I often speak to traders who’ve dabbled in indices … and shares … but what they really want to do is dip their toes into the Forex markets.
However, they’re hesitating.
Well, forex is often “bigged up” by traders as some kind of extreme sport – a place where you need deep pockets, loads of experience and nerves of steel.
This picture might make forex traders feel action heroes, but it’s really not accurate.
There’s no doubt that the forex markets offer some of the best profit opportunities in trading – but there’s absolutely no reason to be overwhelmed by them. In fact, with a firm hand, the forex markets can be the pussycats of the trading world!
Or sometimes people I speak to have had a bad experience trading forex in the past, and they don’t want to be bitten again.
Today I want to look at how we can cut the forex market down to size – so that anyone can tackle it with a few simple tools.
Plus, I want to tell you about the straightforward trading rules that have proved themselves over time to be a firm foundation for forex trading.
But first, let’s look at the reasons people give for NOT trading forex …
But forex is too big and too fast for me …
This is one I hear a lot. It’s true that the forex market is huge, and that it doesn’t sleep – markets just open and close around the globe as the planet keeps on spinning. Some forex traders make it sound like a terrifying fairground ride, that you might never be able to get off!
The truth is a lot less exciting (but also a lot less scary!)
The size of the forex market is what makes it one of the safer places to trade – it means that the market is incredibly liquid – you’ll never be struggling to find a buyer or a seller, and you just don’t get the kind of trading gaps you see in share prices.
Size also means that there’s a huge choice of different instruments …
The main currencies you’ll come across are:
USD / United States Dollar (also called the “buck”)
GBP / Great Britain Pound (also called “sterling”)
EUR / European members Euro (also called “fiber”)
JPY / Japanese Yen
CHF / Swiss Franc (also called “swissy”)
CAD / Canadian dollar (also called “loonie”)
AUD / Australian dollar (also called “ausie”)
NZD / New Zealand dollar (also called “kiwi”)
The major pairings of these are: EUR/USD, USD/JPY, GBP/USD, USD/CHF.
The minor pairs are: USD/CAD, AUD/USD, NZD/USD.
So, where on earth do you start?
My advice to anyone starting out is to pick one pair and stick to it until you’re confident to spread your wings a bit further.
Well, go for EUR/USD or GBP/USD because they are big and they are cheap to trade. (Obscure pairings are a lot more expensive to trade, which will seriously eat into your trading profits and very possibly wipe them out completely.)
Right, so we’ve filtered down all those instruments to just one. What next?
But I can’t be watching the markets all the time …
While we’re often told that the forex markets are like a “24 hour cashpoint” where we can always drop by to pick up some money – the reality is that at certain times of day (or night) they can be deathly quiet.
As a currency trader, we want to catch the busiest times, when most of the action is going on – because that means there are more profits on offer.
The best time of day for the currencies we’re talking about is the open of the London session around 6am to 10am.
And the crossover with the UK and US markets …
But I don’t understand global economics …
That’s the good news! The people who are really in trouble in the forex markets are those who think that they DO understand economics!
Reading the financial press and watching the business channels on TV all day is more likely to mislead you than help you with your trading.
All those pundits telling you what’s going to happen … are also telling thousands of others exactly the same thing. The press isn’t going to get you ahead of the financial curve!
The truth is that the price in the market is ahead of the news – the price follows rumours … predictions … fears … and expectations. By the time you’ve heard the news – the price move has already happened.
The one thing you can do to help yourself is to keep out of the way when a big piece of economic news is coming – I’m talking about stuff like non-farm payrolls on the first Friday of each month. You can keep abreast of these announcements at forexfactory
I find it difficult calculating my risk and profits in currencies
If you’ve made a mistake in trading by putting the decimal point in the wrong place – you won’t be alone.
In fact, JPMorgan are being sued £580,000 by a currency trader for putting a decimal point in the wrong place.
But, if you stick to the principle of only trading one currency pair while you’re building your confidence, then you’re much less likely to make mistakes.
Currencies are trading in “pips”, which stands for “percentage in point” – this is the smallest increment in currency trading. In most currencies, a pip is 0.0001 (there are some exceptions, like the Japanese Yen, where a pip is 0.01).
So, assuming that we’re trading GBP/USD (also called “cable”), then if the price has moved from 1.34551 to 1.34761, then we’ve had a move of 21 pips.
I need some reliable rules to trade by …
Two important things to remember when you’re starting out trading a new market:
1. Start small: accept that you’re going to make some mistakes along the way, and probably more while you’re starting out. So, start off with a demo account, or with very low stakes. That way, if you do make mistakes, you won’t be too worried by them.
2. Have realistic expectations: don’t expect to have doubled your money by Christmas! If you’re trading with low stakes, and picking up regular gains of 10 … 20 … 30 points, then you’re doing well.
And it’s exactly this kind of sensible approach to trading forex that I want to talk about in more detail next week, so until then…