What is forex trading, how does it work?
Forex, or currency trading, is the buying and selling of the currencies of different countries.
Forex traders are speculators in that they trade (take positions) for, or against, different currencies by buying or selling.
In forex trading you can make (or lose) money whether the price goes up or down. If you bought the pair and the price goes up, you are long and make money when you sell at a higher price. If you sold the pair and the price goes down, you are short and make money when you buy at the lower price.
An interesting fact about forex trading, and one which novice traders sometimes have difficulty understanding, is that the buying of one currency automatically means the selling of the other currency in the pair. If I think that the EUR will gain in value against the USD, I buy the EURUSD. The trust I have that the EUR will go up in price against the USD, means in fact that I have less trust in the USD, so I am actually selling it.
Buying a currency pair means I expect the price will go up.
Selling the same pair means I expect the price to go down.
The forex market is an international market that exists mainly online and is open for trading 24/5.
How to start forex trading
To be able to start forex trading, you need to have everything in place:
- basic knowledge
- a broker
- a strategy
- a trading plan
- a currency pair
To join the forex trading business is actually fairly affordable if you start with a demo account. A demo account does not require that you trade your own money. Most brokers offer demo accounts that require no deposit.
When you want to trade live, you will have to deposit funds, which usually start at around $200, although there are brokers who allow small deposits.
How expensive the deposit is, often depends on where you are located. If you live in a country with a weak exchange rate, you will need more money to make up $200. The USDZAR ($/South African Rand) exchange rate is (at the time of writing this article) around R14,50 to the USD. It means you will have to deposit at least R2 900,00 if the requirement is a deposit of $200.
How to do forex trading without money
You can trade (but you can’t make money) with demo trading. Open a free demo account and start learning to trade.
Just keep in mind that demo accounts do not account for costs, so if you “make money” on demo trades, it does not mean the same trades would have been profitable in a real trade.
A demo account has more value as a way of learning trading and your trading platform or testing a new trading plan, than it has in teaching you how to make money on forex trading.
Also keep in mind that trading with demo or “fake” funds, has the psychological effect that will let you take more chances than you would trading your own money. And no, taking a decision not to fall in this psychological trap, does not mean it will happen.
The human psychology is not overridden by a mere decision to manage it.
Whether you believe it or not, you are a slave of your own biases. Biases such as recency, information and hindsight bias can play havoc with any trader’s mind, and whether you are a natural optimist or pessimist or whether you are risk taker or risk avoider, all have an effect on how you trade.
You are who you are, and you can’t change that with only a decision.
So, if you want to join the forex trading industry or just want to “play forex”, start with opening a demo account and anchor your demo trading in intensive reading and learning. You can start by learning some important forex trading terms.
If you want to know how to become a forex trader, you may benefit from reading about my experience.
How to make money on forex
How to make money in forex and how to trade forex successfully, and many more questions related to it, are questions which people ask when they consider forex trading as a way of making a living.
As this website (Forex Trading Tips) is aimed at helping beginner or newbie traders, I try to provide answers that will not only answer the question, but also why the question is asked and, what the new trader may not keep in mind. Sometimes a new trader will not think about something because it falls into that part of his knowledge known as “what we don’t know we don’t know”.
One important aspect we often “don’t know we don’t know”, is that we are asking the wrong questions for the time.
When you want to build a house, you don’t start with the question “How do I live happily in a house?”. You start with the (often) unrealised need of how do you solve your problem or fill your need for housing. Your questions (sometimes unconsciously) would then be “How do I fill my need for a place to live?”, “How do I find myself a house?”, “What is better, renting or buying?”, “What do I need to do to get a house?”.
In forex trading, people often ask the question “How do I make money in forex?”.
The answer they are actually looking for, is “how to solve my problem of inadequate income”, “how to solve my problem of not finding a job” or “how to generate an additional income?”. “How do I make money in forex?” is just another way of asking “how do I trade forex successfully?”
People who aim at making money, rarely do. People who aim at following the rules of success, often make money.
The answer to the question of how to make money or invest in forex or currency trading is not some easy plan sold to you by a guy on the Internet.
The answer is that you make money in forex by learning the trade, finding your edge and keeping to your plan “come hell or high water”.
In our example of building a house, that would mean learning what needs to be done do build a house or have a house built, finding the best way for you to get to a completed house and keeping to your intentions. You may find that you can’t build a house yourself, so you need to find a builder. Then you need to see that the builder does what is necessary to complete your house. If you change your builder mid-way through the building process, or change the house plans or the amount of money available, or decide you are going to build on another piece of land, you don’t have to be a rocket scientist to know that you will never get to a completed house.
