Forex Trading for Beginners
Beginners can make money trading forex or currency cross rates. There is no special secret that expert traders used or insider information that a beginner forex trader needs in order to profit consistently. Believe it or not, the strategies used by many so called expert traders are actually simple basic forex trading strategies that are available from your community libraries or online forums. You can become a consistent trader by following a basic trading system and manage your trade using an optimal risk/reward ratio. It is that simple. Sorry to disappoint but there is no $3000 program to sign up or $97 ebook to buy.
The Holy Grail of Trading Systems
Many of us started out learning to trade by searching for a trading system that will yield perfect results. We are always looking for the holy grail and when we get frustrated with the not so perfect results of each trading system, we start the vicious cycle of testing another system. There is no perfect trading system and almost every system can be profitable with the correct simple risk management techniques.
The trading system that you choose to use must be suitable to your trading personality. If you oriented to short term results and gains, a scalping or day trading strategy would be suitable. Whereas if you are into the long haul and like to see bigger gains and can handle overnight risks, swing trading or long term trading would be your choice.
After deciding on a trading timeframe, you will have to decide on how you approach the markets. There are many traders who tend to trade the market based on a discretionary approach with news and fundamental analysis, while others tend to trade the markets based on technical indicators. For myself, I am more of a technical trader in the short term timeframe. I may enter and manage trades for a couple of minutes to even a couple of days, but I have seldom run trades for over 2 weeks.
Managing Risks While Trading Forex Markets
How do you manage risk in forex trading? The first principle in minimizing risks while trading forex is to assume that the trading system that you are using is not a predictor of the future direction of the market. For that matter, no trading systems or trading indicators can predict the direction of the currency markets. Sellers of black box trading systems and trading newsletters may differ but when you stop trying to predict the markets, you will start to actually trade the markets.
When trading the forex markets, you can manage risks in each individual trade and your entire trading system by using an optimal risk/reward ratio. The concept of an optimal risk/reward ratio is easy to understand. Basically for every trade that you take, you should be targeting a pre-determined amount of gain with a stop-loss limit that is suitably lower. A good risk/reward ratio is to seek a reward/return that is 2 to 3 times more than the potential risk/loss. Why not set it at 10 times the return to loss? Does this mean that if we set the target profits to be a high multiple of the potential risk, the trading system will become a profitable system? That would be ideal but we need to also take into consideration the winning probability of the trading system before we can decide on the optimal risk/reward ratio and whether we should employ each particular trading system. Perhaps an example would help to explain clearer:
Take for example, a dual moving averages cross-over system that yields a winning probability of 55% i.e. out of every 20 trades, 11 are winning trades while the rest of the 9 trades are either breakeven or losses. In this case, we will assume the 9 trades are losing trades. Using a risk/reward ratio of 2:1 would result in an expected profitability = 0.55*2 – 0.45 = $0.65. This suggests that over a long period, the trading system will yield a profit of $0.65 for every dollar invested. Definitely a winner here! But note that there is a inverse relationship between the risk/reward ratio and the winning probability, which I will explain in a subsequent post.
There you have it. Successful Forex trading can be possible for even beginners. Selecting a trading system that is suitable for your lifestyle and putting in proper risk management, forex trading can be extremely profitable. Of course, there are many advanced techniques you should learn but as a beginner, you should approach forex trading or currency trading with a winning mindset as the risks involved in forex trading are not insurmountable and can be overcome by simply following a set system. Good Trading!