Learning how to trade forex as a beginner can be extremely intimidating.
I want to use this trading lesson to introduce you to some of the basic ideas about forex trading and teach you some fundamental rules and methodologies you can use to get started in the financial markets. I’m going to teach you about the techniques and strategies from my forex trading course and open your eyes to a new way of looking at the financial markets.
If you have been failing to succeed at trading on low timeframes, using an inappropriate position size or over analyzing the markets, then you might find comfort in knowing you’re not alone. These are common mistakes that many beginner traders make – I made them myself when I was starting out in the forex market too.
You need to learn how to adapt as a beginner trader, you need to learn the fundamental principles of trading that will give you the best chance of success, and you need to devise a plan that works for you.
From this point forwards it’s all about odds, a well-structured trading plan should well and truly put the odds on your side, and you must be prepared to execute it flawlessly over and over again to prove to yourself that it is capable of delivering first class trading results.
This may seem intimidating at first, but read on, and you will learn the fundamental factors that make a good trader and find out how to apply them to your existing trading activities.
If you’re only just starting out as a forex trader, just starting to learn about risk management, candlestick charts and currency pairs you may not even know what a position size is. Many beginner traders have no idea what a position size is and how to determine the correct size to use based on the capital they have at their disposal.
Position size alone can make or break the attempts of a beginner trader to succeed in the markets – using a position size that’s too large is probably the main reason why most traders manage to blow a trading account while learning how to navigate the financial markets and build a profitable trading strategy.
Concerning forex trading, a position size is primarily determined by how much cash you are currently controlling on a single trade (aggregated position size would be the amount of money you control across all of your trades).
Because trading forex is typically a leveraged financial product beginner in the markets can control much more cash than they have access to. Most brokers will require you to put up a small amount of capital as something called ‘margin’ and allow you to control a significantly larger amount of capital in the markets. This can be great for traders that don’t have huge sums of capital as it allows them to make profits that far exceed the money they initially invested in the markets; but be careful, too. Use of leverage in financial markets can also lead to large losses; it can even lead to losses that far exceed your initial deposit (this is a disclosure you will see on every single regulated forex broker’s website).
You should always use a stop-loss when trading forex and you must use this to determine the position size you’re going to use to trade with. Your stop-loss and position size allow you to define how much cash you are risking on a single trade. You should set your position size such that you would have to lose more than 20 trades in a row to blow your account – this is a general rule of thumb that I’ve used with my trading, and I find it works exceptionally well when combined with the other strategies and techniques I teach in my trading course.
If you would like to learn more about the use of leverage in financial markets, then please read chapter 1 of my forex trading course where I go into a lot more detail on the topic.
Are you one of the many thousand of beginner traders that logged into their trading account for the first time and felt genuinely intimidated by the number of different timeframes available to view your charts on?
I’m sure you are – I doubt in fact there is a trader out there that wasn’t intimated and confused by it.
Brokers deliberately offer a wide range of timeframes with no guidance whatsoever about which to use because they want to encourage their clients to trade inconsistently. Consistency is one of the clear ways to succeed in the financial markets.
You must pick a timeframe and stick to it, you must devise a trading strategy that works for the timeframe you’ve chosen, and you should choose a timeframe that fits around your life.
I’m sure many of you reading my blogs have day jobs where you work Monday to Friday. I’m sure most of you aspire to one day be full-time professional traders, and I’m sure some of you wish you knew how to trade like the professionals at investment banks and hedge funds.
If you tick any of these boxes, you should be trading on higher timeframes. High timeframes are crucial to success for people with day jobs or those that wish to be taken seriously in the financial markets.
There is not a professional trader worth his sole that uses anything below the 1-hour timeframe – there is just too much market noise and too many low probability setups to succeed.
If you have found yourself struggling to make out what is happening in the markets, being stopped out by erratic market movements or stressing yourself out by staring at your 5 or 15-minute charts all day and ‘chasing’ the market, then you seriously need to consider switching to the daily timeframe.