Forex trading is the same.
- You need to know what you need to learn
- You need to know how to manage your money
- You need to know what could cause you to fail
- You need to know how to apply what you have learned
- You need to know how to control your emotions and beliefs so you won’t self-sabotage your trading
- And then you have to diligently apply everything you know.
In forex trading you need to do what is native to the industry, so you need to follow the basic steps to set yourself up as a forex trader, choose a strategy and write down your trading strategy and trading plan.
If you fail to plan properly, you set yourself up for failure, and you make forex trading a gamble.
How to become a successful forex trader
Success as a forex trader is relative, because it depends on what your definition of forex trading success is.
Is your measure of success based on whether you make money, make a certain amount of money, can live from your trading income, whether you kept to your trading plan or lost less money than last month?
The only objective measurement for success is how much money (profit) you make. Most other measurements are subjective in that it is based on some view or someone. Money for a trader is the same as votes for a politician. If the voter is ill-informed, the wrong decision will be the result. If the trader is ill-informed his trading will fail.
Forex trading actually have a fairly low barrier of entry financially. But the barrier of entry lies in the study that goes into it.
No forex trading trainer or mentor can teach you to trade successfully. They can teach you what to do to be successful, but it is only you who can trade yourself to success.
The purpose of trading training is to give you the tools to trade successfully, not to make you successful.
Too many would-be traders expect a trainer or mentor to give them the recipe that will ensure success without any mental effort from their side. That is why there are so many successful scammers on the Internet.
A basic truth of life: You get out what you put in. Just because it looks easy from the outside, does not mean it is easy on the inside. A true professional makes a difficult effort look easy.
Whether you put in the money – by paying for a trustworthy trainer or training program, or put in the time to learn trading by yourself, you will get out what you put in. It does not matter how much money and time you put in, if you do not utilize the time effectively, you will fail.
You can pay a trainer and not do what you are taught, or you can have all the time in the world but you spend it daydreaming, then all your effort will be in vain.
We already dealt with the technical how-to of forex trading.
Now we need to look at an evenly important aspect namely the trader’s approach.
The most effective way to become successful in forex trading is to be successful at self-discipline.
First you need to empty your mind from all the hype, nonsense and good advice you encountered in your initial study of trading. Then you have to look at forex trading with a mind cleared of clutter.
Don’t expect anything in fx trading
We dealt with probability in a blog post.
Whatever you expect, it will influence you to see chart patterns and trades where there are none. Expectations let you think you know what will happen.
Your only expectation should be that you expect anything can happen. That is what will probably happen.
If your mind is focused on making money, you will do what you think will make you money. That changes as the charts change, which in turn means you start to meddle with your trade while it is unfolding. In the end you chop and change and chase a trade and 99.5% of the time, the trade will turn and surprise you with a losing trade.
As a beginner forex trader, you must focus only on the plan, not what the house must look like when it is completed. If you keep changing your house plans, you will drive your builder crazy. When you focus on the trading profit, you will drive yourself crazy.
The builder with a lifetime of experience can make changes to a plan “on the fly” based on his experience. A lifetime trader can make changes to a trade when circumstances change based on his experience of how markets act and react.
The “lifetimers” make money from amateurs who want to act like lifetime traders.
Keep your eye on your money
Do not make your trading a gamble by trading recklessly. Any deviations from your trading strategy and plan, is reckless – no matter how convinced you are.
Only trade what you can afford to lose.
Keep in mind your personality. If you are aggressive, concentrate on relaxing and keeping to your plan. Never, ever revenge-trade.
Prepare to lose. If you are prepared to lose without it creating emotional stress, then you are making progress.
Choose your trading strategy
A trading strategy is a set of rules that define how you trade.
Forex trading strategies are broadly classified under the names
- scalping
- day trading
- swing trading
- positional trading
A trading strategy is there to increase your chances of success (gives you and edge), and to limit your losses (stops).
Emotions in trading
Emotion has no place in trading, but it probably is one of the most influential aspects of unsuccessful trading.
If the outcome of your trade creates out-of-the-ordinary depressing or joyous emotions, you need to alert yourself to it. It is natural to be happy or disappointed, but it needs to be controlled. Here are some Mark Douglas quotes that may help you form perspective. Douglas wrote Trading in the Zone, which is a powerful technique if you can master it.
Never forget the two debilitating emotions that motivate all we do: fear and greed and overcome it.
Trading in the zone, knowing yourself, and trust in your strategy, enable you to trade free from stress and emotional see-sawing.
Stop loss or wipe-out
If a trade moves against you, you lose money.
