Forex Trading Tips for Beginners

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We have put together some Forex trading tips for beginners to help beginning traders get the right start in Forex trading.

Forex Trading Tips

Don’t Take Trading Advice from People Who Don’t Trade – This tip should be obvious, but you would be surprised how many people are actually giving out trading advice without ever having traded themselves. If you’re looking for a Forex trading mentor that you’ll need to find someone who actually trades successfully. Why? Simple. Because you want to duplicate the success of the trader wo is profitable rather than duplicate the failure of a trader who is not.

Never Stop Learning – The Forex markets are changing constantly. Along with these changes is the ever-increasing pace of financial market technology. Successful traders already know the benefits of continuing education in their industry.

Learn to Be Patient and Don’t Be in a Rush to Make Your Fortune in Forex Trading – When you are just starting out your level of enthusiasm and anxiousness to get into the Forex markets is almost overwhelming. This level of enthusiasm is actually one it can be a positive rather than the negative. Channel your energies and enthusiasm into learning how to trade effectively. By being patient at the start of Forex trading, many traders have realized that they would’ve made many foolish and expensive mistakes had they rushed in unprepared.

Develop Your Own Forex Trading Strategy -With so many strategies available for you either for purchase or for lease, the best possible trading strategy will be one that suits you to a T. You can get started with something that is simple, yet effective such as a channel breakout strategy. From there, you should do your own trading research to test your strategy and make certain it is one you are comfortable trading.

Learning to do your own trading research is an important part of becoming a profitable trader. Many will not go through the time and effort to learn technical analysis and trading systems development. Personally testing and tracking to see what works and what does not work gives you a tremendous edge.

Realize That Losing Trades Are a Natural Part of Successful Trading – It is very common for beginning traders to try their very best to avoid having any losing trades at all. This journey seeking, “trading perfection” has left many would be excellent traders in a state of paralysis by analysis. As a result of this many of those who are just starting out find themselves in the perpetual quest for the, “Holy Grail” of trading.

Make certain that you keep in mind that the most successful traders in the world have losing trades. Also bear in mind that your trading system does not have to have a high percentage of winning trades in order to be extremely profitable and effective. In fact, you may not know this, but there are trading systems that have 50% winners and are very, very profitable.

What we just covered are few Forex trading tips for beginners that you should keep in mind as you continue along your Forex trading journey.

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Effective Forex Trading Tips

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There are a number of things at the top Forex traders in the world do in order to trade Forex successfully. Becoming a profitable Forex trader does not happen by accident nor does it happen overnight.

What follows is a list of those things that must be done in Forex trading. Some of these things must be done before you begin trading Forex and some must be done after you begin to trade Forex.

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Decide why you want to trade Forex – If you ask anyone why they wanted trade Forex the vast majority of people will tell you because they want to make money. Truthfully, this is as realistic and valid a reason as any other.

Have realistic expectations – Many a would-be trader has fallen prey to expectations of getting rich quick and letting the money flow in on autopilot.

Have adequate working capital – According to the Small Business Administration (SBA) one of the biggest reasons that new businesses fail is lack of adequate working capital.

Have a Forex trading plan – I know I am going to sound like a broken record here but here we go again for those who may not have latched onto the concept the first time. If you fail to plan, you plan to fail. It is really as simple as that. The Forex market is unforgiving and simply eats unprepared and under prepared traders alive.

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Choosing A Forex Trading System – Things Every Beginning Forex Trader Needs To Know

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There are many different kind kinds of Forex trading systems. Of course, the most important Forex trading system is the one that is right for you.

As you search the web for Forex trading systems suitable to you there will be many seemingly appealing offers many promising to be so much better than the rest.

It can be difficult to compare some Forex trading systems due to the lack of performance information. You want to have enough information available to you for you to be able to make an intelligent decision. You need this valuable information prior to committing to purchase or lease a Forex trading system and before committing to the money necessary to properly fund a trading account.

