Forex 101

New To Forex :Start Here

 Whats it all about ?

The Forex market is the biggest traded market in the world. It boasts a traded volume of approximately 5 trillion dollars PER DAY.

The market is open to everyone to trade from retail traders to huge hedge funds and banks. Unlike the stock market the forex market is open 24 hours a day 5 days a week.

Trades are placed on currency pairs , for example the Euro Vs the US dollar (EURUSD) where you may think that the value of the euro against the US dollar will go up to a certain level.

As a retail trader you will be using a broker to place your trades using computer software which is either website based or a standalone desktop application. You choose a currency pair that you think will change in value and trade it accordingly using either a buy or sell position.

For example if the value of the EURUSD currency pair is 1.35000 and you think it will drop from this level you will place a sell trade.

This process normally takes less than a second to accomplish.

The busiest time of the day for trading forex is the London session this is because the London market starts trading at 8am, which is close to the end of the trading day in the Asian countries, as the Banks in London are opening at 8am they are able to deal with traders in Tokyo, Hong Kong or Singapore whose trading day is just coming to a close.
Around 1pm London time the traders in the US are sitting down at their desks to begin their day and hence the afternoon period of the London session co-incides with the morning session of the US market.

In this set of articles we will show you how to start off in your forex trading mission,

  • How to setup your trading platform for the first time.
  • Different types of trade entry.
  • Stop Loss and Take Profit.
  • How to avoid the pitfalls/typical new trader mistakes.
  • How to identify the rogue brokers.
  • Trade Emotions.

 

A Typical Selection of Forex trading Pairs

Forex Trading Pairs

Forex Trading Pairs

Next:

The first step : Demo Time

 

Where you are now.

You have probably heard about trading Forex through a friend or a spam email promising that you can turn $100 into many thousands in a very short period of time.
(this claim by the way is bs)
So your interest got perked.

The very first thing you need to do after you have figured out what exactly forex trading is , is to get a demo account running from a broker such as Alpari or FXCM or IBFX.

A demo account is one where you are given a certain amount of "play" money so you can practice your trading.

The first time you start your trading platform you will normally see something like this :



MT4 Fresh Install


Most of what you see here will be useless for you as a new trader so the first thing you need to to is clean it all up by clicking all the X's so it looks like this:



MT4 Clean

Next step is to setup a blank/default template.
so click file . new chart and click on EURUSD

MT4 add chart

Now right click the chart click properties
under colors change them as below


MT4 Chart colors

next click the common tab and uncheck the show grid box. then click ok .

MT4 common settings

You will now see yout chart like this:

Mt4 Chart


Once you have clicked the 2 buttons as show in the picture above . Right click anywhere on the chart , put your mouse over Template , then click save template.

Save the template as default.tpl

Now when ever you open a chart it will open with a nice clean look.

Next:

Different types of trade entry

So now we have a basic clean chart setup. How is a trade opened?
Real easy. if your using MT4 press F9 and the trade order box pops up.

Forex MT4 Trade Order Box


Quite a few options here but for now we will just take a look at the trade order Type.

There are 2 types of trade entry. Instant Execution and Pending Order.

Instant Execution

The default setting when you press F9 is Instant Execution. What this means is that when you click either te buy or sell buttons you will be placing a trade into the market at the price specified , you will be instantly in the market basically speaking if you have clicked the Buy button you are thinking that the chart is going to move in an upwards direction , ie the price increases and if you have clicked the sell button then your assumption is that the chart is going to move down, price decreases.

Buy Entry

Buy Entry

 

Sell Entry

Sell Entry

 

 

Pending Order

Press F9 and the order box pops up. Now use the Type dropdown box and select Pending Order.

Pending Order Entry Box

 

There are 4 different types of Pending Order available and as the name suggests this is a "pending" order in other words its is an order that waits for a specific market condition to occur.

Buy Limit Order

A buy limit order is an order placed which will be executed when the price drops to a specified price . When the market hits this price the order will trigger and open a buy trade.

MT4 Buy Limit Order Box

 

When you place the order you will see it sat there waiting on your chart for the price to drop down to it.

Note : to set a Buy Limit order the price must be above where you want to set the order.

MT4 Buy Limit Order Chart View

 

You want the price to drop down to the entry line and then bounce back up.
Buy Limit Order

Sell Limit Order

A sell limit order is the opposite of the buy limit order . IE the price come from below and you set an order where you think the price will bounce to the downside.

Sell Limit Box

 

You want the price to move up to the entry line and then bounce back down.

