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.

Forex Trading And Scams

Because Forex Trading is relatively new in terms of the average investor being able to make money in the currency markets, there is a lot of speculation as to what kinds of returns are considered to be the status quo. In fact, if you look on any forum that deals with forex or yahoo answers, you will find the it will be peppered with questions such as "how much can I make with forex"..."can I make a living trading forex?"....."is forex trading good for beginners?". If you continue reading over a period of time, you will find even more ridiculous questions like "could I double my money in a month with forex trading?".....or...."I was at (insert scam website name here) and it says that I can expect a 4% per day return on my investment..is this possible?"

For those of you who are completely new to forex trading, I implore you...use some common sense...the old adage 'if it sounds too good to be true...' should be employed here. I know that many would love to think that making huge returns quickly is possible (these are mostly wishful thinkers or complete forex newbs), it simply isn't. And because forex trading is fairly new arena, you are going to find a lot of con artists that can't wait to separate your money from your ignorance.

Am I being too hard on these poor individuals? Probably...but the point I am making that most of the forex beginners aren't asking the right questions. They have the dollar signs in their eyes. Their vision is clouded and the money that they think they will make has already been spent before they have made it.

I think rather than asking "how much can you make trading forex?", the inquisitive should instead be asking "how much can you consistently make with forex trading?" And that is the key.

Five years ago, I was one of the ignorant that I am currently bashing. I got into forex trading after suffering some losses from a scam operation (based in the Asia) called PIPS "traded" away nearly $2,000 of my money. I learned of this company from a friend of a friend who actually flew to the country and met the owner (Bryan Marsden). He was convinced that what Bryan was doing was legit and actually had collected over 100k from his investment over the period of year.

Just to let you know exactly how stupid I was, I thought that Bryan was actually trading forex and consistently making 4% COMPOUNDED daily. I wasn't alone. There were nearly 100,000 of the "bungled and botched" out there hanging their hopes and dreams on the shoulders of this con artist.

And the sad thing was, the longer that the company existed, the stronger the belief that he was doing the trading was. And even after the supposed company was defunct and Bryan was gone, there were still hordes of people who believed that their ever growing account would eventually be theirs for the taking.

When PIPs disbanded, I started looking into trading. I didn't want to get hoodwinked again. At the time, I still believed that you could make a ton of money trading the currency markets. I still had visions of making a killing, quitting my day job and purchasing an island in the bahamas. Five years later and although I have made money (and lost money), I have learned that just like everything in life, nothing good comes from easy.

Currently, there are probably 2,000+ sites that claim to trade the forex markets. Some these supposed "forex traders" claim to be able to make as much as 100% ROI in one day. Most fall between 1%-4% a day though. And I am here to tell you, if you think that you can make 30% per month ROI consistantly, then you really need to check your head.

Well, I know that this rant is abit winded so without further ado, here are some realistic expectations that all of you forex trading beginners can look at:

• Expect to have some good luck initially out of the gate with your DEMO forex account- Call it beginner's luck or the god's trying to play tricks on you but most beginner forex traders wind up having substantial gains that kind of lulls them into believing that they are ready for a real account. Trading with REAL money will do some crazy things to your mind, especially if you are on the losing end.
• Expect to lose...initially- Best case scenario is that you don't drain your forex account within a couple months (what most will do) and actually learn from your mistakes. Worst case scenario is you lose really quickly and decide to throw in more money (can we say degenerate gambler?) to try to get back to even.
• Expect to become partially bald from pulling out your hair- My first year of trading, I had a semi-permanent bald spot on the side of my head made primarily from me yanking it out whenever I couldn't cancel a trade quick enough.
• Expect to become obsessed with new 'tricks', 'systems' and other con jobs out there- Over the years, I have tried a couple dozen guaranteed systems out there. The "system" I use now is what I consider the fundamentals of forex trading., such as dow theory and how it applies to forex trading, support and resistance bands in forex, how to use leverage when dealing with forex trades and understanding how risk and rewards work in forex trading
  
• If you are forex day trading, expect to be glued to the screen for hours looking for good entry points- The notion that you will be loosening the chains of that J-O-B is replaced with the shankles next to your computer.
  