Here are a few quick tips to help you hack your way through the jungle of available Forex trading systems:

Ignore the testimonials

Your first job is to ignore the typically glowing testimonials telling you how great a certain Forex trading system is. Remember that these are most likely not typical results obtained with the trading system.

Now I’m not suggesting that you ignore all testimonials about all products. I’m simply suggesting that when it comes to testimonials about money making strategies that we all need to be more objective.

Don’t forget that a testimonial about a vacuum cleaner is a lot different that a testimonial about t trading system. For one thing everyone knows how a vacuum cleaner works and what it is supposed to do. Not everyone knows what a Forex trading system is and how it is supposed to work.

Not looking at the testimonials will allow you to be more objective in your evaluation.

Also keep in mind that it is highly unlikely that you will buy your own private island based the few great trades you see in the testimonials.

Let’s take a look at a few other do’s and don’ts for choosing a Forex trading system. With that in mind here is “don’t” number 1.

Don’t be overly impressed by a high percentage of winning trades

Often times you will see Forex trading systems advertising a high winning trade percentage. The ad might contain information a line like the following: “Over 90% Winning Trades”

You might look at that and say, “Wow, with numbers like that I’ll be rich in no time!” Before you stop reading the ad to call your local real estate broker about buying that private island just realize that this one figure does not tell the whole story.

The fact is that most successful traders the world over have made their money with far smaller percentages of winners than many of the trading systems you will see advertised.

I would suspect that the reason the high winning percentages are advertised is to attract as many customers as possible. Many buyers believe that the closer the winning percentage is to 100% the closer the trading system is to being a “sure thing”. In the trading world there is no such thing and you would be well advised to run as fast as you can away from anyone who tells you otherwise.

Here’s a quick illustration of a losing trading system with a high percentage of winning trades:

Trading System A Performance

Number of trades = 1000

% of Winning trades = 92%

% of Losing trades = 8%

Average Winning trade = $180

Average Losing Trade =  -$2100

That’s just a quick illustration of how a Forex trading system can have a high percentage of winners and still lose money. We’ll go into even more depth in the next part of our series as we continue to explore choosing a Forex trading system.

The whole point of the exercise was to get you to take a closer look at the performance results of trading systems that you are interested in pursuing. Now that you know that it is possible to lose money trading a system with over 90% winners, you’ll be able to look at the next advertisement for a Forex trading system much more objectively.

Let’s take another look at our example:

Trading System A Performance

Number of trades = 1000

% of Winning trades = 92%

% of Losing trades = 8%

Average Winning trade = $180

Average Losing Trade =  -$2100

A few quick calculations tells us that this trading system had Total Net Profit of -$2,400

The Total Net Profit is an important factor in any trading system although it doesn’t tell the full story.

Here’s how the Total Net Profit is calculated:

Total Net Profit = Gross Profit – Gross Loss

In our example above these figures would be:

$165,600 – $168,000 = -$2,400

As stated above the Total Net Profit for this trading system is negative. This is important to note. As you can see, if the only information you originally had access to was the percentage of winning trades you would have started to trade a losing trading system. Now with a little more information such as the Total Net Profit we are clearly able to see that all the glitters is not gold.

Please note that it is unlikely that anyone would be openly advertising the fact that even though their trading system has a high percentage of winning trades that it is a losing system.

In the next part of our series we’re going to take the performance data we currently have at our disposal and generate a very important number to know in evaluating any trading system.

I promised you previously that we were going to “generate a very important number in evaluating any trading system”. Well now I’ll make good on that promise. This very important measurement is called the Profit Factor

The calculation of the profit factor is quick and easy:

Gross Profit =$165,600/Gross Loss=-$168,000 = 0.9857

Unfortunately for this trading system the profit factor is not attractive. A profit factor of 1 means that the trading system just breaks even. Any profit factor below 1 indicates a losing trading system. In other words our example trading system would not be worth trading.

Can you tell me how good a trading system would be based on the following simple calculation:

Gross Profit =$1,000,000/Gross Loss=-$1,000,000 = 1

So how good would that trading system be? After all it is showing a million dollar gross profit. If you answered that a trading system with a profit factor of 1 would not be appealing you would be correct.

