How do I do a forex trade?
When novice traders ask this question, they usually get a course in forex trading. But what many new traders have difficulty with, is how to actually go about placing their first trade.
Here are the steps:
Find yourself a broker.
Deposit the smallest amount the broker allows you to deposit.
Study how trading works on your broker's platform.
How do I find a forex broker?
By now, you should already have done enough research to give you an indication of which traders you could use as online mentors by following their advice through their blog posts and videos. Look for comments and discussions on their forums, posts and videos for indications of which brokers other traders use. If you trust the standard of their advice and the standard of advice by their followers, ask who they use.
I start with a Google search: "(company or broker name) testimonials". Ignore the ads at the top. Make a mental note of the language used in the testimonials. If you detect that there are multiple testimonials that use the same language, it's probably orchestrated. Always look for tips or indications that seemingly unrelated testimonials may be orchestrated, especially in comments to blog posts.
If the review or testimonial says: "Why trade with XXXX.com? The firm lists these reasons", you do not have a testimonial but a promotion.
Look for testimonials or complaints related to the ease or difficulty of getting your money back from them.
See how long the giver of the testimonial has been trading. Novice traders are often so excited with belonging to a group, that they are keen to give testimonials. Look for expressions like: "I have been trading for two months with XYZ company and never have difficulty in getting paid".
Look for criticism or negative testimonials. The lowest demoninator gives you the standard. But again, try to find out whether it is bona-fide testimonials or testimonials planted by a competitor. One good and one bad testimonial have the same value - no value.
My first broker, that I used on the advice of a fellow (novice) trader, had a balanced mix of testimonials, although I only realised later that the positive testimonials were all by novice traders. I smelled a rat when I started receiving agressive sales calls trying to entice me into trading binary options. At the time of writing this, I had left them a year ago, but still receive sales calls from across the world. My name is obviously now on some mailing list that gets passed on between unscrupulous salespeople. Truecaller has become my friend!
Before you consider trading binary options, read this article about the binary options industry. It works like that everywhere.
Another problem was that I struggled more than a week to get my money paid back when I closed my account, which is why the next tip (2 below) is important.
Does it sound like there are more criminals than brokers in the forex industry? Not really, but like in any place where big money is involved, there are "funny" people ready to take your money. Just look where brokers and other forex service providers are based (it's on their websites) and you will see how many have their registered addresses in countries where control is at best, questionable.
Sources to help you identify a broker:
Why deposit the smallest amount?
Because that must be the biggest amount you will lose if your broker is not what it seems and you don't get your money back when you want to withdraw money.
What you do is deposit the minimum, or just what you need to make the trades of your choice, but still calculate your total exposure (e.g. 2% of portflio) on the portfolio amount (although that money is in your own bank account).
Let's say your total portfolio is $10 000. Your broker requires a minimum of $200 in your trading account which is 2% of 10 000. You can enter trades with a total exposure of $200, although, as a novice trader, you may want to expose yourself to less money at risk by trading only micro lots.
Also read about risk.
- Your broker's platform has a "help" section, usually on the menu at the top of your computer screen but I have found that forums and blogs give better (clearer) explanations of what you want to know.
- Google the term you need info about e.g. "how to place a trade on (your platform name)" or "how to set a stop-loss on the (your) platform"
- Then do a demo trade or ten to become familiar with the platform.
Decide what your trading strategy is going to be;
How do I decide on a trading strategy?
Types of trader
- Scalper - super-short-term trader who may open and close positions within minutes;
- Day Trader - short term trader that usually holds position only intra-day and close out before the market closes;
- Swing trader - short to medium term trader that may hold positions over days or weeks;
- Position trader - longer term traders that may hold positions for days, weeks or years.
- Investopedia's definitions
- Baby Pips's list and discussion.
- Another discussion of trader types
- Other types acccording to Investopedia
- Traders according to motivation
Your first encounter with the types of traders and trading will probably be some, or all of, these:
- Price action trading - a trading technique that uses price movements in fx pairs to make trading decisions.
- Rolf at Tradeciety who is a reversal trader, and his partner, Moritz, who uses more advanced trading strategies which you may find interesting.
