Fibonacci, Forex Retracements and Other Goodies

Okay, here's the deal. Most people who are just beginning to learn to trade forex online do the right thing and grab a demo forex account from a broker and get to learning. And, in the beginning, the forex platform completely overwhelms them.

• What forex currency pair should I start to analyze?
• What time frame should I use? 5 minutes? 15 minutes? 1 hour?
  
• How much leverage should I apply to my forex trades?
• What forex indicators should I use? Which are best? How do you crunch the numbers for EMA's to find the best way?
• And so on and so forth....

You guys get the picture. So, rather than trying to figure out what to do, you either jump right in and start to trade, making trading more like betting red or black on a roulette where OR you stare at the screen kind of star struck as to what to do next (imagine a deer staring into the headlights...is this you?)

So, today, I am going to tackle some of these issues for those of you completely new and hopefully you will get something out of it.

What Foreign Currency Pair Should I Start With?

It really depends on your trading style. If you are planning on doing forex day trading, then you are going to want to go with the currency pairs that have the most volatility. The USD/EURO pair is probably the most volatile because it sustains the most trades, volume wise.

Alternatively, if you are planning on going long term, then you can analyze virtually any currency pair although once again, realize that the more volume a pair has, the greater the chance of more volatility and the greater the chance of bigger profits (and unfortunately greater losses).

What Time Frame Should I use when I am Planning Entry Points in Forex Trades?

Most beginner forex traders get totally enamored with the shorter time frames because they think that if they are squeezing a few pips a day, that they will ultimately make more money than if they did long term trading.

This may or may not be true (depending on the leverage you use) however realize this....shorter time frames make for more volatility which means that short gains and losses come easier. However, shorter time frames make it really hard to find trends since the trends come and go more quickly. In other words, if you snooze you lose. There are a lot of forex professionals out there that absolutely stay away from these shorter time frames because in their minds, you can apply the random walk theory, meaning that there is no rhyme or reason to how it moves and more importantly why it is moving in the direction it is.

In contrast, the longer the time frame, the easier it is to identify the overall trend of a forex currency pair. And as you probably know, the trend should not only be your friend...it should be your best friend. There is a lot of research to prove this...if you don't believe me, check out my Dow Theory post.

So, if you are completely new and aren't grounded in trading fundamentals (which are universal no matter what you are trading..stocks..commodities..whatever), you best bet would be to choose a larger timeframe. You are going to want to eventually be able to identify the trend on the long term forex time frames, then you can move down.

How Much Leverage Should I Use When Making Forex Trades?

Leverage is a funny thing. You probably hear these fantastic claims of someone doubling their money in a month. Perhaps you are reading this to see how YOU can double your money in a month. If this is you, then you probably will want to look elsewhere.

If someone makes a claim like this, wait a month and see where they are. Chances are these guys are gambling their money big time by using huge amounts of leverage. Chances are also great that in a month, the money they made will be gone...profits and all...everything.

Like I have said before, I used to do sports gambling (I still dabble in it) and just like all forms of gambling, money management is paramount to profiting long term. Normally, I use no more than 2% of my bankroll per trade. Sound too small because you don't have the money? Well guess what....if you are trading with more than 1:20 leverage, then you are most likely going to be giving your money to the house (in this case, the forex brokerage firm).

If you are trading the wise way (long term), then chances are you won't be able to use near that amount of leverage, since this type of trading is normally measured in weeks or months so therefore you will have to sustain some possible considerable valleys and will have to make your stops at very high levels.

Leverage in forex trading can be a beast in sheep's clothing. If you don't leverage correctly or worse, you get greedy and increase your leverage for greater gains, you will most likely get knocked out of the race. And we all want to stay in the race.

What Indicators Should I Use? What Forex Formulas Should I Set?

Like I said earlier, most forex platforms (I use MetaTrader) come with a myriad of tools and indicators that you can apply to your trades. Learning to use them and make them congruent with each other is a process that will take time. I encourage you to test indicators on a DEMO ACCOUNT first and for a couple months before you actually apply them to your real account. The reason is simple. You may have thought that you found a good set of indicators that work together only to see them peeter out after a month or so. Why does this happen? Who knows...perhaps your trading strategy was smitten with dumb luck.

Personally, I have tried them all and I use Fibonacci numbers almost exclusively (in relation to pivot points). Basically, you determine your support and resistance lines, then when something breaks one of these spots, I will plot out the Fibonnaci retracements (unless the break is caused by reports or forex news).

