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What is Forex trading?
The Forex market is the market in which participants can buy, sell and speculate on currencies. The currency market is considered to be the largest financial market with over $5 trillion in daily transactions. It has enormous opportunities for everyone to trade. Investors’ trade in Forex for the same reason that they trade in any other market: because they believe that the value of certain currencies will go up or down over time.
Trading foreign currencies on Forex is popular with many people who are looking for low capital trading. There is no need to have a massive investment to get started. It’s also convenient to trade Forex because a Forex trading day lasts for 24 hours a day, beginning Monday morning in Asia to Friday afternoon in New York. Some brokers are offering weekend trading for cryptocurrencies as well.
What are the trading types on Forex?
Forex trading is based firstly on two different categories: fundamental and technical analysis. Which later can be broken down in to further subcategories like trend trading, range trading, sentiment trading, price action, etc.
Fundamental analysis is based on a country’s performance economy wise as shown by the fundamental economic indicators such as GDP, inflation, employment or consumer sector performance. Learning fundamental analysis can help you to see a larger picture and helps to understand whether a currency is undervalued or overvalued.
Fundamental analysis can be a compelling indicator of currency performance on longer-term, but it has its own drawbacks in the short term. Any surprise event can fluctuate price and often shake out the “weak hand” traders out from the trades, due to tight stops or raising doubts in the correctness of their own analysis.
Technical analysis involves reviewing the past and recent behaviour of currency price trends on charts to determine whether they move up or down going forward. Many chart analysts believe that trading patterns tend to repeat themselves again and again over time, and anticipation of similar behaviour allow them to speculate on currency moves.
The benefit of technical analysis is that you have apparent points of entry and exit so you can limit your losses in case your interpretation is incorrect. At the same time, the negative side is that your exit levels are creating a clusters of “stop losses” which acts as a magnet for price.
Subcategories are helping to avoid drawbacks of two main categories. For example, sentiment trading can help you to avoid being caught in stop-loss cluster. Knowing that over 75% of retail traders losing the money trading currencies, can indicate that trader should avoid trading in the same direction as most retail traders. No matter how good your technical setup looks like, if 90% of retail traders are on one side, most likely price will go to the opposite direction; therefore trades like this should be avoided.
The example below is a clear indication of how retail traders started cutting their long positions when price moved up, and did completely opposite when the price started moving down. Now with 94% of retail traders being on the long side of the trade, it’s hard to see how the price will go up, before shaking down at least more significant part of retail traders from their trades.
So, which approach of the two should you learn? The ideal scenario is to take the best of two worlds. Learn to read a chart like a pro with a technical approach and then look if price action makes sense from the fundamental aspect, based on the economic performance of the countries. To summarise in Forex trading, fundamental analysis is better used as a tool for long-term investing. In contrast, technical analysis is more appropriate for day traders to benefit from short term price fluctuations.
How to start trading on Forex?
- Self-educate, read books recommended by other traders, visit forums or social networks and speak with active traders, ask for advice and share your experience so people can identify your weaknesses. Be greedy for information and don’t think about making money from day one.
All these steps can give you an excessive understanding about price action, teach you candle patterns and can build a solid ground for your knowledge to evolve. Most of the books will focus on your psychology rather than technical expertise, and you shouldn’t skip this part. Traders with the same charts, same indicators and equal amount of information have different results, why? Because of the psychology. Each trader will act differently when they see price moving up or down. Some will cut losses early, others will keep them building until the account burns. Some are greedy for perfection, others trade like a gamble.
Best place to start?
You can start taking baby steps at BabyPips. Look for experienced traders at Twitter. And finally, you can cheaply buy books on Amazon, and with Amazon Prime, you can have books delivered even the same day.
- Open your trading account with a reputable broker.
Now you need to answer if you want to start Forex trading with a demo or real account. There are many different opinions about this. Some will argue that demo trading will never prepare you for trading with real money. When you trade a demo account, you are not using real money. So the fear of losing real money will not impact your performance. You know if you lose fake money, nothing will happen, you will open new demo account and start over again. As mentioned previously, psychological factors will have a massive impact on your trading when real money is at risk.
However, demo trading it’s a great place to familiarise yourself with the trading platform and learn basic trading concepts before you jump on the ship with real money.
- Once you have identified a profitable strategy you can work with, start trading small. Build your confidence slowly and then increase the size of your trading lot gradually. Learn to limit your losses and let your profits to grow. Sounds easy isn’t? But the reality is harsh, and you will notice how your psychology will start messing up when you see losing trades and how hard it will be to cut them with the early bad signs.
