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

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.

Forex Trading For Beginners | The Art of Scalping Trades in the Currency Markets

If you are brand new to forex trading, then chances are you have never heard of scalping trades. However, if you have been around the block on the forex circuit, then chances are you have run into the notion of scalping forex trades as a way to be profitable. In this tutorial of Forex Trading For Beginners, I am going to introduce you to the art of scalping.

What is scalping in relation to trading currencies?

A forex scalper is basically a trader that will enter and exit a trade quickly, usually within a minute of the trade being made, and take the 4-5 pips in profit and move on to the next trade. A typical scalper will exploit small price movements and usually deals with the lowest time frames possible. In other words, while most forex traders will look to enter trades with a potential for large bulk profits (50+ pips), a scalper is only looking for small profits. As you probably can guess, the scalper will need a lot of these small trades to make it worth his while and he will prevent a reversal of fortune by placing tight stop/loss points in his trades. Typically, a successful forex scalper will have a very disciplined system in place when making trades. For example, if the scalper thinks they will make 5 pips, he will typically take the profits regardless of whether the price is moving in the right direction.

However...there are some problems with scalp trading...

The first and probably the biggest problem with scalp trading is that most brokerage firms don't like this. The reasons are really two-fold.

1. First, opening and closing trades for something as small as a couple pips is a big time waster for a brokerage firm. Not only that, but most of the second tier brokerage firms need time to actually make the trades. If you are opening and closing trades in just a matter of seconds, you are essentially just taking money from them.
2. Secondly, most forex brokerage firms actually make money betting against you. What I am trying to say is that alot of time the forex firms will take your trade then open a trade against your own. Once again, time becomes the key factor here. If you are opening and closing trades quickly, they won't have enough time to profit from you.

That said, in an ideal environment, scalping trades in the forex currency market can make you money. However, be aware....if your brokerage firm is not letting you out on canceling trades (since they are short term) or give you a montage of excuses as to why you weren't able to exit a trade, then perhaps you should look for a different firm.

Okay, now that we got that out of the way, let's look at what to expect from scalping the forex market....

• Don't be unrealistic with your numbers- When you are scalping, you should aim for no more than 6 pips a day in profit. Not quite the numbers you were expecting, right? Well, add it up....6 x 30 = 180 pips for the month which is likely better than 97% of the folks out there. Is that a consistently attainable goal? No. But it is a good spot to aim for.
• High leverage is the best way to make a small forex account larger- I know, I know..I have spoken fairly negatively about leverage in the past but I don't believe that leverage in of itself is a bad thing...I think that since most forex traders who are beginners don't understand leverage, they risk way more than they should. Use your brain and stop dreaming....I normally risk 7.5% of my bankroll per trade. This way, I can lose 9 times and still retain half of my equity. And although losing 9 forex trades in a row is unlikely, anything can happen. The main reason why I advocate high leverage in scalping strategies is because typically you stop/loss is tight and the profit is so small.
• Only Scalp Trade using volatile currencies- The market should be liquid and volatile with a high daily average in range (average possible range divided by bid/ask price) The Eur/USD is a great currency pair to scalp trade.

What you can expect....

Like I said before, you shouldn't expect a windfall of pips on a daily basis but rather a small stream of pips profit daily. And this adds up. Once you get the average daily range of the currency, you should aim to make 5-10% of this. Like I said, not a lot but it is steady profit.

One more thing before I end my rant on how to scalp forex trades....if you think that scalping trades can be a part-time job, think again. Scalping the forex market requires vigilant attention to the trading platform and those thinking about scalping should keep realistic expectations about what can be made. Oh...and yeah, you do need to know the fundamentals of forex trading and preferably have your own system in place before attempting to go this route. Forex trading is fun, y'all. But it ain't easy. Until next time....

Forex Trading For Beginners | What all Traders Should Know

About 5 years ago, right before I decided to get into forex trading, I was like many who were on the outside looking in. After all, by all accounts, if you were to believe everything that you read, you would think that trading forex could be as easy as learning a few indicators and plugging in a "proven forex system" and then laughing all the way to the bank. However, forex trading for beginners is much more difficult...in fact, even after you bust your "forex cherry", you are still in for a bumpy ride. Below are some common myths about Forex Trading and what beginners want to believe....

1. There is a such thing as forex automated software that works- I see account after account talk about a forex system that claims that you can plug in a couple variables and profit month after month without a hitch. The problem is that there is NO AUTOMATED FOREX SYSTEM that exists that is profitable month after month. Think about it for a second...if you could develop such software, would you sell it? The problem with automated forex systems and their claims is that most forex traders like to think of trading like it is a "us" vs. "them". It isn't. When you trade forex, you are competing against all the other traders out there...which means the market is getting moved by emotions as well as technical data. I am not sure you can write a variable for the human trader's emotions and this is why an automated system would not work.
2. There is a such thing as a "Proven Forex System"- Books are great for learning stuff. And there are many books that claim that their system will work without fail. The problem is that most of these proven systems are based on the trader's knowledge and since the trader writing the book most likely knows Forex Fundamentals, then he can fine tune his system on the fly...which is something that a beginner in forex can't do. I would like to add that systems do work sometimes, but you most likely will not hear about them. After all, why would a trader want you to know his secrets if he was profitable month after month? Books are meant to be sold, folks. Learn from them..test the systems out there and then apply what works for you.
   
3. Leverage is Great..You can double your earnings in a month- Sure, this is true. But understand that the same high leverage position can just as easily wipe out your account.Leverage is something that most new forex traders don't quite get. All they see are dollar signs and the potential upside to trading with leverage...they don't see the other side, which typically is the side that most beginning traders end..that being the losing end...
4. Trading Forex is easy- Trading Forex is not easy. It never has been and it most likely never will be. Don't believe me? Try talking to some of the newer guys out there..you know, the ones not selling the systems and books on how to make money trading forex. Most of the guys who are making money trading have spent years tweaking and testing their trades AND (drum roll please)........they understand the basic fundamentals of finance and trading in general; Things like how to find trends, support and resistance, and the dow theory. Too many newbies think that all you need to do is slap up a couple forex indicators on their platform and get a feel for the market...that, my friends, is gambling.
5. Trading Forex is not Gambling- Alright, this is for all of you puritans out there that think that just because the banks have decreed currency trading as NOT gambling, that therefore it isn't. As a sports gambler, I am going to tell you the similarities are astounding, from how human emotion plays a part in the trades and volumes, to the "spread", a term that gives the brokerage two pips on either side of the trade. And if it smells like a rose, then it most likely is a rose. The key is understand your risk to reward ratio when making forex trades
   

That's it for today. I don't want anyone to think that I am hating on forex trading. I make money with forex trading. However, just like anything else in life, if you don't learn the fundamentals of whatever investment vehicle you are in, then chances are you will come out on the short end of the stick. Tomorrow, I am going to go over a strategy that many forex beginners get all caught in...scalping..how to make money with the forex markets by "scalping" trades.