Forex Trading For Beginners: 6 Steps Every New Forex Trader Should Take – Benzinga
When I was 16 I decided I wanted to be a millionaire. I wasn’t from a wealthy family, and I witnessed how my parents, especially my dad, struggled and worked hard to make ends meet. I knew I didn’t want to walk down that road, so from this point on I continually studied and sought ways to make money.
It eventually became clear to me that I had three primary means to get rich: own a business, invest, or combine the two. I discovered that I liked the idea of using money to make more money, and soon got fixated on investing. This was how I got introduced to forex trading.
Unsurprisingly, I made a lot of mistakes early on. I blew out several trading accounts, with each loss leading to more pain and despair.
However, there were also moments of victory. There were times when I would make more in hour trading than I would in a week at my job, all with a few clicks of the mouse. It was surreal. These were the feelings I clung to in my early days.
It took me about 42 months to make my first windfall in forex trading. I was still a student at that point, trading in between classes and assignments. I remember feeling at the time that it seemed as if I’d been trading forever when in reality it had only been about three and a half years.
Going forward, I carried on that momentum to build a trading business around my personal trading. People and companies started inviting me to give my insights at forex trading conferences around the world, and I had the honor of training traders at banks, fund management companies, and prop trading firms.
In an effort to save others the time it took me, I’ve compiled a list of six forex trading strategies for beginners that embody everything I’ve learned over the last 20 years about how to trade forex and make money from it.
Step 1: Learn How To Read Charts
The price chart is one of the crucial things a forex trader must know and understand.
I always find it funny when new traders go looking online for forex trading tutorials on trading strategies and then proceed to lose money when they try to implement them. Why does this happen?
The simple answer is you have to learn to read the price chart! Trying to use someone else’s trading strategy without being able to read the chart is like trying to do hurdles before you can walk.
The reason for this is simple—no forex trading strategy works 100% of the time. If you rely solely on one trading plan to use at all times, it will eventually fail you. By learning how to read charts, specifically the forex price action and technical indicators like support, resistance, and trendlines, you will not only understand what is happening, but why.
Step 2: Control Your Risk
Trading is all about controlling your risk. Applying inappropriate risk is one of the primary reasons most forex beginners blow out their accounts when trading.
For example, you should never be risking 100% of your account on a single trade. That’s akin to gambling. As a general rule, most forex trading for beginner books will tell you to risk anywhere between 1-3% of your account per trade.
But this low-risk strategy has drawbacks as well. If you have an account worth $1,000 and you risk 1% ($10) on a trade, you will have to make a lot of profitable trades to grow your account. This could lead you to overtrading, which could in turn increase your losses.
Ultimately, you have to find the balance of risking enough to make the trade worth it, but not so much that your risk-reward ratio is too imbalanced.
Step 3: Consider The Risk-Reward Ratio Too
Every trade you enter should have a defined risk-reward ratio. That means knowing how much you are prepared to lose in addition to knowing how much you’re prepared to make. In other words, have specific buy and sell targets on the upside and downside before you enter a trade.
An account worth $1,000 with a 2% risk percent and a 1:2 risk-reward ratio would lose $20 on a losing trade but make $40 on a winning trade. The charts below show risk-reward ratios in practice.
Step 4: Test The Effectiveness Of A Strategy Before You Use It
There is a straightforward way to ascertain the effectiveness of a forex trading strategy. This process is called backtesting. Backtesting involves reviewing the results of trades made using a particular technique over a period.
My general rule of thumb is I will consider a strategy if I observe a net profit for three consecutive years. I do my backtesting on the MetaTrader 4 trading platform, which allows you to backtrack to the period you wish to start testing from.
Step 5: Watch Your Trade Entry Timing
Let’s paint a scenario. Imagine five forex traders, having trained under the same coach, spot the same setup. At the end of the trade, two of these traders make a profit while the other traders lost. What do you think could be the reason for the disparity in the result? They all spotted the same setup, so one would expect they would all have similar outcomes.
The difference comes from their timing. Timing your entry is everything. A poorly timed entry can ruin a perfectly good setup. The two charts below show this concept in action.
These scenarios highlight the importance of entry timing in forex trading. You should have it at the back of your mind never to chase a trade. If you miss your chance to enter, let the trade go and wait for the next.
Step 6: Don’t Get Emotional
There is a concept in poker when a player gets too emotional after losing money and starts playing differently to win it back. This situation is known as tilt.
While forex is a different ballgame entirely, the same concept applies. Understand that losing is an inherent part of trading. You should expect and prepare for it instead of getting vengeful.
One way to keep your emotions in check is to never carry over the results of a previous trade into a new one. Treat every trade as if it’s an entirely new entity and approach it with a clean mindset. If you find yourself carrying over positive or negative reactions from your previous trades, that’s a recipe for clouded judgment.
Another pro tip for controlling your emotions during trading: whenever you feel agitated or emotionally-charged, take a break. Stop trading until you have regained your composure.
I hope the above tips help you the way they have helped me. Forex trading is a great way to make money but as a beginner but it’s also a great way to lose money if you’re not careful. By understanding charts, having a forex trading strategy that works, and controlling your risk and emotions, you’re setting yourself up for long-term success.
Ezekiel Chew founded Asia Forex Mentor in 2008 with the sole purpose of teaching R.O.I-based trading backed by mathematical probability. To learn more about his system check out the Asia Forex Mentor One Core Program.
© 2020 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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