Even though the million dollar trading system has tremendous profits it also has tremendous losses. Basically this is a break-even trading system. If you ask “What’s the point of trading a break-even trading system?” the answer would be “none. There is no point in trading a system that breaks even. The money in your mattress can break even without any of the risks associated.

We want a trading system with a profit factor great than 1 because that would indicate that we have positive net profit. Some people refer to a trading system with a positive net profit as a system with a positive mathematical expectation. Either way you put it the Profit Factor is a valuable measure for any trading system.

You don’t want to miss the next part in this series. Next up is some information that you positively must know before putting your hard-earned money and time into any Forex trading system.

No discussion of trading system evaluation would be complete without a discussion of drawdown.  We must always look at the maximum drawdown of any trading system as it is very, very important.

The maximum drawdown of trading system is defined as the greatest peak-to-valley drawdown in a trading system’s equity.  Let’s say for example that we have a trading system that reaches a particular equity peak of $100,000.  Let’s further say that two weeks later, the trading system equity is at $80,000.  In this example, let’s say that the $80,000 equity happens to be an equity valley.  In that case, the peak-to-valley drawdown would be $100,000-$80,000 equals $20,000.  This means that the maximum drawdown is $20,000.

So why is the maximum drawdown such an important measurement in our evaluation of a trading system? It’s because the maximum drawdown gives us a measure of the survivability of the trading system.  A simple measure, but a measure nonetheless.  Basically, when we look at the maximum drawdown we can say that this maximum drawdown can happen again at any time throughout the life of the trading system.  This is particularly important when it comes to evaluating starting account size.

As an example, let’s say that you started to trade the system using an account funded with $10,000.  Right off the bat, you can see that this would not be prudent, because as we can see from our maximum drawdown figure if we went into a drawdown immediately after starting our account our account balance would logically be wiped out.

We can see from this quick illustration that we definitely need to fund our account with more money than enough to cover the maximum trading system drawdown.  It makes perfect sense to have a buffer of some sort as well.

I would exercise caution, if you are looking a trading system and the recommended account size is the exact same size as the maximum drawdown.

The maximum drawdown is an essential measure that gives us a better idea of what to expect when trading a particular system.  A comparison of risk versus reward is an absolute essential in successful trading.

Here’s another measure who’s importance may not be immediately obvious to you. That measure is the actual length of time over which the trading systems results were achieved. Some of you may identify this as the length of the trading system’s track record.

Why is this so important? The main reason that this is so important is that the shorter the track record of the trading system is the less significant the track record may be. A trading system with a short track record may be only cherry picking and displaying the best possible period of trading. Don’t be impressed by some wording like “made 10% return this month”…so what. In my personal best month of trading I made hundreds of times more than the above example of 10%…again, so what. In trading, as in life, there are many things that are a flash in the pan…trading systems, get-rich-quick traders, etc.

Fortunately, you and I realize that success in trading is a marathon and not a sprint as so many would love for it to be. Your trading system needs to be one that at least displays the ability to weather the long-term storm. As we all know past performance is no guarantee of future returns. A longer track record may give you more insight into your trading system’s chances of survival than one without as much data.

You should plan to have a long and profitable relationship with your trading system. Like any relationship that you plan for the long term it makes good sense to have as much history on your potential partner as humanly possible.

So shy away from those trading systems that seem to selectively share only one or two months of hypothetical performance. Almost any Forex trading system can have one or two great months. Remember, even a broken clock is right twice a day.

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What Are Some Forex Trading Basics?

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The smart thing for beginning Forex traders to do would be to start with Forex trading basics. By starting with the basics you’ll create a solid foundation upon which to build your Forex knowledge, Forex trading skill, and success as a Forex trader.

Forex trading is speculation – The first thing that anyone who wants to trade Forex needs to understand is that Forex trading is speculation. Speculation entails entering into financial transactions in an effort to profit from short or medium term price movement. The one key factor to remember about speculation is that there are no guarantees. This means that just because you trade Forex does not mean that you are guaranteed to make a profit. Speculation also implies that there is risk involved.

