foreign exchange services. This service has been taken up by commercial and investment banks on behalf of their clients, but it has simultaneously provided a speculative environment for trading one currency against another using the internet.

Forex as a Hedge

Commercial enterprises doing business in foreign countries are at risk due to fluctuations in the currency value when they have to buy or sell goods or services to another country. Hence, the foreign exchange markets provide a way to hedge the risk by fixing a rate at which the transaction will be concluded at some time in the future.

To accomplish this, a trader can buy or sell currencies in the forward or swap markets, at which time the bank will lock in a rate so that the trader knows the exact exchange rate in order to mitigate his or her company's risk. To some extent, the futures market can also offer a means to hedge currency risk, depending on the size of the trade and the actual currency involved. The futures market is conducted in a centralized exchange and is less liquid than the forward markets, which are decentralized and exist within the interbank system throughout the world.

Forex as Speculation

Since there is constant fluctuation between the currency values of countries due to varying supply and demand factors such as interest rates, trade flows, tourism, economic strength and geopolitical risk, an opportunity exists to bet against these changing values by buying or selling one currency against another in the hopes that the currency you buy will gain in strength or that the currency you sell will weaken against its counterpart. (For additional reading, see "Top 6 Questions About Currency Trading.")

Currency as an Asset Class

There are two distinct features to currency as an asset class:

Why We Can Trade Currencies

Until the advent of the internet, currency trading was limited to interbank activity on behalf of their clients. Gradually, the banks themselves set up proprietary desks to trade for their own accounts, which was followed by large multinational corporations, hedge funds and high net worth individuals.

With help from the internet, a retail market aimed at individual traders has emerged, providing easy access to the foreign exchange markets, either through the banks themselves or brokers making a secondary market. (For more on the basics of forex, check out "8 Basic Forex Market Concepts.")

Forex Trading Risks

Trading currencies can cause some confusion related to risk due to its complexities. Much has been said about the interbank market being unregulated and therefore very risky due to a lack of oversight. This perception is not entirely true, though. A better approach to the discussion of risk would be to understand the differences between a decentralized market versus a centralized marketand then determine where regulation would be appropriate.

The interbank market is made up of several banks trading with each other around the world. The banks themselves have to determine and accept sovereign risk and credit risk, and for this they have many internal auditing processes to keep them as safe as possible. The regulations are industry- imposed for the sake and protection of each participating bank.

Since the market is made by each of the participating banks providing offers and bids for a particular currency, the market pricing mechanism is derived from supply and demand. Due to the huge flows within the system, it is almost impossible for any one rogue trader to influence the price of a currency. In today's high-volume market, with between $2 trillion and $3 trillion being traded per day, even the central banks cannot move the market for any length of time without the full coordination and cooperation of other central banks. (For more on the interbank system, read "The Foreign Exchange Interbank Market.")

Attempts are being made to create an Electronic Communication Network (ECN) to bring buyers and sellers into a centralized exchange so that pricing can be more transparent. This is a positive move for retail traders who will gain a benefit by seeing more competitive pricing and centralized liquidity. Banks of course do not have this issue and can, therefore, remain decentralized.

Traders with direct access to the forex banks are also less exposed than those retail traders who deal with relatively small and unregulated forex brokers, which can (and sometimes do) re-quote prices and even trade against their own customers. It seems that the discussion of regulation has arisen because of the need to protect the unsophisticated retail trader who has been led to believe that forex trading is a surefire profit-making scheme. (See also "Why It's Important to Regulate Foreign Exchange.")

For the serious and educated retail trader, there is now the opportunity to open accounts at many of the major banks or the larger, more liquid brokers. As with any financial investment, it pays to remember the caveat emptor rule – "buyer beware!" (For more on the ECN and other exchanges, check out "Getting to Know the Stock Exchanges.")

Pros and Potential Cons of Trading Forex

If you intend to trade currencies, in addition to the previous comments regarding broker risk, the pros and potential cons of trading forex are laid out as follows:

Pro: The forex markets are the largest in terms of volume traded in the world and therefore offer the most liquidity, thus making it easy to enter and exit a position in any of the major currencies within a fraction of a second.

