A beginning FOREX trader needs solid preparation before commencing to trade. The first priority is knowledge–learn all you can about the FOREX market, especially how currencies are priced and traded. Establish an online, non-margined FOREX account at a non-dealing desk broker; they make money from commissions only and do not trade against you. Learn the elements of technical and fundamental analysis so that you can develop a trading system. And read about money management, perhaps the most important determinant of profits and losses.
Technical analysis is the prediction of future prices based on price history. As you become familiar with technical analysis, you may find some techniques more attractive than others. A beginner should learn how to construct a simple chart of price action and then begin to interpret the information provided by charts. Most online brokerage software can produce charts of varying sophistication, but to start all you need is one showing the high, low and closing prices per period (usually a day but can be as short as four hours). As you become more comfortable, learn candlestick charting (Reference 1), which packs more information into a graphic form.
Follow the Trend
Examine your price chart and draw a line connecting the high price for each period. Do the same for low prices. You recognize an uptrend trend by seeing a series of higher lows and higher highs in succession. A downtrend is the horizontally-flipped image. Beginning traders should not fight an established trend–buy in an uptrend, sell or short in a downtrend. Add a simple moving average of closing prices over the last twenty trading periods, and use this line as a signal to trading. Trade when actual prices pierce the moving average line AND are in an established trend.
The FOREX market can be volatile and unpredictable. The longer you hold a position, the more you risk a reversal of fortunes. Therefore, start out with short trades, on the order of a few minutes up to an hour in duration. Your strategy is to make numerous small profits while avoiding big losses. After a while, a beginner starts developing a feel for the way a currency pair moves (all FOREX transactions involve a pair of currencies). That’s the sign that you can increase the sophistication of your strategy and the duration of your trades.
Always know ahead of time the maximum you can make and lose on a FOREX position. Never enter a trade where your risk of loss greatly exceeds your potential profit. Discipline is key. Whenever you enter an order, be sure to also enter a take-profit and stop-loss order as well. The take-profit order closes your position when your trade achieves your minimum predetermined acceptable profit. A stop loss terminates your position when price action hands you your maximum tolerable loss. These two secondary trades protect new traders from greed and fear, the implacable enemies of FOREX success.