• Expect months of great returns followed by streaks of no returns- This is for real...My second month of trading, I pulled in a whopping 20% ROI. I thought I hit the promised land (granted, my account was smallish). The next couple months after that, I gave it all back to the house and then some. Oh well, back to the drawing board.
• If you are lucky, expect to make more than your average mutual fund in a year's time- Yeah, you heard me right. There is money to be made in the forex market. But just like the stock market, it is a zero sum game. Everytime you are a "winner", there is someone out there wondering what in the heck just happened ("loser).

That is pretty much it for today. I was planning on getting into how to spot a forex scam, but figure that you can figure that out on your own (I may revisit this later). The bottom line is that because forex trading is fairly new (to the regular investor), the idea of what you could make trading forex is saturated with presuppositions and myths. The only way for you to truly realize what you can make is to get a trading account for yourself and test it out yourself. I'm out.

The Hidden Dangers of Forex Trading

I am going to back track a bit and share with you a story on the hidden dangers of forex trading. I have been trading on and off now for roughly 5 years, and have my share of bumps and bruises along the way. Trading Forex has actually taught me alot about myself, including some of the not so pretty things that I am about to reveal to you. Forex trading is not a piece of cake that many would have you believe.  In fact, if you don't know much about forex trading, then perhaps you should investigate stocks first and learn how to buy stocks for beginners before you get into the volatile currency markets.

I was actually one of the lucky ones out there when I first started out. I was just like many other people out there just starting out. I didn't know a thing about trading and didn't see the importance of placing "stops" to prevent huge losses.

As you are probably aware, the forex markets are unkind to those who don't set up precautionary things like stop losses. Well, on this occasion, I was trading the Eur/USD currency pair and it was late. I was speculating that the USD was going to go up but it had just been hovering at the same place for around an hour or two, give or take a few pips. I didn't have a stop loss in place because I was monitoring it pretty closely.

Well, long story short, I ended up going to bed, and didn't bother to close my position. I can't remember exactly why I didn't do this but the point is that I didn't. I woke up the next morning and went in to check my position. The result? There was a 60 pip move in my favor.

Now while I know many of you would say that that was great and congratulate me for a job well done, understand that this swing could have easily wiped out my rather small account in the blink of an eye had it gone in the other direction at the time. And trust me, it could have easily done so.

So what caused the huge swing? It was an annual news report about the US housing market. Like I said, I had no idea that this report was coming out on this day and had the news been bad, this story would probably be vastly different and it could have forced me onto the forex sidelines with all the other losers for the day.

Needless to say, I could have made a decent return that day. But I didn't. Why? Because rather than closing my position, I fell into yet another newbie forex trader trap...GREED. That's right. My first inclination was to close my position. But then, I started thinking......

What if the market continues to move up? Would I be leaving money on the table? Maybe I should hold onto it a little longer.....

Of course, the market started to correct itself. I started to think that maybe it will rise again (I didn't understand what the market was doing at the time) so I stayed in the trade all the way back down.

The bottom line was I lost PIPs (the spread) instead of making the 60 PIPs. I had a windfall and didn't capitalize on it. I lost the opportunity due to my greed and when it was apparent that it was going back down, I remained in because I thought that maybe, it would rise again. And I DID NOT HAVE A STOP LOSS POINT IN PLACE TO PREVENT SLIPPAGE.

So what is the lesson in all this?

• Understand that you should always have a stop/loss point in place for any trade that you do, especially if you are stupid enough to use high leverage in a trade. If you luck out and actually make a windfall of PIPS, readjust your stop/loss point up to where you will make something.
  
• If you decide to do intra-day trades, take your profits and move on (especially in a correction)
  
• Also, always be aware of upcoming news and when it is coming out as news can make the market swing wildly (in your favor or not so much) and could cause a margin call, once again for those of you who are recklessly messing with high leverage. I don't mess with trading the news and try to close my short term positions during this time.

There are actually more "hidden dangers of forex trading" but those two are probably on the top of my list. If you are going to trade, be smart about it. If you don't use a stop/loss point, you are playing with fire. Couple that with an unmonitored account during some forex breaking news and that spells a recipe for disaster. I'm out.....