I may write something about Fibonacci numbers later but for now, all you need to understand is that fib retracements normally happen when the line of support or resistance has been breached. Once breached, you need to :

• Establish if the currency you are trading is in an uptrend or downtrend (once again, this is easier if you are using larger time frames)
• Set your Fibonacci retracements for .382, .500, & .618.
• Then follow the trend.

Fibonacci Retracements are probably the easiest way to make money with forex trading for the beginner because all you really have to learn is how to identify trends and how to set your support and resistance lines (or forex pivot points) in order to profit long term.

So you can baffle yourself with EMA's, Stochastics, ect...and try to come up with that perfect bulletproof strategy and trade on a 5 minute forex charts thinking you are going to make a small fortune in forex trading, which is what most amatuer traders do, OR you can start to learn some the actual fundamentals of forex trading.

That's it...learn the fundamentals of trading period...forex trading and trading anything else uses the same theories. Trade with a demo forex account first and for a few months. Learn to identify trends first, then learn how to establish your support and resistance lines. And finally, find either a good mix of indicators to use for your forex strategy. The Simpler forex strategy you can create, the better. If you want to learn how to trade forex online, don't think for a second that it is going to be a cakewalk. I'm out.

Learn to trade forex online

Learn to Trade Forex | Do You Really Know Your Competitors

Most people who are just beginning to learn to trade forex don't really know who are their "competitors" (yes, trading forex is a cut throat competition, not a friendly game), and like to think of trading forex in the same way that you would trade baseball cards. They say that 95% of all those who enter the forex market will lose, which ultimately means that those 5% (and the brokerage firms who bet against their clients) make out like bandits. Bottom line: if you want to learn to trade forex, you first need to know your competition then you can start to pull together strategies....

So who are your competitors?

The Central Banks- These guys are the banks from every country and most have more than just money at stake here. Unlike you and I, they don't necessarily trade for the same reasons. The central banks main motivation with trading forex is to provide stability to whatever currency they are associated with and thus protect the economic interests of their country.

What they do is buy and sell their own currency, thus affecting the price of the currency. What you can pretty much bet is that if the currency is following a downtrend, the central banks are trading in the opposite direction.

Export and Import Businesses- I got a taste of these kinds of traders from an acquaintance who was bidding on re-building roads in Iraq. Basically what he did was use the forex to pay his suppliers or accept payments in another currency. These corporations are rarely in it for profit. Just like the central banks, these corporations are able to virtually move the market because when they trade, it typically is in the millions of dollars.

Foreign Direct Investors- These guys are not trading in the same sense that you and I would either. Foreign Direct Investors trade for the long term and essentially hold currencies in the same way that a bank would store money in a savings account.

As you probably could imagine, when they do liquidate their position, it could create a pretty good ripple in the market. Just like Central Banks, most of these investors deals with millions of dollars at a time.

The investors above don't actively trade for profit but have their own interests in mind when holding currencies. They also hold the lion's share of currencies in comparison to you and I and even some of the "investment banks" and hedge funds. However, as powerful as they are, they only make up roughly 5% of all the trader's that trade. So, what about the other 95% of forex traders? Well, that brings up to our final investor....

Speculators- Now, I have read in several forex websites that would like to make the claim that trading forex is not gambling. However, just the term "speculator" brings to mind a gambler of sorts, right? Anyway, speculators make up 95% of all currencies traded on any given day and these are your competitors.

They are made up of investment banks, hedge funds, money managers, corporations, and of course, the small fries...the retail traders like you and me.

As you can probably tell from the list, there are still some major players here that make their living making money for their clients. These guys will use advanced charting methods and know a thing or two about how the market moves. And everytime someone like you or me lose some pips, chances are there is some speculator out there that is making money from our loss.

The reason why I bring this up is not to try to persuade you away from Forex trading. I just believe that if you want to learn how to trade forex, you should have a clear understanding of the players involved in the currency markets and how each can affect you. Now will this help you trade better? Probably not. But hopefully, understanding this will help you realize exactly what you are up against when you decide to trade.

Learn to trade forex

Forex Trading: 4 Rules all Beginner Traders Should Follow

Since this is forex trading for beginners then it is likely you are either looking at forex as a means to an end (making a living online) or you are simply intrigued by the intracities of trading period. I would be willing to wager my account that it is likely you fall into the first category though and if you have any misconceived notions that you are going to make a mint from trading forex out of the gate, then I think you should first read my rant about forex trading and scams.

Let's take a look at what factors I look at when trading forex. Personally, I believe in simplicity...there is no need to run a gazillion indicators and crunch a thousand numbers before I enter a trade or exit one for that matter.

