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....
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.
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
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