Potential Con: As a result of the liquidity and ease that a trader can enter or exit a trade, banks and/or brokers offer leverage, which means that a trader can control quite large positions with relatively little money of their own. Leverage in the range of 100:1 is a high ratio, but not uncommon. Of course, a trader must understand the use of leverage and the risks that leverage can impose on an account. Leverage has to be used judiciously and cautiously if it is to provide any benefits. A lack of understanding or wisdom in this regard can easily wipe out a trader's account. (For more on leverage, check out "Forex Leverage: A Double-Edged Sword.")

Pro: Another advantage of the forex markets is the fact that they trade 24 hours around the clock, starting each day in Australia and ending in New York. The major centers are Sydney, Hong Kong, Singapore, Tokyo, Frankfurt, Paris, London and New York.

Potential Con: Trading currencies is a "macroeconomic" endeavor. A currency trader needs to have a big-picture understanding of the economies of the various countries and their inter-connectedness in order to grasp the fundamentals that drive currency values. For some, it is easier to focus on economic activity to make trading decisions than to understand the nuances and often closed environments that exist in the stock and futures markets where microeconomic activities need to be understood. However, an understanding of a company's management skills, financial strengths, market opportunities and industry-specific knowledge are not necessary in forex trading. (Take a look at "Economic Factors That Affect the Forex Market" to learn more.)

[Note: One of the underlying tenets of technical analysis is that historical price action predicts future price action. Since the forex market is a 24-hour market, there tends to be a large amount of data that can be used to gauge future price movements. This makes it the perfect market for traders that use technical tools. If you want to learn more about technical analysis from one of the world's most widely followed technical analysts, check out Investopedia Academy's Technical Analysis course.]

Two Ways to Approach Forex Trading

For most investors or traders with stock market experience, there has to be a shift in attitude to transition into or add currencies as a further opportunity for diversification.

1. Currency trading has been promoted as an "active trader's" opportunity. This type of opportunity suits brokers because it means they earn more due to the nimbleness that accompanies active trading.

2. Currency trading is also promoted as leveraged trading, and therefore, it is easier for a trader to open an account with a small amount of money than is necessary for trading in the stock market.

Besides trading for a profit or yield, currency trading can be used to hedge a stock portfolio. For example, if someone builds a stock portfolio in a country where there is potential for the stock to increase in value, but there is downside risk in terms of the currency (i.e., the U.S. in recent history), a trader could own the stock portfolio and short the dollar against another currency such as the Swiss franc or euro. In this way, the portfolio value will increase, and the negative effect of the declining dollar will be offset. This is true for those investors outside the U.S. who will eventually repatriate profits back to their own currencies. (For a better understanding of risk, read "Understanding Forex Risk Management.") Opening a forex account and day trading or swing trading is most common with this profile in mind.

A second approach to trading currencies is to understand the fundamentals and the long-term benefits. It is beneficial to a trader when a currency is trending in a specific direction and offering a positive interest differential that provides a return on the investment plus an appreciation in currency value. This type of trade is known as a "carry trade." For example, a trader can buy the Australian dollar against the Japanese yen. If the Japanese interest rate is .05% and the Australian interest rate is 4.75%, a trader can earn 4%. (For more, read "The Fundamentals of Forex Fundamentals.")

However, if the Australian dollar is strengthening against the yen, it is appropriate to buy the AUD/JPY and to hold it in order to gain in both the currency appreciation and the interest yield.

The Bottom Line

For traders – especially those with limited funds – day trading or swing trading in small amounts can be a good way to play the forex markets. For those with longer-term horizons and larger fund pools, a carry trade may be an appropriate alternative.

In both cases, traders must know how to map out the timing their trades through charts, since good timing is the essence of profitable trading. In both cases, as in all other trading activities, the trader must know their own personality traits well enough so that they do not violate good trading habits with bad and impulsive behavior patterns. (To determine what type of trading is best for you, see "What Type of Forex Trader Are You?")

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