Please note that just because I mentioned that speculation is risky that I do not mean to discourage you from trading in the Forex market. I mention this because the risks involved in Forex trading aren’t mentioned nearly enough. This has caused some beginning traders to enter the market with the bad combination of high expectations and low preparation.

Forex trading can be extremely profitable – Just because we’ve spoken about Forex trading as speculation and that there is risk involved does not mean for one moment that Forex trading cannot be extremely profitable. There are many who have learned to trade successfully and some have done so well that they have gone on to become wealthy from trading Forex.

Forex broker selection – It is important to select the right Forex broker or brokers for your needs. One alternative is to rely upon a recommendation from a friend or associate. It is recommended though that you do your own due diligence to find out more about the reputation and financial standing of your chosen brokers. It is also not a bad idea to open more than one account and then place the same trades in each account simultaneously. While this may sound a bit ridiculous as you may suspect that the profit in each account will be the same, it’s best to actually test this out and see for yourself. The results will sometimes amaze you.

Forex can be simple, but not always easy – At first glance that statement might not make very much sense. If you think about it though, if Forex trading were so easy then why aren’t all Forex traders trading successfully? There’s more to trading than having all the right tools in place. Successful traders have the discipline to follow through and do what needs to be done. Trading discipline is one of the toughest things for beginning traders to master.

We just covered a few Forex trading basics. There’s obviously a lot more to successful Forex trading than the few basics that we have touched upon. To get closer to successful trading it is suggested that you learn Forex trading to increase your trading knowledge.

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What Are Some Good Forex Trading Tips?

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It seems most people who are starting out are looking for some good Forex trading tips to help them trade Forex more successfully.

Here’s a collection of excellent Forex tips to help you in your Forex trading:

Never trade without a trading plan – “Be prepared” is a phrase frequently attributed to the Boy Scouts. Being prepared is also essential for successful Forex trading. This means you should have a Forex trading plan before you place your very first trade. Many beginners are unfortunately prone to shortcuts and miss this crucially important step.

Never trade with money you cannot afford to lose – Money that you cannot afford to lose is often times in the Forex trading world referred to as, “scared money”. There is another saying in the industry that states, “scared money never profits”. Why is that you ask? I would say the scared money never profits because it is the type of money that a trader cannot afford to keep in their trading account. The scared money trader is more interested in what money they can pull out of the account than how they can grow the account. This type of trader will often bail at the first sign of a losing trade or two. This has the effect of causing the trader to stop trading and consequently when you stop trading you miss all future profit opportunities.

Learn Forex trading – This is one of my top tips for beginning Forex traders. It makes sense if you plan to master anything then you must be a student of that thing. Some traders, no matter how successful they get, still remain eager students of the markets. You can easily start with some basic Forex trading training like a Forex trading course. This will allow you to get some Forex trading basics under your belt and build a good base of trading knowledge for you.

Learn to be patient – As the old saying goes, “Rome was not built in a day”. The same is true of your Forex trading success. You will be much better off in the long run if you view your Forex trading journey as a marathon rather than a sprint.

Being patient will keep you from over trading and trying to, “force things to happen” rather than letting them happen naturally.

Have realistic expectations – Beginning traders are unfortunately the target of pie-in-the-sky, get rich quick scheme ads which post unrealistic and utterly ridiculous levels of return on investment. Let me set the record straight and save you some time and effort all in one fell swoop. There is no such thing as a Forex trading system with a 98% winning trade percentage. Also, don’t expect to get 1000% return per month on your initial investment. Neither of these is even remotely realistic and especially not for the low, low price of less than $100 as some ads would have you believe.

Exercise good risk control – If there is any phase of Forex trading which isn’t talked about enough it is risk control. If you ask any experienced trader what they thought about risk control they would probably ask you this simple question, “how can you possibly expect to control your reward if you don’t control your risk?”. By controlling your risk you place yourself in a position of profit when the market moves with you. Risk control also gives you the opportunity to, “fight another day” when the market happens to move against you.

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