As long as the trade moves in the wrong direction, the loss increases up to where your broker automatically starts closing your trades (positions) to make sure you do not run into the red and owe them money.
Obviously a broker will be unable to recover money lost and owed by a trader, especially since traders come from all over the world. To protect themselves, brokers do not allow accounts to go into overdraft (in some countries it is prescribed by law).
When your trade goes negative, the broker’s computer trading system starts closing trades to keep your account in the black. That keeps on until all your trades have been closed, by which time your trading balance will be at zero.
Why would you not use stops? Just as any other of your trading activities, it forms part of the way the machine works. Stop losses are the safety belts of the trading vehicle. It cannot stop you from being in an accident, but it can help you survive.
10 things new forex traders should keep in mind about stop losses:
- it should not be larger than your potential profit, as that will give you a negative return;
- it should not be based only on what you can afford to lose, it should also be compared to the potential profit;
- it should not be based on what you think the market is going to do, even if you are completely sure;
- it should not be moved during a trade unless trailing stops are part of your trading plan;
- it should never, ever, be expanded during a trade because you think the move is going to turn around;
- the purpose of a stop-loss is to help you survive so you can make money when a profitable trade presents itself;
- a stop can be missed if the price gaps in the wrong direction (slippage);
- stops are on your side, they are not your enemy;
- price will move in your direction after your stop has been hit, learn to live with it.
- Keep up with markets and market news. If you don’t know what affects the market or the pair that you want to trade, you may receive and unwelcome surprise.
Economic and political news affect the movement of forex prices. An influential political figure may tweet a view that could affect markets if it became reality, negative or positive economic news from a country with a large economy, or interest rate changes from an important central bank, all cause currency prices to move – sometimes unexpectedly and sometimes violently. These may cause spikes in currency prices and create uncertainty, which makes trading more risky.
Do not over-trade
Over-trading is often the result of impatience.
Novice traders expect the market to offer trading opportunities whenever they want to trade.
Most of the time there are trading opportunities but those are best left to the long-time traders, because they have multiple strategies and multiple pairs or markets that they trade.
Beginner traders are better off if they keep to a small range of forex pairs and a single strategy until such time as they trade with consistent success.
Taking too many trades usually indicate a trader that sees trades where there are none, or trying to create trades because that is what the trader wants to see. This often happens after a few successful trades. An amateur with two or three successful trades behind him, is at risk of following up with a losing trade. Success quickly creates a sense of invisibility.
The same can happen when trading too high leverage. It is easier to work out how much money you can make if you increase your leverage from 200 to 500. It is quite difficult to weigh that up against the larger loss you may suffer with the same leverage increase.
Leverage amplifies profits, and it amplifies losses.
Accept losses with the same grace as wins
You don’t have some divine right to always win or always be successful. Losing is part of the balance in life. The same holds true for trading.
There is no successful trader, dead, alive or unborn, that has ever had only wins. You need to take risk to make profit. If you are not prepared to take on risk, you cannot trade. In fact, you can’t do anything.
“Losing” is actually a bad word, mainly because it is associated with failure. That is how we are brought up.
Experiencing a losing trade is not failure, it is merely the price you pay for participation in the market. You need to pay for the right to participate – in life, by paying your civic rent and, in business and trading by accepting risk.
Mark Douglas: “Ninety-five percent of the trading errors you are likely to make – causing the money to just evaporate before your eyes – will stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table. What I call the four primary trading fears.”
Choose a broker that resonates with your personality
Don’t take the first broker you find because they make forex trading sound easy.
When choosing a broker, do your online research well. Google, read testimonials, go through their website with a fine comb to try and form a feeling whether their attitude makes you feel comfortable.
Ask the right questions. Don’t ask “is xxx brokers good brokers?” What the hell does “good” mean? Rather Google “is xxx brokers reliable when paying out …?” or “xxx brokers testimonials.”
Use an ECN broker. ECN brokers are brokers that send your trade order through to the market. ECN brokers do not trade themselves. They are not market makers and therefore they don’t trade against you. They are true brokers.
Keep educating yourself about forex trading
- Only accept what you can verify objectively.
- Verifying objectively is verification based on different sources who in their own right is verified (are not bots or set up by whoever you need to verify).
- Only accept what you have tested.
- Don’t accept someone’s word. That guy on the Internet who makes out to be concerned about your welfare or your bank balance, may only be interested in reducing your bank balance.
- Focus on the value you get, not the promises made, and if you can’t verify the value, don’t buy it.
- Read as much as you can to widen your background knowledge, not to get easy-money-making tips.
- Follow traders with a track record on social media.