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What is Forex?

F orex stands for foreign exchange market, also known as fx, or currency market.  Forex is a global-scale decentralized trading market for international currencies and financial centers as well as individual private investors around the world, functioning as trading anchors between several foreign currencies.  It functions in a similar way as the stock market except that the forex market is an over-the-counter-market where individual investors can trade freely from all over the world, and the market is open all day, 24 hours a day, except for weekends.  The forex brokers are typically large-scale international banks and financial institutions.

Unlike the stock market, there is no centralized exchange for forex; all transactions are typically carried out via electronic networks.  With the advent of sophisticated electronic trading platforms with automatic trading features such as take-profit order and stop-loss order , the popularity of forex trading has exploded in recent years; forex has become the most traded financial market in the world today with the daily average trading of almost $4 trillion, which is 40 times larger than the NASDAQ’s.

In the forex market, currencies are always traded in pairs and one currency is traded against another.  Although there are a large number of  currencies available for trading, most forex traders concentrate on currencies of major pairs, such as EUR/USD, GBP/JPY, GBP/USD or USD/CHF.

One interesting aspect of the forex market is that you can make money when the market moves up and you can also make money when the market moves down.  The only time you don’t make money is when the market doesn’t move at all, but it is unlikely for the forex market to stay the same for any prolonged period of time.  That means that there are always plenty of opportunities to make profits regardless of the current global and local economy conditions.

Click here to read more about Characteristics of Currencies .

From Beginning Trader To Winning Trader

As traders, we all share one common goal, which is to make profits from trading, yet a vast majority of people hardly ever make consistent money as traders.  This is because they don’t know what it really takes to become a consistently successful trader and they keep making same mistakes over and over.

The following are key points that can help you get started in the right direction:

  • Learn the terminology.
  • Learn the trading platform well.
  • Practice on a demo account until you become profitable three months in a row.
  • Control your emotions – Do not panic when the market goes against you.  Trading with a fear of losing your money can cause you to make the exact errors you are trying to avoid.
  • Develop winning attitudes.  Learn how to trade without fears.
  • Learn how to read and analyze price actions.
  • Go with a flow.  Trade with a trend.
  • Avoid averaging like a plague!
  • Develop a winning trading strategy based on probabilities.
  • Take full responsibility for all your trading results.
  • Develop patience.
  • Be persistent.
  • Cut your losses early and let winning trades run.

Common pitfalls of novice traders:

  1. They want to jump right in and start trading before establishing winning attitudes.
  2. They let fear and greed take control over their trading.
  3. They are not willing to accept losses and hang on to a losing trade until the loss becomes too much to bear.
  4. They expect the market to behave in their favor simply because some technical indicators say so.
  5. They trade with poor or no money management.  They tend to overtrade with greedy expectations of making a lot of money in a short period of time.

Before you jump in and start trading, you must establish solid foundation: learn the terminology, learn your trading platform, practice with demo money, and develop a winning trading strategy.

One thing you need to know about a demo account is that there is a huge psychological difference between trading on a demo account with demo money and trading live with your real money.  A fear of losing your real money is one of the worst enemies in your trading.  A fear can cause you to make many errors that eventually cause you to lose lots of money.   For this reason, do not ever trade with money you cannot afford to lose.  When trading with money you cannot afford to lose, a fear of losing it can intensify drastically and, as a result, you will end up losing it.  As long as you are trading with fears, you will never become a consistently successful winning trader.  Read “Trading in the Zone” by Mark Douglas to learn how to overcome your fears.

Trading with a small amount of capital can significantly increase a chance to blow up your account.  However, you don’t want to start out with a large amount of money when you are completely new to forex trading.  A good compromise may be to open a micro account with a small initial deposit and trade micro lots, such as 0.01 lot.  With a micro account, you are risking only 10 cents (USD) for each pip.  Once you have learned to win successfully for three consecutive months, you can increase your account capital with a larger amount of deposit and start trading with either a mini account or standard account, depending on a size of your capital.  Typically, with a mini account, you are risking $1 USD for each pip.  With a standard account, you are risking $10 USD per pip.

It is important to understand how to read and analyze price actions.  Understand the concept of a trend, support and resistance.  Identify a major trend in higher time frame, such as Daily and 4-hour charts, and then zoom in to 1-hour or lower time frame to look for signals for entering a trade.  It is important for you to be able to identify trendlines, support and resistance by looking at price actions on a chart.

Learn to read candlestick patterns so you will be able to identify reversal signals.  Technical indicators are also good tools for confirmation of signals.  However, do not trade solely based on technical indicators.  All technical indicators generate “lagging” signals, which means that all their signals are after the fact.  They are all based on the past history, and therefore, they do not predict future market movements.  Combined with trendlines, support and resistance, price actions can provide much more reliable source of information than any technical indicators.

You don’t have to know everything about trading to start trading successful.  The most important thing to do to become a consistently successful winning trader is to establish winning attitudes.  Developing winning attitudes is far more important than trading strategies because without the winning attitudes, no matter what trading strategy you use, you will eventually lose.  Check out the recommended reading for more information.

Anything can happen in the market.  Learn to accept the uncertainty and start trading in the now moment based on probabilities.  Know that each trade is fresh regardless of the previous wins or losses.  Accept uncertainty of the market without your own favorable expectations, such as “The market should behave this way or that way.”  When you truly accept the uncertainty of the market,  you will be able to trade without fears.

Remember also that the market always presents plenty of opportunities to make money.  However, when you trade with fears, you will not be able to make yourself available to the opportunities.

Do not try to revenge trade.  When revenge trading, you are emotionally upset over the previous losses you suffered, and it can lead to reckless and forced trading even when the market condition is not optimal to enter a trade.  It is best to take some time away from trading to cool off.  Go back to the trading next day or so when you feel refreshed and no longer upset.  Remember also that if you get upset or emotionally disturbed by your losses, you are not truly accepting the uncertainty of the market.  When you can truly accept the uncertainty, there is no reason for you to get upset when the market goes against you.

If you ever lose one-third of your initial account capital, stop trading.  Go back to demo trading and figure out what went wrong.

Take full responsibility for all your trading results.  There are so many traders out there who always want to blame on the market or brokers for their losses.  The truth is, however, as long as they keep blaming others for their losses, they will never become consistently successful traders.

Developing winning attitudes does not come overnight.  It may require you to unlearn some of your bad habits or resolve conflicting thoughts and beliefs that are preventing you from becoming a consistently successful trader.  It may take quite some time for most people but be patient and be kind to yourself in the process.   Once you have unlearned self-defeating thoughts and beliefs and replaced them with winning attitudes, you will become a consistently winning successful trader.

 

Click here to start learning the Forex Trading Fundamentals .

RELATED TOPICS:

Creating a Winning Trading Strategy

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Top 10 tips for trading success

5 common mistakes that can wipe out 5 months of trading in 5 sessions

The Best Kept Secret of Trading; The 10:00 am Rule

Articles in this website focus mainly on foreign currency trading or forex trading.  However, you are not restricted to just foreign currency trading.  Virtually every forex broker mentioned in this website offers a full line of trading in stocks, gold, silver, crude oils, commodities, and other indices as well as currencies.

NOTE: If you need translation of the articles on this website, the easiest way is to use Google Chrome browser and select “Translate” in the Tool bar that appears at the top of the content area.  The article content will be automatically translated in your language.

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