Foreign exchange trading is meeting with a growing response among private investors. Forex is the largest financial market in the world, with more than $5 trillion being transacted daily around the world and trading virtually around the clock.
Even investors with years of “parqueting experience” in equities trading, however, are breaking new ground with FX trading; decentralized structures, off-exchange trading platforms, major financial leverage, and trends such as “social trading” are new challenges in the market. Here we present you the 10 best Forex trading tips for beginners!
Not every broker is alike. Newcomers usually end up opening an account with a market Maker; advanced and professional traders rely on trusted STP and ECN brokers, whose offers are usually characterized by narrow but variable market spreads and lower order fees (commissions.) Market makers lure new comers with commission-free trading and fixed spreads. As spreads are wider than good STP and ECN brokers, market makers are still more expensive over the long term, especially if high trading volumes are implemented. Important: Not every broker operates from a reliable regulatory environment. Suppliers based in the South Seas would often like to disguise this and try to do so by renting a foreign landline number.
Decisive is the head office country – an office in the EU with appropriate regulation is therefore advantageous for European customers and creates trust. Many FX brokers are headquartered in the UK, which is one of the major hubs in global forex trading with being the London financial center. The regulatory authority in the UK is the Financial Conduct Authority (FCA,) which has an excellent international reputation, so traders are generally in good hands with brokers with FCA regulation. Emerging within the EU is also Cyprus – the local financial regulator CySEC (Cyprus Securities and Exchange Commission) regulates, meanwhile, many prominent and established Forex brokers such as FxPro.
Unfortunately, good regulated FX brokers are still in short supply, so FX traders should at least pay attention to reliable EU regulation. Tip: Online brokers active in Europe and regulated in the EU are listed at BaFin as cross-border service providers and accordingly entitled to offer their services to customers around the world. For the regulation, however, only the respective tax authority in the country of origin of the broker or financial service provider is responsible.
Choose a suitable strategy
Most newcomers evaluate the performance of trading strategies exclusively on the basis of the profit factor and take into account the maximum drawdown at best. Regularly, one’s own psychology falls by the wayside. Beginners should focus on strategies that succeed with many small wins – often these are trend strategies. Strategies with low hit rates and long loss series and thus few (then very large) profits are more for experienced professionals.
Tip: Whatever trading strategy you choose, it is extremely important to evolve consistently. After the first losses often comes the uncertainty and you start to actively intervene in the system. Gut feeling is not a trading strategy and certainly not replicable and evaluable. If a trading system has a tested result pattern. Statistical advantage: you have to stay loyal to the system even in hard times (drawdown phases) in order to take the corresponding performance in the coming profit phase. Psychologically, unfortunately, it is very difficult here – most newcomers to trading underestimate this point, which in theory is logical, but extremely difficult to implement in practice.
Forex trading for beginners: Keep mental accounts at fence
Beginners are even more inclined than experienced traders to mental account formation; Instead of market activity, they worry about the balance of accounts and are dominated by the train of thought. This is exacerbated for many by certain “milestones” in the account history. For example, if an account is stocked with $10,000, a 4-digit account balance will automatically be perceived as unpleasant. Often it is helpful to deposit an odd amount (for example $12700) and not to remind yourself about it too often. In any case, one should mentally adjust to extended drawdown phases, losses, and emotional ups and downs.
Investors who have only one share deposit and invest their money in the long term, may not be sufficiently prepared for the high volatility due to the leverage in the foreign exchange trading. Therefore, at the beginning, be careful with the position sizes carefully to avoid extreme account movements! Anyone who would rather avoid these experiences with his hard-earned money, for them, trading is not be the right business, so be honest you have to be. Everyone can make profits, but to endure losses is much more difficult mentally. It is psychologically proven that success leaves less imprints on the brain than failures, i.e. a big loss takes much longer to forget than a big win. Above all, successful traders are mentally very strong personalities or have developed through many years of experience accordingly.
Initially, no exotic currencies trade
First steps in the FX market: traders should focus on the main major currency pairs. Anyone who is starting with foreign exchange trading should pay attention to the currency pairs they are looking for when selecting the services and initially restrict themselves to majors such as EUR/USD, GBP/USD, USD/JPY, USD/CAD, AUD/USD, and NZD/USD. Many brokers with fixed spreads set horrendous spreads in exotic currency pairs anyway, often 10 pips and more, so that profitable trading is only possible in the longer term trades. With variable spreads, you should be very cautious, especially in volatile market phases, spreads can widen quickly and lead to unforeseen order fills. The above forex majors are highly liquid and well tradable even in high volatility market phases.