I have been trading for over five years now – I now trade very successfully – and I only ever use the daily and 4-hour timeframes to trade with. I have tried it all, and I have failed on every other timeframe – I do not want you to make the same mistakes.
Did you try to insist that all of the different timeframes didn’t intimidate or confuse you a minute ago? Well, maybe you got it right away, perhaps you picked a timeframe, and it just worked for you – but if so, you can’t be telling me you weren’t confused by all of the indicators your broker offers as part of their charting platform!
This is even more confusing and intimidating than all the different timeframes for most beginner traders. There are so many different indicators to use in the forex market I’ve lost count. MetaTrader even has functionality that allows savvy technical experts to create custom indicators these days!
However, here’s the secret – it’s not a secret if you think about it – they are all a complete waste of time. The only indicator out there that’s worth its sole (and indeed, used by professional traders) is the moving averages. Different traders use different types of moving averages to suit their trading style, and this is entirely reasonable, I teach you which indicators I use in part 3 of my forex trading course so please check it out if you want to find out more.
Indicators are a waste of time for one simple reason, they are lagging and only tell us what price has been doing in the past, they cannot tell us what price is doing right now. The only way to work out exactly what price is doing at the current moment is by reading price action setups, and this is the style of trading I teach in my course. Just take a look at the charts below and decide for yourself which ones you would rather be trading from – it doesn’t take a genius to work out which is easier to read and understand!
Messy Chart Full Of Indicators
Clear Chart Without Indicators
Risk / Reward Ratio
Your risk/reward ratio is core to determining how profitable you are in the markets. This is how we give ourselves an advantage over the market and put the odds on our side.
In it’s simplest form, your risk/reward ratio is the amount of cash you risk on a trade versus the amount of profit you make.
So, for example, if you risk £50 on a trade and set your profit target as £100, then you would be using a risk/reward ratio of 1:2. The higher your reward relative to your risk the less often you need to win a trade to be profitable (or the more profit you can make by winning the same amount of trades as someone using a worse risk/reward ratio).
I teach all about the risk-reward ratios I use in my course so check it out for a more detailed explanation of how you can design the best ratio for your trading strategy.
Set And Forget
The hardest challenge you will come across as a beginner in the forex market is learning how to control your emotions when you start trading with real money. You should learn how to trade using a demo account before diving into the markets with your own cash.
When you do this you will realize how much harder it is to avoid becoming emotionally attached the financial markets and interfering with your trades. However, here’s the thing, if you stand any chance of becoming a profitable forex trader you simply cannot do this.
You must devise a sound trading strategy from the start built on good fundamental rules and stick to it religiously, you should never interfere with your trades, and you should act purely by fact and reason.
One of the best ways to achieve this is by adopting a ‘set and forget’ trading approach.
Set and forget traders only check the charts for a short period each day (usually after the New York close at 22.00 GMT) to see if there are any new setups in the market. If they find a good setup they will place their orders to trade and close their charts until the same time the next day when they look for more setups. Adopting this approach allows you to tune out of the market and essentially ‘forget’ about the orders you have placed – leaving it up to fate to determine whether they result in a winner or not.
This is an extremely powerful strategy to use because over-analysis of the markets is the main reason for many beginner traders becoming emotionally attached to the trades they make. Reduce your chart time to just checking for new setups and entering trades, and you will find it much easier to keep a clear head and focus on the technical price action setups that you see in the market.
Forex trading is complicated and intimidating for beginners, but this should not put you off.
I have devised a free forex trading course to guide you on your journey to becoming a profitable trader in an honest and straightforward way. Follow the strategies I teach and adopt decent fundamental principles from the start and you will be best equipped to succeed in this game.
I am committed to helping you maximize your trading potential, and I have dedicated myself to helping my students develop the best trading strategy they can. If you want to learn how to trade from somebody that’s already walked the tightrope, you intend to walk then head over to my member’s area and register for one-on-one coaching today.