Forex Trading Tips

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Updated: 03 September 2020

It’s essential to be fully prepared and supported by as much research and learning as you can find when trading the forex markets. If you’re new to trading, you’ll quickly discover that information is abundant and freely available to you. The first tip is to develop a degree of self-awareness and to work out how to manage your approach.

Forex Trading Tips

In this article, we will cover:

  • Understanding the nature of forex markets
  • Learning the basic forex strategies
  • Using social trading
  • Macro trends
  • Demo accounts

1. Consider your approach

There is a need to focus on what is important at any one time. There will be moments when checking second-by-second price movements in a particular currency pair is essential. At other times leaving a position alone will be the best option.

GBPUSD price chart — 10-second candles

GBPUSD price chart — 10-second candles

Source: IG

Be prepared to adjust your approach between focussing on detail or considering the ‘bigger picture’. More importantly, make a conscious decision to continuously monitor what you are devoting your time and resources.

Ask yourself if what you are doing is the course of action most likely to make your next trade a profitable one.

2. Trade the market you see, not the one you want to see

An elementary mistake to make is to take an item of research, develop a strategy and apply it to market conditions that don’t match that approach. It’s a sure-fire way to lose money and you might end up discarding a system that would work in different situations.

Markets are dynamic environments and the constant changes need to be appreciated. Scalping strategies are best applied in sideways markets and Momentum-based strategies in trending ones.

Developing the skills to trade trending markets is a useful way to make money. Ironically, beginner traders, in particular, tend to trade the ‘retracement’ rather than the trend.

USD Basket price chart –— Daily candles

USD Basket price chart –— Daily candles

Source: IG

There is a place for retracement strategies. However, one of the best lessons to take away from experienced traders is to practice catching the underlying trend.

3. Run your winners

This market adage is particularly relevant to the forex markets. New traders, in particular, are prone to developing the habit of managing their positions from a cash perspective.

That means profits are taken too early, particularly if they’ve been experiencing a run of bad trades. The temptation is to claw back some returns to try to work back to a break-even point. The preferable option is to develop the discipline to trade the market in front of you.

4. Understand the nature of forex markets

If you’re new to forex trading, you’re probably at something of an advantage to someone who has traded other asset groups.

Forex markets are driven by a combination of economic fundamentals and speculators. The first reflects cash flowing in and out of respective economies due to news and events such as a country’s economic outlook — the latter is ‘hot money’ trading those underlying trends.

NZDUSD Basket price chart — Weekly candles

NZDUSD Basket price chart — Weekly candles

Source: IG

S&P500 index — Weekly candles

S&P500 index — Weekly candles

Source: IG

That means forex pairs are as likely to move up as down and are different from equity markets in that they tend to trade upwards with momentary corrections. If you’ve been trading stocks and are trying out forex trading, this is something to keep very much in mind.

5. Don’t double down

Similarly, it is vital to cut loss-making trades. Letting loss-making trades drift further away from you is a sign you are relying on hope rather than expectation.

If you find yourself moving stop losses, so you don’t cut a trade, or even worse double down on a loss-making position, you will need to take a break. Collect your thoughts, remind yourself of your strategy and apply the discipline required to manage your account.

GBPAUD price chart — Daily candles

GBPAUD price chart — Daily candles

Source: IG

Accept that not every trade will be a winner. The hard truth is that managing the losing trades is probably more critical in terms of ultimately making a profit than managing your winning ones.

6. Learn the basic forex strategies

It is incredibly easy to find sites that outline the most popular and effective trading strategies. There is no need to re-invent something when tried and tested methods of making a profit can be easily accessed. That might not make them ideal for a trade put on today, but there will be a track record of their success rate to analyse.

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  • Scalping— These are very short-lived trades, possibly held just for just a few minutes. A scalper seeks to beat the bid/offer spread quickly and skim just a few pips of profit before exiting.
  • Day trading — These are trades that are exited before the end of the day. That removes the chance of being adversely affected by large overnight moves.
  • Swing trading — Positions held for several days, whereby traders are aiming to profit from short-term price patterns.
  • Positional trading — Long-term trend following, seeking to maximise profit from significant shifts in price.

Ask any successful trader what they are most afraid of and you might hear the phrase ‘paradigm shift’. That is the moment when what has been working stops doing so. Something to be aware of, counterbalanced by the fact that some of the strategies have been around for decades.

7. Use Social trading

A relatively new and increasingly popular trading tool is the crowd-sourcing of ideas. These include Copy Trading and internet chat rooms where traders share ideas. They can be educational and informative.

Copy Trading is the process where trading signals of others are applied to your funds. It is a hands-off way of getting exposure to the forex markets. Giving up control to third-parties does, however, have its risks.

Copying someone using a demo account allows you to follow the trading activity of a more experienced trader. Some brokers, such as eToro, which specialise in Copy Trading, also provide specific areas on their sites where their clients can benefit from the ideas of others.

What is interesting is that the traders who want you to copy them tend to share some of their ideas as a ‘hook’ to get you interested. They won’t disclose their secrets, but the information they will impart can be useful.

8.      Keep up to date with research and news

With so many news events being surprises these days, there is a lot to be said for keeping a calendar of those upcoming data releases that are diarised.

Pepperstone Economic Calendar

Source: Pepperstone

They can be accessed for free at broker sites.

Reports on GDP figures, unemployment numbers or inflation data can all move the markets. It’s also worth keeping an eye out for the big announcements. They can cause prices to whip-saw.

GBPAUD price chart — 5-minute candles

GBPAUD price chart — 5-minute candles

Source: IG

The US jobs numbers known as ‘non-farm payrolls’ are disclosed on the first Friday of each month. It is one of the biggest data releases and can cause prices to fluctuate momentarily. That can lead to open positions being ‘stopped out’ before price settles back where it started.

Managing the stop losses on any positions is more than a case of setting the stops and forgetting about them.

Price moves simply reflect the volume of buy trades and sell trades netting off against each other. Given that your account is likely to be ‘peanuts’ in relation to those of the big players, there’s a lot of benefits to be gained from keeping up with the thoughts of the market movers.

A lot of the commentary from Hedge Funds and other institutional investors will come up in the mainstream financial media sites such as CNBC, Reuters and Bloomberg.

There are other industry sites to consider including Zero Hedge a specialist news and research site for the Alternative Investment industry. It approaches the markets from a sideways perspective, but often breaks the news that other sites post later.

Market News Example

Source: Zero Hedge

Albourne Village is a specialist site for Hedge Fund professionals. It has chat rooms, industry news and even a jobs notice board. All in all, an interesting insight into the sector and a chance to catch a glimpse of current industry trends.

Albourne Village Website

Source: Albourne Village

10. Trade on Demo accounts

The top brokers such as eToro, Pepperstone and IG all offer free demo accounts. Trading with virtual funds is a great way to practice and test new ideas. Even experienced traders who already have live accounts return to demo accounts to test or revisit trading ideas.

There is also a lot to be said for opening Demo accounts with a range of brokers. Seeing things differently can help your analysis and trading. You might find that one broker is a particularly good fit for the approach you want to adopt.

The next step up from demo trading is live trading at a small size. Each trade should be a small fraction of your total capital. At the point of starting trading, this multiple should be as small as possible.

Final thoughts

Beginners often fall foul of over-trading. There are frictional costs associated with each trade and they will eat into trading P&L.

Overtrading can also be a sign of a lack of focus. Be self-aware and always ready to switch back to demo account trading.

Industry professionals make a habit of ‘sitting on their hands’. The focus is on making money, not ‘good’ trading. As the market saying goes — “sometimes the best trades you do are the ones you don’t do”.

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