The challenge of successfully trading forex lays in its global nature. Every economic transaction in the world, at some point settles into a currency. The forex trader is therefore constantly filtering through a morass of information. The common first impression is that forex trading requires too complex an array of fundamental and technical information. Here are some tips to help guide you through your trading.
1. Scan the latest news on currencies. When considering a trade on a currency pair most traders just look at the charts or read forex commentaries. Rather than letting the news come to you, find the news you want. Set-up Google alerts entering key terms. Scan the news by searching on key terms for the underlying economies of the currency you want to trade. A simple search often results in tradable information.
2. Scan weekly and daily charts for trends. While traders tend to focus on short-time intervals, such as the last five minutes, it is important to look at the big picture by scanning the weekly and daily patterns. Ask yourself “Are any currency pairs probing key trendlines?” Are any currency pairs probing key support or resistance levels? When currency pairs are probing key support and resistance points, the trader must be on the lookout for trading opportunities. Do not lose your discipline by chasing different parameters than you normally trade, but different time frames may confirm a trend or keep you out of a bad trade.
3. Know the direction of the U.S. Dollar (USDX). Forex trading is essentially a war between dollar bulls and dollar bears. It is a global play on U.S. dollar sentiment. Therefore, before you choose a currency pair, ask yourself, “Is the U.S. dollar in an uptrend a downtrend or range bound?” You can determine which fundamentals a currency pair is trading off of by knowing what the USDX is doing. You can get a quick insight on dollar sentiment by checking the USDX at: http://quotes.ino.com/chart/?s=NYBOT_DX&v=d12.
4. Indentify price levels to get long or short. Even if you have already formed an opinion on which direction the market will move, it is a good idea to identify both future buying and selling conditions. Locate where your next buy or sell will be by examining key support and resistance levels. Identifying buying and selling targets helps your discipline and prevents you from getting married to a position.
5. Pay close attention to the four-hour chart. Before you put on a trade using a five- or 30-minute chart, take a look at the four-hour chart. This interval is long enough to provide a good assessment of the big picture and most recent sentiment because four-hour charts generate wider ranges.
6.Choose profit/loss targets. Many traders put on a trade but neglect to place limit orders for closing the position at a profit, or to place stop orders in case the price moves against you. Mental stops do not work. Each trade should have an average pip goal and average pip loss target. Stick to your plan.
7. Never trade overnight. The 100:1 and 50:1 leverage now offered by forex firms increases risk as well as potential for profit. It is a gearing that constantly needs monitoring. New forex traders should never carry trades overnight. When you have developed the necessary experience to trade longer-term you will need to use much less leverage than you are afforded
8. Know your benchmarks. The best way to improve your trading is to know your strengths and weaknesses. After completing a set of 10 trades, compute your benchmarks. What is your average win? What is your average loss? What is the percent loss resulting from your worst trade? What is the percentage gain resulting from
your best trade? Compute your win/loss ratio by taking out the best trade and the worst trade. Knowing the answers to these questions will help you improve.
9. Use mini-lots. Beginning traders need to develop a base of experience. Trading mini-lot sizes (10,000, where 1 pip =$1) permits anyone to trade any of the currency pairs and test their skills without suffering catastrophic losses. As you get more experience you can trade with more mini-lots or move to big lot trading (100,000, where 1 pip=$10). If the size of your account requires you to use leverage of 50:1 or greater, you are probably better off with minis.
10. Use two accounts. It is only human nature that we deviate from our best-laid plans and good intentions. It takes time to develop the discipline necessary to successfully trade forex. A good risk management practice is to open two accounts. You should strictly apply your trading plan/rules in one account. The second account is for experimentation and allows for trading that varies from your plan.A trader can be more successful when he has rules to follow.