Forex Trading for Beginners Rules

Rule #1- The Forex Market is driven by other investors...

I know that most of you will realize this and wonder why I am stating the obvious. But it is something that many beginning forex traders forex. While it is novel to think of forex trading like a "us against them" kind of way it is very far from the truth. When you make a trade, the more realistic perspective is it is "you against everyone else". And that is a hard truth to realize. We would all like to believe that us "little" guys out there can stand united against the big corporations and banks and make a killing but the reality is that you can pretty much bet that if you make some money, chances are there is some poor schmuck out there that is pulling out his hair wondering what on earth just happened.

The reason why I am stating the obvious is because of this, it is important to understand just how important news relating to currencies actually affects or can affect your trading outcome. Now I am not saying that you need to rush out and become one of those "trading the news" practitioners as this comes with its own set of headaches. All I am saying is that human emotion ultimately affects where the market may go. And human emotion also drives the market up and down.

For instance, let's say that you are in a long trade (which is unlikely if you are a beginner forex trader...most beginners seem to believe that they can profit from day trading) and suddenly you notice a spike or dip in your active trade. If this was me, the first thing I would do would be to check to see if any news has come out concerning the currency I am in. It is likely that I will be able to find it just by checking for the latest news.

The next thing I would do is take a look at the overall volume of the trades when the news first came out, and then watch to see how much volume overall the currency was still be traded at.

My final course of action would be to monitor the support or resistance line. If the trading volume is still heavy and my support or resistance line is about to be breeched, I would then monitor retracements (fib numbers). At this point, I may or may not surrender the trade according to what I feel other traders are likely to do. Notice that I didn't say according to some blase blase technical indicator says. When trading volumes spike, it is normally human emotion that ultimately will cause the number to move in one direction or another.

Rule #2 Technical Analysis is, for the most part, a sham....

I know, I know...I am not building a fan base by stating this and there are some indicators that I use (retracement indicators..fibronnaci numbers...sometimes bollinger bands)...but understand this...if you are trading based purely on technical analysis, chances are that you are going to lose. Many new traders are absolutely seduced by the idea that if they can find one technical indicator that they can use...that is a forex slam dunk...that they will be on the path to riches. Guess what? If there were such an indicator and it became public, then the market would adjust to handle the system making this indicator ultimately useless.

Rule #3 Following a trend works.....

If there is one thing that I have learned in my relatively short 5 years of trading forex, if you don't follow the trend or go against the trend, you will suffer losses. And the best tool in my opinion is to learn to develop a support/resistance line for all of the currencies you are trading. As a beginner forex trader, you will need to know where the market is going long and mid-term. I hate to sound so trite, but so many beginner forex traders don't want to believe that something as simple as following a trend works (especially if you are in longer term trades) but it works. The important thing to look for is where you support and resistance lines are in terms of the entry point of the trade itself.

Rule #4 There is no way to predict where the market will go

I know that this sounds a bit counter active to my last point but it really is meant to be. Long term trends tend to go in the same direction and you should follow it until it proves otherwise. However, this is intended for those who seem to believe that there is some way to pinpoint when a market is going to go up or down. There is absolutely no way to know this and if there was, there would be a lot of money to be made. I hate to burst anyone's bubble here, but the market kind of has a life of its own. Let's face it, since this market is trader driven, the market will move on the emotions of others. Predicting this movement is a lesson in futility. For those of you who follow people who like to analyze the market after the fact, I can tell you that I too could analyze when the best time was to get into a trade after the fact. Heck, even if you don't know squat about forex or forex trading, you could state the obvious after the fact.

I know it sounds like I am being a bit down on most of the supposed methods that newbs use when they are trading forex but I'm not. I just am writing about what works for me. Retracements work well for me. Support/resistance lines in relation to the trend works for me. Things like "EMA's" don't work (at least not for me). Complicated "systems" that require a ton of technical analysis don't work for me (or I am too lazy to deal with them). Forex Trading for Beginners is not hard. There is no reason to make it any more complicated that it has to be.

How to Trade Forex- Where Should I Place my Stop-Loss points?

Learning how to trade forex is easy...implementing trading strategies is a completely different story.....One of the biggest learning experiences for me was the proper places to put what is called Stop/Loss for my forex trades. For those of you that are green, a stop/loss is simply a point where you are willing to surrender your trade to try to control the bleeding. As you can probably imagine, this is important and should be implemented anytime that you go into a trade, regardless of whether you are learning how to scalp forex, or are simply do longer, more stable forex trades. Bottom line is if you want to learn how to trade forex AND make it profitable, you need to understand this important concept.