Sell Limit Chart

 

Buy Stop Order

A Buy Stop order is one where the price is below where you want to enter and you want the price to continue in its existing direction.(up) NOT bounce.

Buy Stop box

 

You want the price to move to entry line then continue going UP.

Buy Stop Chart

 

Sell Stop Order

A Sell Stop order is one where the price is abovebelow where you want to enter and you want the price to continue in its existing direction. (Down) NOT bounce.

Sell Stop Box

 

You want the price to move to entry line then continue going DOWN.

Sell Stop Chart

 

Viewing your entries and orders

Click View on the menu bar at the top of the platform and then click Terminal.Here you can see the various orders and positiona you have open.

MT4 Terminal window

 

Entry Removal

I you have either bought or sold a position in the market and decide the price has ether moved into profit enough to take profit or position has moved against you and you want to close it.

Put your mouse over the buy or sell order you want to close , right click it and left click close order,this brings up a trade Close box.

Trade Close Box

 

Order Removal

If you have decided to remove a pending order you have set then in the Termnal window , right click the order and left click modify or delete order,then left click Delete.

Order Delete

 

Next:

Stop Loss and Take Profit



When trading the markets your Stop Loss and Take profit levels are probably the most important things you should know before placing a trade as these define your trade plan and your risk management.

If you do not know your stop loss you cannot assess your risk managment and if you do not know your take profit price you cannot assess the risk reward for your trades.

Stop Loss

Your stop loss price is used primarily for 2 things.

  • To stop you losing more if a trade does not work out
  • To calculate your risk and number of lots tradeable per trade.

Your stop loss will automatically close your trades at the price you set it at preventing the trade from causing you further loss.

Here is an example of how a stop loss can protect you from massive loss and pain

Stop loss saved you

 

 

Take Profit

Your take profit price is that place you want to take profit on your trade. We use partial trade closing but this is beond the scope of this 101 arcticle.

It is also used to calculate the risk reward per trade.

It is not always necessary to set a hard take profit level not setting one though normally means you will have to more attentive to your trades.


Next:
How to avoid the pitfalls.

Simple fact is you wont avoid them all and will never have a 100% record as a forex trader no matter what all the spam emails and websites tell you.

However you need to be aware of the main mistakes you can and will make as a new trader.

  • Trading without a stop / moving your stop
  • Overtrading
  • Over leveraging (too many lots)
  • Holding / Opening trades when Red news is near

 

Trading without a stop / moving your stop

THE number one cardinal sin of trading!

If you do not set a stop loss order it shows that you have applied absolutely no planing to your trade. If you dont have a stop loss order you cannot assess your risk properly and you will find it very hard to close your trade if it goes against you as your mental state will be saying to you " it will reverse , its will reverse" so you hold onto a trade and eventually you either close the trade for a much bigger loss or you lose your entire account!

REMEMBER : Plan the trade , trade the plan.

Stop loss moving is another pitfall you may encounter , You must only ever move your stop towards your entry , never away. Doing this blows your trade plan to bits and wrecks your risk assessment.

 

Overtrading

This comes in a couple of flavors.

1. You made a nice couple of trades and are thinking that your invincible. So you start putting on more and more trades and forget all about your trade plan. Result . the gain you made on the first few trades is erased and you end up the day down rather than up.

2. You made a few lossy trades and are pissed at the market so you start putting more trades on trying to get the loss back, this is revenge trading and will cost you . Your mental state is shot to bits.

Remember the market does not care about you or anyone else. It will do what it does , if you have done a few lost trades on a working strategy . Sit back and take stock , grab a coffee and relax for a bit.

 

Over leveraging (too many lots)

What happens here is that you have failed to correctly work out your risk.

Say you want to take a trade that needs a 20 pip stop and you have an account of $1000 and each pip on your trading account is worth $1

You should only be using 2% risk per trade .

this means that your risking $20 for this trade, at a pip cost of $1 per pip that means you will only be able to trade 1 mini lot.

If you do a couple of good trades you might start to get greedy and trade more lots . so instead of making a measly profit you shoot for the moon and trade more lots for example 10 lots , this now puts your risk at $200 for the trade or 20% .

You lose the trade and your account has now dropped by 20% , you now return to your original 2% risk and it takes a long time to get the account back in shape.

 

Holding / Opening trades when Red news is near

If you are technical trading you have no business trading when major news events are due to happen. The news announcements can and will throw your tecnical analysis right of sync , not just that spreads can also widen and you will be unable to exit your trades until the news is done spiking the prices around.

