Tuesday, March 11, 2008

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.

1 comment:

Anonymous said...

Thanks Tigers Fan for keeping it real for the newcomers. I have always felt we would have a better reputation in the forex industry by setting proper expectations. I grow tired of most Forex attitudes of "get them in, get their opening capital, and then send them on their way."