Required for the forex course
Forex account: free account at Markets.com
Duration per lesson: about 10 minutes
A couple of lessons ago you were still a forex rookie, but now you have almost arrived at the end of the Forex trading course for beginners. You learned how the forex market works, you got to know the most important terminology, have a basic understanding of technical analysis and fundamental analysis, and gained a bit more understanding of your own psychology. You’ve probably already made a few trades to put your new knowledge into practice and, admit it, you’re are liking it already.
But actually, the real fun is only starting now. Well, it was already fun, but now it is getting even more fun. All the new knowledge you gain from now on no longer serves to understand the basic principles of trading (you know them already), but to further develop and refine your strategies. If Forex trading were a language, you would by now understand most basic grammar and vocabulary and you could start singing songs and understanding fascinating literature.
In the forex articles we will dive into many factors that determine the forex market; what you should know to become a better trader; how to apply Technical and Fundamental analysis in practice; how to discover a trading style that best fits your personality; and many more new and exciting things. But before you really jump into the deep and start trading a lot, we want to give you some final tips. These ten forex trading tips for beginners will help you avoid making stupid mistakes that many beginners make.
Always apply a stop loss
While it does not really require any specific knowledge, it is the most important aspect of trading since it prevents financial catastrophes. Numerous small and larger traders have seen their trading capital vanish, either when they went out to do groceries, or when their computers crashed. They could have easily prevented this by applying a stop loss to their trading position. There are no excuses: always apply a stop loss!
Always apply a take profit
Partially for the same reason you have to set a stop loss. Maybe you need to leave your computer, or you lose your internet connection, etc. But what is more important: it forces you to think more extensively about the potential of your trade. How far is the price going to move? The predetermination of an entry and exit point is the most important aspect of a successful trade. You do not have to nervously watch every price tick and be glued to the screen when the trade is running. You can just patiently wait for the price to either hit the stop loss or your take profit.
This does not mean that you can never deviate from this. If a new development in the market advocates to step out, even if your take profit (or stop loss) has not yet been reached, then of course you can do so. But in general, you do not want to adjust the stop loss or take profit during the trade.
We also recommend you determine the ratio between your stop loss and take profit beforehand. For example, you can set a stop loss at 25 pips and a take profit at 75 pips; a ratio of three to one. This means that only 25% of your trades needs to be successful in order to break even in the long term. (After all, if you lose 25 pips three times and you win 75 pips once, you will break even.)
Never add to a losing position
This is one of the biggest pitfalls in Forex trading. You opened a position, applied a stop loss, and then the trade is starting to move against you. Your stop loss is hit, and you make a loss. You are feeling bad and you want to make up for your loss by buying the same instrument again, now at a lower and better price. However, the price continues to move against you.
Never do this. Just accept the loss, leave it, and analyse why it did not work out the way you anticipated. Remember that no trader can only have winning trades. Every trader has losing trades; the point is that you win more with the winning trades and lose less with unprofitable trades (hence the ratio between the stop loss and the take profit). It may be worthwhile to open a new position at a cheaper price. But try to consider it as a stand-alone decision, not as a way to make up for your initial loss.
Don’t get overconfident
The fewer the knowledge, the bigger the boast. At least, in many cases. But you should not be trading forex to boast or prove something; you should do it for the money. If it is also fun and exciting, that is nice, but in the end it should just make you money. It is very easy to overestimate your own knowledge and talent after some lucky trades on the forex market.
Realize that on a scale of 1 to 10 – where 1 is a monkey that randomly trades and 10 is Bruce Kovner, one of the most successful forex traders in the world – you might now be at 3 or 4. This may already be higher than the average individual forex trader, but there are also many losing traders. Start trading with modest amounts, but remember that you are working on a learning experience and have a long way to go before you can trade millions.
Do not create wrong expectations
It is not the end of the world if you lose $ 100 due to a stupid mistake; similarly, you should not start dreaming of buying large mansions when you just made $ 200. Take the time to learn and improve yourself and keep looking at your progress realistically, without becoming obsessed with how exactly you’ve done over the past week or month.
It may be that in the long run you make more money with Forex trading than with your regular job. But it is equally likely that you will not make it that far because you lack the time, interest or discipline. Do not to quit your job; at least not too soon. It’s better to just see how far you get, gradually get better and increase profits, than to set yourself hard financial goals. After all, you do not always know what will happen in the future.
Never trade with money you cannot afford to lose
NEVER TRADE WITH MONEY YOU CANNOT AFFORD TO LOSE! The best thing about forex is that it is the least risky of all trading instruments. You can never lose more money than you invested, and if you use the stop loss well you can never lose more than the number of pips you have specified in advance. It is therefore not necessary to put money at stake which you cannot afford to lose.
Just reserve a certain amount for your forex trading and realize that there is a possibility that you lose it – especially if still in college this is important. If there is one thing you don’t want when trading forex, it is sleepless nights. So, just don’t put yourself in that position.
Never trade without a plan
A headless chicken is usually eaten. Think before opening a position. Do not trade because you have some vague suspicion or because a distant acquaintance at a party argued that the Dollar is now really going to collapse. Base your trades on extensive Fundamental and Technical analysis.
Before entering a trade, try to determine an entry and exit point as well as possible. What is the best moment to get in, and what is the right time to get out of the market? Determine an entry point and stop loss level beforehand. In the beginning you may notice that your plan does not always work out as expected and that sometimes the market does something unexpected. However, this way you will increase your experience and you will develop a feel for the market.
Do not open a position when in doubt
Americans have a nice expression for this: “When in doubt, stay out.” Of course, you should not be a coward either, but if you have made your analysis and you are still in doubt as to what the price is going to do, then start looking for another opportunity or get some coffee. You place a trade for a certain reason and if you cannot even convince yourself, then it is probably not a very good reason.
Do not exit a trade due to a whipsawing price
Another saying from the US: “Monitoring extended periods or whipsawing is like watching paint dry.” A price on the forex market of whipsaws back and forth before choosing a definitive direction. The market is building momentum before it makes a large move. Looking at such a whipsawing price is not only boring, it can also bring your head full of (unjustified) doubts. Did I make a justified decision? Did something suddenly change? Should I quickly close my position?
The whipsawing of currency prices is the result of a large group of traders (mostly computers) making many flash trades. Make sure you do not trade these small price fluctuations. As an individual trader, should you pay attention to larger price movements.
Focus and concentrate when opening a position
It has probably happened to almost every trader: button here, button there and … Oops! The wrong button. By accident you went long instead of short; 10 lots instead of 1 lot; purchased Australian Dollars instead of Canadian Dollars; etc. Of all Forex trading tips for beginners this is the simplest (even the monkey can learn this): focus and concentrate when opening a position. Check whether you have set all fields correctly before clicking “Open”.
If you open a wrong position, this means that at best you pay double the spread; once when opening the wrong position and once when opening the right position. This will cost you a few pips. But if you do not realize that you have made a mistake, the consequences can be huge. Imagine that you accidentally went short instead of long and only find out later, after you have lost 200 pips. Concentration is essential!
And with that you have come to the end of the forex trading course for beginners. These eight lessons explain the basics of forex trading. Also have a look at our other interesting forex articles.
We wish you a lot of success!