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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 July 2016

5 Ways for a Beginner to Approach the Forex Market

Firstly, preparation, so that the trader does not enter the market without knowing some basic information about it. Preparation can consist of education about Forex trading and familiarization with using a trading platform.

It is easy to make mistakes, for example by placing the wrong kind of order (for example a pending order instead of a market order). How easy or hard this is to do may depend on the platform to some extent at least. Thus familiarity with the chosen brokers platform is essential. While books and courses can give a general guidance on how to place an order, the reality of facing a platform and actually placing an order is another matter.

This is a good reason why it is important to use a demo account. It is also a good idea to continue to use a demo account, not only to test out strategies, but also to get a deeper familiarity with the platform, in the light of experience of live trading. However using a demo account and actually trading is another matter and no matter how well prepared one is, in theory, the reality may be overwhelming to some extent. However as with anything, practice and familiarity can provide some support.

Secondly, appreciation of the difficulty of the market. Forex does not tend to move in one direction. Even if it does, it will tend to retrace while moving in this direction. This means that it can move in the opposite direction to the trade. While the move may then continue in the traded direction, it also may well not.

It is easy to get in on a move towards the end because that is when direction seems obvious, which perhaps stands to reason, since such directionality is not common. In fact, at the very end of a move, the Forex pair can surge to an extent that looks like it is going to continue on. But in fact this can be the end, followed by volatile moves up and down. Awareness of pattern in Forex can help to some extent, but no matter what, A can look like B.

Thirdly, knowing that technical analysis while it may be essential to understand what is going on in this market, does not necessarily predict what will happen next. In fact it can be safer to assume it will not predict directional moves. What it can do is show changes which may happen, which in conjunction with other events may indicate different kinds of movement.

Fourthly support and resistance is important in this market, that is past price levels the pair reversed off. But just as a pair may not continue in a given direction it may also not respect these levels at a later time. Part of the difficulty in Forex is the way a pair is seemingly balanced between up and down at a given time, that is the apparent determinism in its direction is illusory and ready to change at any time. This does not mean that strong trends do not happen, they do, but the fact that they happen can seem like a random event.

Fifthly, using a simple technical indicator versus using a more complex indicator set. This is a process which may occur in trading: the trader starts out using something like RSI, finds it is not so effective then adds more indicators as filters, until it gets complicated and still does not predict direction. But then again, if RSI is at best going to show a change then filtering it will other indicators will not necessarily enhance it.

What awareness of the up/down instability in Forex can show is that a change can turn into something else. But other factors needs to be considered, including what time it is (is the market opening, closing or in between, which market is it) and the volatility in the market.