You need a lot of time to become a confident profitable trader. You will need to spend hundreds if not thousands of hours to grasp Forex trading basics and you still be making mistakes. Journal your trades and learn from mistakes so you can improve in the future.
How much can you earn on Forex?
There is no definite answer to this question. And it can’t be. There are too many factors involved to give you a precise answer. What is your starting capital? What is your risk? The smaller starting capital you have, more risk you will have to accept and probably will be willing to risk more as well. The more money at stake, the more careful you will be with the selection of your trades and risk. Trading With £1,000 you probably can achieve even 50% profit per month, but very often your risk will be so high that it can lead to the sad ending and burned account.
Hedge funds with billions in their accounts can make a 20% profit per year, and this would be a very successful year.
However, I would be very sceptical about traders who increases their account 10 times and more in one year. Someone stating they do this year after year, would flag “SCAM” in my face the same second I see such a claim.
And you know what, you shouldn’t even bother to think about how much you can earn from Forex trading. Focus instead of learning and becoming consistently profitable. Learn to cut losses early, and money will follow.
Manual treading vs Algorithmic trading (trading robots)
Personal computers have brought opportunities for a wide range of people to trade from home by opening personal Forex trading accounts and executing the trades by them. And nowadays there is a lot of discussion about automating their trading altogether.
Automated trading, aka algorithmic trading or robot trading, is a growing trend in the trading world. Many institutional trading firms are developing the highly optimised trading systems which are pulling the money out from the markets. And so the retail traders are trying to create robots which could replicate their trading strategies.
Thinking about automated or manual trading, I haven’t seen clear evidence that one is better than others. Both ways have benefits and disadvantages, and each trading system can be used in a different environment to increase profits.
If you have clear points-based system “If this -> then this” it makes sense to automate your strategy. The trading robot will execute your trading plan to perfection, it will stay disciplined and will follow strict rules you have set up with your stop loss and take profit targets. Robots have no psychological issues and will not shake their hand to cut losses or keep trade going when price jitters. Also, robots can follow more currency pairs, on different timeframes and can do this for a prolonged time. While a human has only one pair of eyes, have to switch charts to see different time frames and have to sleep at least sometimes 🙂
However, robots will never “feel” the market and sometimes can execute losing trades simply because the price has overshoot on negative/positive/surprise news.
The market is so full of robots now that It makes sense to check past performance and read reviews before buying anything. Again, start small and don’t risk money you can’t lose.
Should you trade on Forex?
Why is Forex trading so attractive? Anyone who watched “The Wolf of Wall Street” can be easily lured into the Forex to fulfil their dreams. Most of the new traders come into Forex with too high expectations and desires to get rich quickly.
Can you become profitable on Forex? Yes. But as we already know, the vast majority of new traders fail. To become profitable, you must think or do something differently. Learning to become a profitable trader takes a lot of time. If you are ready to set aside hundreds of hours studying before jump on live trading, and then trade small to build your account, you have a chance to succeed.
Should you sign up for the trading signal service?
If you are thinking just to sign up for the trading signal service with the idea to become reach easy, think again. Social networks are full of accounts offering cheap signal services where you don’t have to do any work, just copy-paste trades of others, and soon you will be the next zillionaire in the town. Pictures next to private jets, Ferrari’s and stunning villas, it’s a standard way to attract people into Forex trading. Newspapers writing an article how 16-year-old boy turned £150 to £60,000 in one year surely adds more fuel into the fire.
Unfortunately, most of the signal service providers are scammers and Ponzi scheme runners. Many of these scammers simply collect money from a certain number of traders and disappear. Some will recommend a good trade now and then, to allow the signal money to perpetuate. Although there are signal providers who are honest with intentions to provide the best service they can, it pays to be sceptical and to do your own research before you sign up. If the first thing you see when looking at the signal provider is flashing pictures of Lamborghini’s and suitcases of cash – run away and don’t look back.
What steps to take to avoid being scammed?
- Find a right, loyal and experienced Forex broker. Make sure it’s regulated by reputable financial authorities. NFA in US markets, FCA in the UK, ESMA in EU or ASIC in Australia.
- Check for the reviews of broker and course or signal provider. Forexpeacearmy it’s a great place to start.
- Start small and see how it goes. Don’t be greedy for profits. Stay greedy for knowledge
If Forex trading sounds too risky for you – try selling T-shirts instead. You can start without any capital!