Turnover in individual currency pairs
More than a quarter of all Forex global trades are in EUR/USD currency pair, which is highly liquid and therefore highly tradable, especially during European and American stock market trading hours (around 8am to 10pm CET.) Only at night do sales decline and spreads or slippage can widen. So, despite 24-hour trading, there are preferred forex trading hours. Night owls should therefore rely more on currency pairs such as AUD/USD, NZD/USD, or USD/JPY, which have consistently high trading volumes at night.
Keep an eye on important events
Hard-boiled disciples of technical analysis should keep an eye on important events and relevant third-party markets. These include central bank meetings as well as key technical brands in certain bond or commodity markets. All forex majors with US dollar participation, e.g. EUR/USD and GBP/USD react very strongly to economic data of all kinds affecting the US economy. Similarly, data from the euro area is relevant for currency pairs with EUR participation. Every forex trader should use an appropriate economic calendar to keep an eye on the most important releases of the trading week.
Learning foreign exchange means constant readiness to learn & further education
The first profits are no reason to stop personal development. To master foreign exchange trading, beginners should view of seminars and webinars. Good brokers and other service providers often offer useful events even for free. For example, the leading FX and CFD broker GKFX offers a forex crash course in video format:
Free information often gives you a good start
Several eBooks, reference books, and journals deal intensively with foreign exchange trading. Studying relevant literature will sooner or later pay off. Most importantly, while certain course content requires basic programming skills, math, or statistics, they should not be avoided. It is important to be able to check for simple trading strategies and trading ideas for their validity and subject them to a backtest with historical price data. Thus, not only the historical profitability of a strategy can be tested, but also directly determined, whether the respective strategy fits one’s own personality.
Consider apprenticeship as investment costs
Trading is a business and deficit positions are the operating costs of this business. In the beginning, losses are usually more frequent – of which beginners should not be discouraged and consider the lesson for what it is: an investment. However, this only applies if systematic action is taken from the beginning! Everybody and trader makes mistakes, that’s part of it, especially in the initial phase. But if only “gamble,” then there can be no further development. There has to be a concrete trading idea or a system that is also traceable and reproducible. Until this system is designed or found, it is best to trade in a demo account to minimize the risk.
Loss limit from day one
Trader with a willingness to learn and a little skill, that is the common opinion, are successful in the FX market in the long term. In order to achieve this “long-term,” consistent risk management must be put in place from the first day of trading. A person who acts wildly and run into losses until the margin call loses everything very quickly: “Puppy protection” in currency trading for beginners does not exist! The necessity of a consistent risk management concerns both the loss limitation and the position size determination. That choose position sizes more conservatively in order not to drive the account directly to the wall. Always work with hard stops.
Parallel demo account: learn currency trading without risk
Before the first trades in the FX market, a demo account is a must anyway: Anyone who wants to learn currency trading without having to pay too painful apprenticeship money, needs a few weeks of practice in the trading of virtual capital. Even after unlocking the live account, a forex demo account is a useful help for investors. Traders can test and develop strategies in parallel, run external trading systems, and test deviant variants of the real money strategy.
Although some experienced retailers argue that demo trading cannot simulate the psychological burdens of trading realistically, a demo account will at least bring benefits to novice investors and save them from a few costly mistakes. Of course, online brokers would also like to see their customers immediately in real money trading, because commissions or spreads are earned there accordingly. Do not be fooled by emails or customer service calls and take the time it needs to become familiar with a trading platform and foreign exchange trading.
Regularly, put everything to the test
Even if profits are made and the broker proves to be reliable and fair in terms of cost, everything should be put to the test at regular intervals (for example, once every quarter.) Would Trade Ratio and Payoff Ratio (average earnings to average loss ratio) have been better with closer or further stops? Were the traded currency pairs highly correlated with each other? Are the “usual spreads” stated by the broker compatible with the actual spreads? Does a very successful indicator in another market phase show a noticeably worse hit rate? These are just a few approaches and tips on how to constantly evolve in forex trading. Our 10 tips make it clear: Forex trading is an exciting field for ambitious investors and as everywhere applies: no diligence, no price!