There is a place for news trading and we do it here but it takes a totally different view of the market.

 

Next:

How to identify the rogue brokers




To be able to trade the forex market you have to deposit money with a broker. The broker executes your orders on your behalf and they generally get paid the spread between the buy and sell prices of whichever currency pair you trade. This can vary between 2 -10 pips depending upon the currency pair.

There are good and bad brokers and REALLY bad brokers.
Lets take a look at the different types.

  • Bucket Shops.
  • Properly Regulated Retail Brokers
  • Institutional Market Maker.
  • Fully Institutional Broker.

 

Bucket Shops

A bucket shop broker typically will not have a direct connection to the markets , do not execute trades into the market and will take the opposite side of your trades and trade against you .

You can identify them quite easily.

  1. They will not be regulated by a proper financial institution (EG in the US the CFTC or in the UK the FSA) .
  2. They will probably reside in some odd island type country.
  3. They may offer introductory deals , eg 20% extra money when you deposit a certain amount of money with them.

DO NOT give these cowboys you money. It is highly likely that even if you do make a profit with them you won't be able to withdraw it anyway

 

Properly Regulated Retail Brokers

One of these brokers will be your best choice for your trading . They will be properly regulated , part of this regulation means that client funds have to be kept in a segregated account so that your money is safe even if they go belly up. Most have excellent client support channels available 24/5.

 

Institutional Market Maker

This type of broker are very closely connected with the Forex market. They have a more direct connection than most Retail Market Makers.They usually require large amounts of money for direct access to the interbank market so may not be suitable for a beginner trader.

 

Fully Institutional Broker

These guys are directly connected to the Forex market. This consists of a consortium of approximately 200 banks. It also represents nearly half of all Forex trading. Unless you are a bank you will not be able to use this type of broker.

 

In a nutshell stay away from unregulated bucket shops , use a properly regulated broker , and even if they state on their website that they are regulated double check that they actually are.

Always use due diligance before sending your prospective broker your money!


Next:
Trading Emotions



There are dozens of books written about emotions in trading . It is a very large subject so I will identify here the key points that you need to look out for.

Trading in Forex can be a very emotional activity. Here are some classic emotional responses.

1. Invicibility

You take a trade it works out great you get some pips for the day. Your happy! . So you take another trade and that works out too . Your Super happy and feeling invicible. You then take 3 more trades during the day and all of them lost and instead of being happy you now are thinking "Why didnt I just leave while I was ahead".

2. Greed

See 1. above, you made some pips and then lost them all and more because you wanted more , you failed to limit your gains just as much as you should limit your losses . There is always another trade on another day.

3. Revenge

Now we are in bad territory you lost your pips already gained and you want to beat the market with a stick and get them back , you might , but it is unlikely that you will . Revenge is now clouding your judgement.

4. The "what ifs" the "maybes" the "could haves " and the "should haves"

Here's a classic . you plan a trade it works out great . You have set TP and SL . It hits TP + say 50- 100 pips . The price then keeps rocketing and you "could have " made another 100 pips. Now think why did you put that TP there , it was part of your plan right ? So you traded according to your plan. The trade worked, pat yourself on the back and have a beer ! Dont even think about getting pissed cos you missed those extra pips . You succesfully took your share of profits from the market.

Other side of the coin is your SL . You plan a trade and it hits your SL and reverses . GAH! ive seen it many times and will continue to do so . Thats part of trading you planned a trade and stuck to it this time it didnt work out .

So lets look at what happens when emotions come in .

a.You had a winner at your take profit level . and price carried on through your TP and you could have got more pips (remember greed?) So the next trade for some reason you either dont set a TP or you set a TP way above where it should be. Guess what happens ? Price takes your trade into profit 50 -100 pips and your trying to let it ride for more (remember greed?) then suddenly a news spike wacks your trade the other way and your stopped out for a loss.

b.You had a losing trade from SL and it bounced at your SL and went back to a nice profit . Next trade you possibly do the worst thing ever and not set a SL .(remember revenge ?) price goes the other way and your in a loss . When exactly are you going to close this trade ? Whats the plan ? Price continues against you and your now 20- 50 % down on your account on one trade ! Not looking great is it .

All of the above can be avoided partly by setting out a trading plan and sticking to it .

5.Cut the losses and let the profits run:

Not really an emotion but this is a very important rule to get into your head

You must maximize your profits by staying in the good trades and get out ot trades quickly that are not working .

The emotional part is being able to leave a trade running that is showing you profit and cutting a trade that is in a loss.