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What is a Trade in Forex - Making the Small Significant

Forex trading is about money. But not money as it is usually seen in life. Forex magnifies movements in the value of a currency, movements w...

31 May 2016

Some Things to Know before Starting to Trade Forex

If one is totally new to Forex, what is a good place to start. A good starting point is awareness of risks. The reason for this is that even a short time trading in the market, can make the trader aware of the risks. So it is better to try and understand this beforehand, to the extent this is possible. Arguably this is the most important factor to be aware of first.

Another starting point, is to use the demo account. This provides a risk free way of getting a feel for the market. Diving in may not be a good strategy at all. But there is a way to get some grounding in the market before even opening a broker account, and that is take a course, or perhaps less expensively, to read and to watch webinars.

In terms of reading material then books about Forex are a good starting point, paying attention to the mechanics of placing a trade and understanding, to the extent this is possible before trading, technical and fundamental analysis. It might be said that this is also a good approach for a new binary options trader. It is also helpful to continue education in the early days of trading. It may be the case that the trader decides to stop trading, but still retains an interest in the whole experience. This can be a good time to study and reflect.

Reading books about technical analysis, which go through types of patterns, can be helpful, as these pattern can be seen on the chart and can affect the way the traded asset is moving. It can be helpful to see technical analysis in this way, as showing signs of changes in behavior, rather than expecting it to predict moves. Expecting behavior in markets, can be a route to frustration.

Even knowing very little about the market, it is possible to get lucky with the first few trades. For example if one happened to go long on an uptrend, and stayed with it then positive things could be seen to happen, without it even being clear at the time why this is happening. In this case the good feelings become paramount, not the desire to know why, potentially washing away any knowledge. This is perhaps why one tends to learn mostly from the trades which go wrong.

Awareness of risks can inform the trader that a move in one direction could become a volatile move or one which is not going anywhere, or even one potentially about to reverse. It is possible for trades to reverse with rapidity, perhaps after a number of attempts to break through support or resistance, trapping the trader in a move counter to the direction of the trade. Awareness of patterns can help illuminate moves which turn out like this, at least after they happen.

However knowledge of the market can teach the trader of warning signs that these kind of things are about to happen. A good starting point for this knowledge, is also awareness of types of patterns common to Forex, such as patterns around big figures. But no knowledge of the market can protect the trader from a sudden sharp unexpected move, for example from a surprise commentary from a Central Bank. As long as it is honoured, a stop-loss can protect the trader in these cases and it can act as a necessary protection in all kinds of trading.

There is something more, that is the emotional part of trading. Those feelings of awesomeness when a trade works and despair when it does not, can themselves lead to risky trading behavior, which can create losses proactively. For example, hoping a trade is turning, when in fact it is in a trend opposite to the traded direction, or continuing to take positions on a trade which has in fact ended its trend. The capacity of the market to do other than what is expected is vast, bringing this article back to the beginning, getting awareness of the risks of this market, first.