Last Updated 6th September 2016. In this article I’m going to outline from start to finish how to get started with forex trading, the basics and a 4 step tutorial I personally recommend. If you haven’t already read it, you can pick up our free ebook in the sidebar on the right which contains 30 pages of everything you need to know before making your first trade. This guide is also very long, with a few videos embedded throughout to give you an exact picture of what to expect both long and short term if you decide you want to become a forex trader.
Table of Contents
- 1 Introduction – The Background & Basics
- 2 The Different Types of Trading
- 3 What’s the best time frame to trade on?
- 4 The Different Forex Trading Strategies
Introduction – The Background & Basics
Foreign exchange or Forex is one of the largest investment markets in the world. 5 trillion dollars are traded everyday on these markets through currency pairs. A currency pair is simply 2 currency’s prices against each other. For example when you go to a different country and exchange your home currency for the currency used in your destination, you are making a forex trade, obviously on a small scale. Professional full time forex traders will trade hundreds of thousands up to tens of millions on a currency, depending on what they think the currency pair will do. For example if you brought dollars you would expect the dollar value to increase against the currency you purchased the dollar against.
Understanding what currency pairs are and how they work is the first step to making a successful trade. Unlike other investment methods currencies are affected by the entire economies and not just specific companies or countries. Below is a video that outlines everything you need to know when it comes to forex pairs.
When you trade a currency you are essentially stating that one of these currencies is going to weaken or strengthen against the other and the difference or amount at which this changes will be your profit or loss figure.
Now generally the instant comeback to this is the following….
Currency prices don’t change all that much (on a daily, weekly or even monthly basis) so how can I make a decent sized profit if this is the case?
And to be honest this was my initial worry too. If you have a small amount of capital to start. Say £5,000 or $5,000, and you want to place 1% of your balance on each trade (which you should.) Then that’s only 50 per trade, and with the fluctuations of the currency being so slight you would only make pennies or cents even if your trade did go the way you expected.
This is what happens to most people, they simply don’t think they have enough capital to make it worth while, but there is something called leverage that can help this.
Leverage – Put simply, is the amount at which you can trade above what you actually deposit into an account. So for example let’s say you deposit £10,000 into a trading account of your choice, (we recommend etoro as we have private strategy sessions for individuals who sign up through us here but you can choose any forex broker.) Once you have this in your account you can select a leverage level. For example 2:1, 4:1 10:1 all the way up to 200:1 in some cases. This figure is how much you can actually go on to trade with.
So say you deposit 10,000 and select a 4:1 leverage ratio, that means you can now have 40,000 to trade with. Pretty sweet right? Well kind of…..
As you can probably guess leverage is very dangerous, people that treat forex like gambling can get into a lot of trouble with the markets and end up owing a lot of money! But used correctly leverage is a valuable asset to a trader. Especially someone who doesn’t have a large amount of capital to get started with. The video below helps to visually display this point using a real estate example.
If you watched this video through you probably had the question about PIPs and wanted to watch the video titled “what is a pip?” – I’ve embedded that below here too but its essentially a way of measuring how much profit or loss a trader makes without having to use monetary figures. For example if someone makes a 15pip profit from a trade that might only be 15c but it could also be 150,000 depending on how much was initially put on, and hence forex traders tend to prefer to calculate profits and losses using PIPs instead of a monetary figure.
The next video I’ve embedded below is from a forex trader I really like. Unlike the above he isn’t recording these to try and get you to sign up to something or earn his company money, he is just talking about trading and the risks and benefits associated. Now if you didn’t watch the above 2 videos you haven’t missed that much but I highly urge you to watch the below as it might save you a lot of money in the long term. He even states he risks up to a maximum of 3% of his account per trade, now for me that seems high I would never go above 2% but it’s working and he explains why below and also talks about how much capital you need to start forex trading – Which is always a question I personally get asked.
In this video Kleveland touched on our next point which is risk management.
Risk Management Basics in Currency Trading
Risk management is the difference between the individual who can make a profit month after month and year after year, versus one who may be profitable initially but ends up losing it all. I won’t give you the lesson on how you should approach each trade carefully and research your option as it’s your money so you are already doing this! Instead I want to talk about the correct risk management strategies. If you want to watch a full video on this there is a good one here but its 22 mins so I’m going to break it down to a 3 minute read now.
What most people don’t realise in forex is when you are trading 1-2% of your account balance (maximum) – That should be 1-2% maximum IF YOUR STOP LOSSES HIT. This means if you are closed off on a trade, for example if you take a position and it decreases to your pre-established stop loss, then you are closed off at a 1% account balance loss. If you’re not sure what a stop loss is, it is simply the price at which your trade will automatically be closed, say for example you took a trade at 1.3310 then your stop loss could be anywhere below this figure, it “as much risk as you are willing to take.
So assuming you are risking 1% of your account balance which is 50,000 (with or without leverage.) that means you will be risking 500 per trade. Now the next most important element is calculating correct stop losses and take profits.
