Learn How To Trade Forex [Guide]

Reading guides or watching videos on YouTube is not enough if you truly want to learn how to trade forex effectively. Getting a formal forex education is important so you can learn from a credible source. Read about the different terminologies that you might encounter while trading this particular asset. Check out trading blogs written by professionals to get an idea of how to trade forex effectively. The internet can provide almost all the information you need if you look hard enough.

However, listening to a forex professional or reading about all these things isn’t enough. Applying all the information you learned is also crucial when learning how to trade forex. But how are you going to apply it without having to risk your hard-earned cash?

This is where demo accounts come in. There is no shortage of brokers who offer this free feature. You won’t even need to deposit any money to be able to trade using a demo account. The broker provides virtual funds to your account so you can practice trading without risking anything. Demo accounts also mirror live market movement so you can prepare yourself for live trading.

Use a micro forex account.

Professional traders or instructors usually recommend that beginners use a micro forex account. A micro forex account allows you to trade in smaller amounts by using micro-lots. This means that you can open or execute trades with a smaller trading size.

This minimizes the risk of loss and allows newbie traders to invest a smaller amount. This also helps eliminate the possibility of discouragement for traders who are just starting out. Think about it. If you lost almost all your money in your first trade, you’d lose interest in the profession and think it’s not profitable at all.

With a smaller trading size, both beginners and veterans can practice new trading strategies, or they could even use trading bots to simulate real profitability or drawdowns. Having a micro forex account also grants you the opportunity to potentially make a big profit out of a few trades if you decide to trade with high-risk conditions.

Tradeable currencies

The tradeable currencies vary from broker to broker, but worldwide, there are over a hundred different currency pairs to choose from. All these currencies always come in pairs and consist of major, minor, or exotic currencies.

Each currency has its own unique aspect. This aspect could either be controlled by the broker or dictated by the market and its participants. Some of these traits could include varying liquidity and volatility.

The market divides its currency pairs into three types. These are the major, minor and exotic forex pairs. The major seven major currency pairs are EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD, and NZD/USD. Notice how all these pairs have the USD in them? This is because this is the most widely traded currency in the forex market.

The USD is paired with the seven other important currencies that are used in the financial world. As the most popular currency, the USD is part of more than 80% of the global currency trades. Additionally, it is used in financial investments in trading goods and services as well as a hedging strategy for some investors.

You need to learn when it is ideal for you to trade these currency pairs. To trade these pairs optimally, traders must be familiar with the three most active market sessions: the London, Tokyo, and New York trading session.

Investors should take advantage of markets opening up within these sessions that provide liquidity to certain forex pairs. For example, when the Tokyo session starts, pairs that involve the JPY or the Japanese Yen begin to have more movement, resulting in more opportunities when trading this currency.

Additionally, there are certain times in a trading year when market sessions overlap. This causes a peak in market participation and expected volatility. One of these peaks is during the summer and winter trading session overlap of the London and New York sessions.

As the seven most popular currency pairs, major currencies tend to have lower spreads compared to other types of currencies. This minimizes the risk by lowering the slippage when trading assets under this type. Additionally, brokers allow higher leverage for this type of product due to its volatile nature.

Minor currency pairs are much like major currency pairs, but they do not include the US dollar. Some examples of minor forex pairs are EUR/GBP, GBP/CAD, EUR/AUD, NZD/JPY, GBP/JPY, and CHF/JPY. You will notice that all the currencies involved above are also paired with the US dollar as major currency pairs.

Alternatively, minor currency pairs can also be called gross currency pairs. For these kinds of pairs, the more popular ones are those that involve the Great British Pound, the Japanese Yen, and the Euro. Market conditions for this type of currency pair are similar to the major currency pairs, but they generally have higher spreads because of lesser market participation.

Lastly, other pairs that do not belong to the two types above are classified as exotic currency pairs. These exotic currencies come from emerging markets or developing countries. To promote a bit of volatility and demand for these currencies, they are paired with major currencies. Examples of exotic currencies include the Turkish Lira (TRY), Mexican Peso (MXN), Singaporean Dollar (SGD), South African Rand (ZAR), and the Hong Kong Dollar (HKD).

Exotic currency pairs have the highest spreads among the currency pairs. Of course, this is because not a lot of people trade these because of lack of demand.

Risk Management

It’s important to practice and know about risk management because it will help your portfolio survive both in easy and difficult market conditions. When done correctly, risk management is a tool not only for mitigating losses but also for ensuring that your portfolio’s value will flourish.

There are many ways to manage risk. But before anything else, a forex trader must master or at least familiarize themselves with basic price action and how assets work in the investment scene.

Some of the more important and essential knowledge that one must have when managing risk is knowing how to plot and determine support and resistance areas. This is a fairly simple concept that even newbie traders know. However, this topic is taken for granted despite its potential, especially when managing risk.

Being able to minimize your losses by having really good entry points will ensure that you have the best risk/reward ratio. Having as little risk as possible will mean that each of your trades will only suffer a minimal loss if the market goes in the opposite direction.

Having a good risk/reward ratio means you don’t have to be right most of the time. Instead, you will be profitable overall, even if your trade success rate is only 30% with proper trade management.

Additionally, well-seasoned traders practice portfolio management in terms of asset allocation and diversification. Through asset allocation, you will only risk a certain amount of your portfolio per trade. Ideally, each trade would have a VAR or value at risk worth 1% of your portfolio’s total value. This means that even if you suffer a loss, you will be able to gain back your losses with ease.