If you are new to forex, you probably look at stop/loss points in the simplest fashion....your strategy may be to control the losses by deeming a point in the trade where you are willing to surrender. However, if you are doing this, you are one of the many that will likely be on the losing end of almost all forex trades.

How to locate a proper stop/loss point for a trade

First of all, I am going to say that you have a ton of things going against you. There are some that believe that some "bigger" traders such as banks use a tactic called "stop-loss hunting" to force us "small fish" out of the market. I will get that later but for now let's take a look at how most experienced traders locate proper stop-loss points in their trades.

1. Locate your support and resistance points-This is important because as you know, the market will generally stay inbetween a certain frame UNTIL it breaks them. Now I am being kind of vague because finding support and resistance points aren't so cut and dry, especially if you are day trading (something I don't recommend). As a general rule, I typically put a stop/loss nearly 20 pips below this line but understand that I don't day trade. There is a reason I do this...

Most of the time (but not all the time), once a resistance line is broken, it is followed by a retracement period in which the traders are testing the line itself. I have already spoken briefly about trader's remorse but if you don't know what I am talking about, then you should take a look at this theory.

Once again, I don't day trade and most beginning forex traders do (and do so with great risk) so this may or may not apply to you.

Oh, and for you day traders...the resistance and support lines are very hard to define in these shorter time frames because the movement is a lot more volatile. If you are a beginner, you should focus on the longer time frames, as you will be able to identify trends more easily.

2. Understand what the general trend is for the currency pair- First of all, if you are trading using one or two time frames, chances are you won't be in the game long. Even if you are day trading with 5 minute or 1 hour charts, I implore you....take a look at the daily, weekly, monthly and quarterly charts. You should know the general direction that the currency pair is going. For instance, as I am writing this rant, the USD is falling to the euro and has been for months. However, if you were simply using the shorter time frames and ignoring the primary trend, you may think that the USD is rebounding.

3. If you are a forex day trader, the quickest (and easiest) way to make a little profit is to short your trades- What I have learned is once you have defined the market's R & S points, if a pair breaks one of these barriers, chances are you can expect a retracement of some sort rather than a steady climb upward. Grab some quick profits by trading the Resistance and Support lines. I don't do this because I am a set it and forget it kind of guy (I like to profit over the course of a week or month rather than daily) however, it is one of those weird things I have noticed.

4. If the support or resistance line is too long (60+ pips) and you can't afford to play the line, lower the leverage until you can play- No surprise here, right? I know you want to make a ton of money trading but you have to understand that ultimately, you want to stay in the forex game, right? Understand that in most cases, currency pairs that do make money are extremely volatile meaning that they will shift down or up on a dime. While recognizing and identifying the S & R lines isn't totally fail-safe, it is a relatively safe bet to bet on. Reduce your leverage and take less profit until you are in a position to play with higher leverage.

Now, while a stop/loss will protect you and your forex account from suffering losses that would make it hard to rebound from, you also are going to want to place an exit point where you can exit the trade ( I will talk about this at a later date).

Now for the realities of forex trading and this will most likely get your goat, so to speak. So, let's say that you have done all those things I have spoken about...you have:

• Identified the trend
• Identified the support and resistance levels.
• Have an entry point strategy.

The hardest part to realize is that even if you do all these things, you can still lose quickly if your stop-loss point is not in the right spot. Why? Because of stop-loss hunters.

What are stop-loss hunters?

Stop-loss hunters are simply bigger entities (such as banks and other institutions) that trade forex as well. You have to start looking at trading in the same way that a gambler would look at sports gambling. Your competition are other traders, just like in gambling, you competition will be other gamblers. There are only two sides that you can take...the winning side or the losing side. Movement of the forex market is determined by volume.

These stop-loss hunters simply determine a point where they think the majority of traders have put their stop loss point and trade enough volume to move the market down (or up) to that point. That is a good strategy for them (and most of the time, the forex brokerage firms that manage the losing trades) as they basically reap the losses of their competition. And perhaps the most frustrating part of this is that the trader that just lost because his point was hit, gets to watch the market climb back up in the direction he thought it was going to go.

And it is for that reason, that I will place my stop loss point at a much lower point than simply hovering around a support or resistance line. I want to be assured that if I think that the market is moving in a certain direction, that my trade won't get "stopped" out prematurely.

Oh well, I am done with this rant. If you want to learn to trade forex, you need to not only know the rules but understand some of the nuances of the market and some of the dirty tactics that your competition will employ to know you out of the game. Thanks for stopping by forex trading for beginners.