Stop loss / Take Profits
Generally there are 2 ways to set stop losses and take profits. Stop Losses are a lot more important than setting take profits, but I recommend doing both as its a good habit to get into. The first method is to simply use PIPs to measure potential profit or loss. For example if I wanted to set a stop loss to close a trade when I reached a loss of 20 pips then I would calculate it that way. In the same way I could set a take profit level too, but the key here is I would set my take profits at least double my stop loss level. For example if my stop loss level was 20 pips, then I would set my take profit level to 40+ pips and probably closer to 80 in most cases but that decision is up to you. The reason this works is I only have to be “right” 1 in 5 times to break even and anything more is a profit.
The second method to calculate stop losses is more difficult but is generally seen as a better way to go. As mentioned above you want to risk (let’s say 2%) of your account per trade. So if you have a £100,000 total account balance including leverage this would mean the maximum we want to lose per trade is £2,000. We also need to calculate the PIP value to the nearest line of resistance/support and then using this tool we can input the numbers and get the lot size we would invest [screenshot below.] The pip calculation element is the only part that is slightly difficult, but if you already have support and resistance levels in this shouldn’t be hard to calculate and input, in this example I simply set it at 75 pips.
If you don’t already know a “lot” in forex trading is simply the amount you trade in. In the past it was only possible to trade in specific lot sizes, but nowadays obviously you can trade in any value you like. Below is a screenshot of the lot sizes used, so if you are following an expert who talks about trading mini lots, all he means is he uses 10,000 as a lot.
Calculating the Profit/Loss
This is obviously an important element as you need to know what you stand to gain or lose in any given trade. Below is an example with the EUR/USD 1.09980.
- Let’s say you buy 1 standard lot = 100,000 units @ 1.0998 (remember this will be the “ask price”.)
- The price then moves to 1.1021 (bid price) and you close your trade, earning (11021-10998 = 23pips.)
- Next you need to calculate your profit per pip. .0001/1.0998 x 100000 = $9.09 per pip x 23 pips = $208.61.
Calculating the profit or loss per pip level is something I always struggle with. Most of the time I just use the tool on Oanda, makes this a lot quicker and easier, you can then set your stop losses based on % of your account and not directly related to pip movement similar to the second method we talked about above.
Types of Orders
An order in foreign exchange is simply how you will enter into the market or exit from it. There are a number of terms associated with this that newbies can find difficult, in this section of the tutorial I will outline some of the most common ones.
Market order – This (put simply) is the price at which you will take a trade. This is always at the ask price which is usually slightly above the current position of the market (this is how brokers make their money, it is called the spread.)
Limit Entry Order – This is when you want to take a price higher (or lower) than the current position, but don’t want to sit in front of your computer until the price drops/raises to this level. For example if you want to take a position at 1.2050 but your current price is only 1.2060 then you have to either wait for the price to decrease and manually make the trade, or you can simply create a limit entry order and your trading platform will open the trade once the price reaches your specified point.
Take Profit and Stop Losses – These are 2 incredibly important elements that we have already discussed. A stop loss is the price you want to get out of a trade at, this is usually a certain number of PIPs below where you started. A take profit is again a certain number of PIPs above where you started – These can be edited live but you should always have a stop loss in place!
Trailing Stop – A trailing stop is a form of stop loss that tracks your position. You can set a trailing stop by the number of PIPs at which to follow your original position. For example if you long @ 1.2060 with a trailing stop loss of 1.2040 or 20 PIPs. Say the price moves up to 1.2090, your new stop loss would be set at 1.2070 (a profit of at least 10 pips.) If the price were then to increase again, the trailing stop loss would also increase. This is something I recommend doing for very beginner traders, its also a good skill to have.
Other Types – There are other types of forex orders such as the “one cancels one” and “one triggers one” orders, in this case one price movement or position can trigger or cancel another. These are more advanced strategies and we are just sticking with the foreign exchange trading basics today (and to be honest these don’t even need to be used to make a profit.)
Demo Trading Accounts
Now, 95% of people in the forex industry and the ones teaching you how to forex trade will say “Open a demo account and wait until you get a profit until you deposit into a live real account.” Personally I think this is utter BS and its gets you into the wrong mindset. Instead this is what I recommend (and its a lot harder!)
Start by researching, learn everything you can about currency trading, make the decision that you will either be a part time or full time trader, set realistic targets that you want to achieve too. Next you need to go out and find seriously good experts to follow (not the ones trying to sell you cr*p!) This can be difficult but follow the value and don’t over-complicate things either. Personally I don’t have the time (or the want) to trade in a demo account, because what ends up happening is you either a.) Lose patience and quit or b.) Take the right steps and earn money and then realise you should have just started with a normal account.
Finally you want to have a strategy in place, you can’t just follow all the trades other people make, you need to make your own trades and in your own trading styles, whether this be day trading, swing trading or anything. My personal strategy revolved around wanting to make a small 50 PIP profit per day and growing my account over 2 years before becoming a full time trader! The amount of research and work you have to put in before you even open your first trade should be around 1000 hours! And then if you work 4 hours a day for 2 years (4 x approx 350 x 2) = 2,800 hours. Remember the 10,000 hour rule to become an expert? If you reach 10,000 hours active research and implementation in the forex markets you will be a successful trader! – The issue is most people are too lazy to put this in.