On the other hand, Asset diversification allows the opening of multiple positions for different assets or for different trading strategies on the same asset. Through asset diversification, you also get more opportunities that could probably improve your profitability over time.

Managing emotions as a trader

One of the most important aspects of being a trader is being able to manage your emotions. Emotions are the number one factor that causes traders to make irresponsible moves when executing trades. These bad decisions lead to more losses as well as early exits in trades that could’ve gained more.

To manage emotions effectively, traders should set strict rules for themselves and diligently follow them. One of the rules you should follow issetting stop-loss points and ttakingprofit levels even before you execute your trade.

Another rule that is important when trading forex is appropriately setting your ideal trading hours that match the volatility of your selected asset. Doing research is also important so that you do not make impulsive moves or give in to FOMO or fear of missing out.

Forex trading strategies

Before we dive deep into the different strategies that you can use in your trades, you must figure out first what kind of trader you want to be. This involves determining your holding period and timeframe of choice. There are more than two choices, but we’ll be focusing on two for now as these are the most common types of traders in the forex market.

Day traders

Day traders are those that would open and close new positions on the same trading day. They are essentially scalpers by nature and profit from minuscule moves in the market.

Through day trading, they avoid the overnight risk that might come from unforeseen economic events, erratic volatility, and other sentiment-changing factors from tomorrow’s news. These events could be in the form of federal reserve meetings, policy changes, or even the release of a country’s economic data.

Additionally, day traders avoid the possibility of having to pay for negative net interest rates that come from swap fees. These kinds of forex traders prioritize gaining even a single percent per day that adds up over time for portfolio growth. The best day traders are regarded to be systematic in following their set trading rules and have the best trading mindset in managing risks and greed.

Although these traders are up-to-date with the news, a good chunk of them does not trade when there is a market moving news due to its volatility at the same time. They know when the best time to trade is and are patient in waiting for a profitable opportunity.

Swing traders

The other common type of trader is swing trader. Unlike day traders, they hold a trade for more than a day and would usually trade up until it reaches their further target price or if their trial stop has been hit.

Swing traders are masters of trend trading and momentum trading. By using a few indicators, they will be able to plot potential zones where they could take profits or perhaps enter a new position.

Trend trading

Trend trading involves riding a trend until it breaks or until it reaches a target price set by a trader. This kind of trading allows traders to capture the heart of the move without being hindered by volatility caused by news.

To use proper trend trading, an initial trend must be established. This means that the trader must only trade downtrends and uptrends instead of trading an asset that is stuck in what is called a price range. To confirm if a trend has been made, it must satisfy a few conditions such as being above or below your selected moving average, and the trader must be able to at least draw a downtrend line or uptrend line based on recent price action.

Trend trading also involves looking at the bigger trend by using higher time frames. These higher time frames can be used as a directional bias for your trades on a lower time frame. If a currency pair is in an uptrend on the monthly time frame, long trades will be more successful on a daily time frame as opposed to short trades.

When following a trend, the trader can either draw an uptrend line or use a moving average to act as a moving take-profit zone. Both of these methods are acceptable as long as the trader has practiced them through either backtesting or through a demo account.

Momentum trading

Through momentum trading, traders will be able to get the best entry points following a breakout or a breakdown. These types of traders should master the basics of support and resistance as these would be the core of their trading strategy.

This kind of trading is like the Darvas trading strategy in which they will patiently wait for an asset to break its range. Generally, the longer an asset consolidates, the greater its incoming trend will become.

This strategy could also be used for forex on any kind of time frame but is best when used on higher time frames such as on the weekly or the daily. Additionally, practitioners of this strategy benefit more from supporting news articles, increasing volume on the traded asset, and subsequent breakouts from smaller ranges.

Momentum trading strategies transition well into trend-related strategies as they are able to take advantage of a trade before it reverses.

Scalping

Scalping is a strategy that takes advantage of quick moves with varying intensity. Scalpers, in general, can be classified into great technical analysts or knowledgeable fundamental traders. Depending on their forte, conditions for entering the trade will vary.

Traders that take advantage of price ranges and price action will enter a trade if they spot a breakout or a breakdown of a certain asset. On the other hand, Fundamental analysts may trade breaking news since they know exactly if it’s hawkish or dovish for a certain currency.

Because of the volatility that they might experience in a trade, scalpers would take their profits as soon as possible to protect their small gains. Their strategy is also dependent on how well they manage their funds. These types of traders would not want to risk a lot of cash on a single trade, but instead, they would only risk a small amount so that damage to their portfolio will be kept to a minimum.

Range trading

This type of trading is popular in forex as price ranges more often than not on higher time frames given how slowly forex pairs’ price moves. This, much like momentum trading, involves the proper identification of pivot points, supports, and resistances. Basically, their trading system states that they should go long on supports and go short on resistances.

In this kind of trading, however, they prefer to trade false breakouts, false breakdowns, as well as support bounces, and resistance rejections. This strategy relies on confluences that could come from significant price points.

Higher time frames provide more significant price points relative to an intraday chart. Range traders typically use the 1D, 4H, and 1H timeframe to plan their trades. Additionally, they are patient in executing a trade and would not chase price movement.

Practice Trading Forex

Now that you get the gist of forex trading, it’s time for you to apply what you’ve learned. But you’re just starting out, and it seems like a bad idea to practice trading using your hard-earned capital. As mentioned above, demo accounts act as training grounds for beginner and even well-seasoned traders.

Demo accounts are offered by most brokers. The company equips your demo account with simulated money, which you can then use to practice trading on their platform. As previously mentioned as well, the charts on the demo platform mimic live market movement and situations.

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