Starting with Forex Trading
Trading the Foreign Exchange market by using capital leverage is very risky, and there are a lot of things you need to learn (execution models, trading spread, slippage, etc.) Therefore, it is highly recommended that you start trading Forex by opening a free demo account. A demo account can help you gain experience without any risk of losing your funds.
In addition, getting a free No-Deposit Forex Bonus is a smart way to start trading without risk. The advantage of a No-Deposit Bonus over a Demo Account is that you will be trading on ‘Real Market Conditions’; therefore, you can test the real conditions of your broker (platform, order execution. slippage, etc.) without risking your funds.
When you are ready to trade for real money, it is better to start by opening a micro-lot account and depositing only a small amount. The Forex market offers nice opportunities for beginners that you can fully exploit by risking a limited amount of money.
Trading the Forex Majors
The Forex Majors refer to the most active and liquid currency pairs and account for about 85% of the total Foreign Exchange market activity. Based on G. Protonotarios' research (January 2000 to October 2018) this is the periodic performance of 7 major Forex pairs.
Table: Compare the performance of 7 Forex pairs based on historical data (2000-2018)
Source: G. Protonotarios for CurrenciesFx.com (c) 2000-2018
The Euro against the US Dollar is the most active and liquid pair in the whole Forex Market. Based on historical statistics, the best months to go long are December and June, and the best months to go short are May and October.
- EURUSD accounts for 28.5% of the total Foreign Exchange market volume
- US Dollar Index → 57.6% EUR weight
The British Sterling against the US Dollar (GBPUSD) is a very liquid Forex pair. Based on historical statistics, the best months to go long are April and June, and the best month to go short is May.
- GBPUSD accounts for about 11.4% of the Foreign Exchange market volume
- US Dollar Index → 11.9% British Pound weight
The US Dollar against the Japanese Yen is a volatile and liquid Forex pair when measured on a daily and intraday basis
- USDJPY accounts for 21.8% of the total Foreign Exchange market volume
- US Dollar Index → 13.6% Japanese Yen weight
The US Dollar against the Swiss Franc (USDCHF). The Swiss Franc and the US Dollar are both significant reserve currencies.
- USDCHF accounts for 4.4% of the total Foreign Exchange market volume.
- US Dollar Index → 3.6% Swiss Franc weight
THE COMMODITY CURRENCY PAIRS
The US Dollar against the Canadian Dollar. USDCAD is a medium-volatility financial asset and a relatively liquid Forex pair.
- USDCAD is highly correlated to the price of crude oil.
- US Dollar Index → 9.1% Canadian Dollar weight
The Australian Dollar against the US Dollar. AUDUSD is a highly volatile Forex pair when measured on a daily and intraday basis.
- During the past two decades, AUDUSD has had an 80% positive correlation to the price of gold and a 90% positive correlation to the New Zeeland Dollar.
- The correlation between copper and Aussie is more than 70%.
- AUDUSD accounts for 6.5% of the total Foreign Exchange market volume.
The New Zeeland Dollar against the US Dollar. NZDUSD is a highly-volatile Forex pair on a day-to-day basis.
- New Zealand is a major exporter of raw materials, and NZD is a commodity currency.
The US Dollar Index
USDX is a very important index that measures the overall strength of the US Dollar against the strength of other major Forex Currencies.
Table: Forex Currencies and their weight on the US Dollar Index
US DOLLAR INDEX (Basket of Currencies)
British Pound Sterling
The Four (4) Trading Lessons
Learning is power when trading the Foreign Exchange market.
(1) Market Analysis
Market analysis refers to the process of studying market fundamental data and measuring the dynamics of future demand and supply to identify risks and spot trading opportunities. These are some key takeaways:
- Create the macroeconomic picture of tomorrow in your mind
- Imagine different configurations of the financial world and then create alternative scenarios, don't try to predict with certainty
- Markets are never wrong, however, opinions can often be wrong, so be ready to change your opinions
- Listen to what large investors and other big players are saying, but don't trust bankers
(2) Market Sentiment
Market sentiment refers to the prevailing attitude of investors in a particular market. These are some key takeaways:
- Always consider whether your idea is already discounted by the market
- Make sure there are a lot of people who are going to be wrong if your idea is correct
- Think contrarian to the herd, the herd is destined to lose money
- A technical pattern is more likely to confirm when it is less observed and less-discussed
- Don't Focus on what the market's going to do, focus on your action if it gets there
(3) Key Trading Rules
Trading is a zero-sum game, and as a few people are making a lot of money, there must be a lot of others who lose. That means that basically, you should trade against the crowd. These are some key takeaways:
- Be willing to take what the market has to offer
- Don’t try to buy the Bottom, try to buy the easy part of the trade
- The wise trader, every day assumes that all his positions are wrong
(4) Money Management
Money management refers to a set of rules and techniques aiming to minimize portfolio losses in the short term and maximize profits in the long term. These are some key takeaways:
- To fail is to learn and a losing trade doesn’t necessarily mean a bad trade
- Never overtrade, prefer to trade small positions by protecting your trading capital
- Accept only trades with a Reward/Risk ratio of more than 3
- Hold your winners and run your profits
Trading the News
News trading is the process of trading the financial markets by linking macroeconomic events to strong price movements. Trading the news requires a good understanding of fundamental analysis, certain day-trading skills, and especially elite money-management skills. During important announcements, extreme volatility is very common.
Automated Forex Trading
Automated Forex trading is the process of trading 24/5 Forex currencies, without any human intervention. Algorithms analyze market data over multiple timeframes, and when certain conditions are met, trade positions are opened, altered, and close. The great advantage of automated trading is the elimination of fatigue and emotional/psychological influences. An automated trading system will use a set of pre-established rules to simultaneously manage multiple accounts.