Note: The only reason I advocate opening a demo account is to actually get used to the platform itself and how to make trades, set stop losses, add lines ect.
The Different Types of Trading
In this section I’m going to cover the different types of markets inside forex trading as a whole. This isn’t going to be the different currency pairs, it’s going to be what time-markets I recommend people start trading on. There are a number of time-frames you can invest in with the shorter time-frame markets generally being less volatile than the longer ones (obviously.) But in these cases traders tend to make more trades and close their trades very quickly for small PIP figure gains as markets don’t tend to have such big fluctuations in shorter time spans as you would expect. Both types of trading (short and long) have individual time frames inside of them and can be very profitable for each type of trader. The only difference generally is how much time it takes to close a trade and the number of trades you make in a specific time-span.
My advice when it comes to selecting a time-frame to trade on is 3 fold:
- The amount of time you have to research and implement trades.
- The amount of capital you have to get started.
- The amount of time you can input into pre-trading research.
What’s the best time frame to trade on?
This is one of those questions that is the same as – “What is the best currency pair to trade on?” Experienced traders have their favourites, but they also look out for the signals associated with the other pairs. The same goes for time frames. I know traders who are experts in 5 minute charts, and others that make 100% of their income through trading weekly charts. The decision is yours, but the one piece of advice I would give is to specilise in a specific type before trading. Also avoid trying to learn them all at once.
If you don’t have much time to look at charts and graphs then I recommend a higher time-frame selection. If you have a lot of time to invest into the markets, that you can implement on a day to day basis, then I would recommend smaller time-frames. But the truth is I cannot tell you what to do in this case. There are multiple strategies that are beneficial to both short term and long term traders. The decision on what type of time frame should come down to a few elements but the most important is how much time you actually have to trade. This depends on the strategy you can use and essentially how much you can profit per trade.
The Different Forex Trading Strategies
Before going to deep into a tutorial of actual strategies that will make you money I’m going to talk about the different strategies you can take, because forex trading is not a one-type of market. As discussed above there are many different markets you can trade on from different currency pairs to different time frames and everything in-between. The most time consuming part to an entire forex trading business is the initial research involved. You cannot follow the “gurus” or experts all your life, instead you need to learn how to make your own trades and more importantly how to have a sustainable profit in your account at the end of every month. It’s not the end day figures that matter its the end month ones.
So you’ve learnt the forex trading basics. You have the capital needed mixed with leverage. You have your broker. Now what?
Well first of all, congratulations you made it 90% further than most. The next step is 4-fold and its something I personally recommend to every single one of my forex clients. It’s the only forex tutorial you will ever need…. As long as you follow it. And make sure you’ve read and understand all of the above otherwise this will all be for nothing. Hint: This part involves a hell of a lot of research and time.
Step 1: Read the 2 (in my opinion) greatest forex trading books ever
Read the 2 most influential day trading books of all time. These are Forex Made Simple by Alpha Balde and The Simple Strategy by Markus Heitkoetter. Seriously these are probably the 2 greatest books ever written on the theory and strategies behind making money through small day trades. If you don’t even bother to read the rest of this article, purchase these two books (linked above) and read them thoroughly. They will give you the platform to become a successful day trader in as little as a few weeks. I talk about day trading as this is my speciality, if you want to look for swing trading or longer-term trader experts then have a look around the site for different articles, or head over to YouTube for some extra information.
Step 2: Learn the basic strategies
- Moving averages – Read, watch and understand everything on this method.
- Fib retracement – Read, watch and understand everything on this method.
- Candlesticks – Read, watch and understand everything on this method.
- Our article 1 – http://eliteforextrading.com/fx-trading-moving-averages/
- Our article 2 – http://eliteforextrading.com/short-term-forex-trading-strategy/
- Our article 3 – http://eliteforextrading.com/15-minute-forex-system/
Once you’ve completed step 1 and 2 then congratulations you are now ahead of 98% of the competition, assuming you haven’t fallen into any of the hype associated with making £5k a day in day trading. Stay on track as you are 2-3 months away from creating a profitable forex business, month on month…. Stay with me.
Step 3: Find an individual(s) to follow (Social Trading)
Don’t fall into the hype here. You don’t need to follow someone who claims to be the best trader in the world. Just follow someone that has made consistent good trades and makes a profit month on month (not day by day.) This doesn’t need to be expensive, there are YouTube channels out there that give some of the best information every single day totally for free, simply subscribe to these and absorb the content daily.
Step 4: Tailor your specific strategy
No one is going to give you £10 million. You have to go out and earn it for yourself. You do this from learning everything from what I have outlined in this article, and then you start to tweak things and develop your own strategies. If you can do this effectively then you will be a successful trader, if not then you may as well give up now as this will give you the edge over 99.9% of your competition that just blindly follow the “experts” and lose when they lose. Tweak your system and really understand the patterns. And above all else, KEEP IT SIMPLE!