- Nial Fuller of Learn to Trade the Market
- Price Action Trading
- Nic Bencino at Forex4Noobs
- Trading Setups Review's beginners guide to reading price action
- The Forex Guy, Dale Woods
- Kim Krompass at The Price Action Traders Institute
- Trend trading - a trading technique that identifies the direction of the momentum as reflected on a chart. It depends mainly on the concept of "higher highs" and "lower lows" to define a trend.
- Michael Covel of Trend Following
- Rayner Teo at Trading with Rayner
- James Stanley on Dailyfx
- The Balance
- Colibri trader
- Momentum trading - a more specialised form of trading where momentum trading opportunities are identified inside trends and other trading patterns.
- Reversal trading - trading reversals in trends. It is more a part of price action trading than a trading style by itself.
Don't make trading complicated. Start with the least indicators and grow from there
Price action traders:
Price action (PA) trading is a good place to start because it uses "naked" charts and, the novice doesn't get bogged down in indicators and other technical aids. That can come later.
Rolf at Tradeciety is a reversal trader. See his tips here.
Don't worry too much about what type of trader your are, or want to be. It will change as you gain experience. This list is for information and to help you start somewhere.
Types of trading
Choose the currency pair you want to trade
- You want an fx pair that has some activity so you get enough opportunites to trade.
- The EURUSD is the most actively traded fx pair with about 27% of forex trading volume. That makes it a good pair to start trading.
- Then also the USDJPY (13%) and GBPUSD (12%).
- A quick guide
- Good currencies for a beginner to trade.
- This will give you a good background.
- Using currency correlations.
- A nice list of currency correlations.
Just keep in mind the correlation between currencies (currencies that move in relation to one another). Don't buy and sell the same pair, because that gives you double exposure to the same pair.
Write down your trading plan
It is important that you keep proper records of all your trades, even if it is only demo trades. You will not reach your goals and master the art of trading if you do not have a historical record of what you did wrong and what you did right, what worked and what did not.
Don't use loose papers, they get lost. Rather use a spreadsheet or book as trading journal or use the free trial version of Edgewonk.
What needs to be recorded in a basic trading journal
The least you need to record as a start are:
- Date of trade;
- Size of trade (see calculator below);
- Time of entry of trade;
- Time of exit of trade;
- Currency pair you are trading;
- The price at which you enter;
- Trading strategy you are using;
- Whether you buy or sell (long or short);
- Stop-loss in pips;
- Target profit in pips;
- Reasons why you do the trade - reasons are at least the requirements of your strategy;
- The price at which you exit;
- Profit or loss in pips - use pips rather than $ so you get focused on successful trading, and not money;
- Risk/Reward (RR) - Potential profit/Potential risk. See Forex Terms;
- Your emotions (feelings) when entering and exiting the trade to enable you to build a history of how your emotions affect your trading decisions.
Calculate your risk
This form enables you to calculate your risk by calculating your trade and lot size based on risk of 1% of trading funds.
Choose the demo account on your broker's platform
Many forex trainers have a dislike of demo trading, because it is so far removed from real trading, that it often just teaches the novice trader the wrong trading habits. The mere fact that you know in the back of your mind, that you will not lose or win real money, tends to make a demo trader careless.
However, you need to learn your trading platform, you need to learn your trading strategy and you need to learn how irrational the market can act. Demo trading is a good practice opportunity for that.
Enter your first trade
- According to your trade plan, click on "buy" or "sell
- Enter your take-profit (TP) price or pips.
- Enter your stop-loss (SL) price or pips.
- Click the button that places your trade (send it to the market)
Follow your trade until it closes, either by reaching your profit target, or your stop-loss
Many good trainers will tell you not to micro-manage your trades by following it. That is sound advice.
But you also need to gain experience in how the market moves, and how it can fool you with its erratic moves. The athlete must practise before she can run a race
The most important proviso is that you are not allowed to deviate from your trading plan while the trade is in progress, regardless of what happens, or what you think is happening or is going to happen.
Do a post-mortem of your trade
If you don't have a professional trading journal such as Edgewonk, to help you study your trade afterwards, you need to have a spreadsheet or notebook where you record all your trades in detail, as explained above.
Study what you did so you know exactly what you did wrong, but evenly important, what you did right. Evaluating your actions and decisions afterwards, ensure that you can look at your trade more objectively and gives you better insight in what motivated you during the trade.