Forex Trading for Newbies

Whoever you are, I would like to take this opportunity to welcome you to Forex. If this is your first or one of the few exposures to forex, please be prepared to be confused. It is ok to be confused. My objective in this hub is to make forex simple enough for you to understand. But before I talk about myself, and my version of forex, let’s look at what really is Forex!

FOREX Market is a 2.5+ TRILLION DOLLAR market. You can compare this to the 15+ billion dollar Stock Market and just imagine the kind of money that is floating around in this market. Just in the past decade, forex has become accessible by small investors like you and I. Prior to that, the big banks, corporation, with millions and billions of dollars were the only ones trading in this market.

The idea in Forex is simple. You buy and sell currencies; the same way you might buy and sell products. I was speaking to someone not too long ago regarding forex trading, and he asked me innocently, “So I go to the bank and do the actual trade?” As much as it sounded funny to me, it is an important question in understanding the way this market is traded. The trade is executed online from the comfort of your home or wherever you may be as long as you have a computer and a high-speed Internet connection

This form of convenience and the fact that anyone with basic technology and some investment can trade in this market has attracted a lot of “gurus” to educate these newbies. You can go to Google right now and type in the words Forex training or forex education and you will get tons of hits. Some are quality and some are simply quantity. Some courses online or offline give you a whole lot of education on forex, but that’s all it is. Some impress you with big words and reel you into their trap. Is that their intention? I am not sure. But amongst this forex jungle there are those whose training is actually meaningful. Have I taken all the courses you might ask? The answer is no. But if this statistic that 95% of the new comers to forex lose their money in the first 90 days of trading, is true, can that be treated as a reflection of 90 % of the courses out there. Scary, is it not? I have my theory on this and it does not have so much to do with the quality of these courses but another element that some of the courses sometimes simply overlook and that is a trader’s mindset. I will touch on this later.

You can read reviews of courses and go to this site and then to that site and then stay up late nights wondering where should you get your forex education. You are scared and yet you know you have to take a risk. How do I know this? I have been there. Not so long ago.

Now you might wonder which educational program is the best out there.  I don’t know all of them but I know a few.  Some charge $50000.00; some $1000.00, some $5000.00 and some ask you to become members of the trading club.  I am not going to do analysis for educational programs here; frankly there are a lot of sites out their for your entertainment pleasure. :o) It is, however, somewhat important for you to know the types of traders that exist in the forex market.    

There are many kinds of traders: End-of-day traders, fundamental traders, and day traders. There are many versions of these traders but those are the general categories.

End-of-Day Traders: These traders have a position in the market. They may place an order in the market and indicate that their order be executed when the price gets to a certain point. Once that happens they also anticipate based on their expertise that the currency will either drop in price or move up, hence taking a BUY or a SELL position. These traders can stay in the market for a couple of days, weeks or even months. They generally do the Market analysis after 5 PM EST and place their trades for the following day or so.

Fundamental traders: Well these traders trade only in time of news. Throughout the day, a country can have one or many news announcements. News announcements usually relate to economic condition of the country and can move the market 50 – 100 pips within the hour. It is risky but profitable for some. An example of this kind of news is interest rate news in the US. The news only lasts a couple of minutes but because of its anticipation and post-news results the market moves immensely. And within this move the news traders get in and out and make their profits or lose.

Day traders: These traders are in the market for no more than a day. It could be 1 minute or it could be in the entire duration of the day. Some of them trade many times through the day and may win or lose their money by the end of the day.

So which one type of trader is successful? Well it could be any one of them or neither of them. What is the key then? It is knowing what you want folks. What did you want to accomplish when you first came to forex? Was it to become a millionaire? Was it to make some extra money on the side? Was it to grow your money so that you have some money at retirement? Or may be you just wanted to replace your income?

It is so important to understand this because this then becomes your business plan. As soon as you lose focus, you are doomed to get off track and then you will be all over the pace.  This will guarantee one thing for sure: your loses huge and your gains small and inconsistent.  Treating forex as a business is a discipline matter. I treat my forex trading as a business. But the question is if you want that?

What do I do? I have a business plan. When I stumbled on forex, I was looking to start a business online, that I could generate some income from. The ultimate goal was to become operate a business online full time. I wanted to get more time to spend with my wife and other family members. That is what drives me still. I do want to make money but I do not want to lose money. That is how I learned forex and now accept forex as such. This is not what happened right away though. I got excited about forex, lost my focus on what I was trying to do initially and started thinking of loads of money from trading the forex and lost focus of why I came to forex in the first place. Where did I go with that? Nowhere? This way of thinking did not work for me or the others that thought the same way.

Call it whatever you want to, but my plan is working for me. And I can help others achieve the same IF they want the same. The method of trading that has worked for me and I truly believe in is based on I-POD.  I use Patience Observation and Discipline. I do not make large sums of money everyday, but I make it over the long-term.

All traders use an online trading platform. This platform is provided from the broker company that you will join. Once you are all set with your platform, you can trade in the demo account until you become comfortable and consistent in your analysis. The platform you will be using will allow you to access charts that you will analyze and place trades. You will analyze a currency pair or pairs and based on your criteria, if you happen to see a trade you will trade and execute a BUY or a SELL trade. You enter the market and when you have attained the desired result, you exit the market. Now, how you do your analysis and how long it would take you to reach your desired result in a trade is done by many different techniques. Traders use indicators, mathematical tools, news, and many other methods.

Making money in Forex is simply a matter of taking a correct position; you are either going to be a Bull or be a Bear, please never be a pig. Of course there is no position in the market as a pig, but if you decide to break the rules and lose all your money in the trade, you are taking a Pig-ish position in my terms.

You have a bullish position in the market or you are a bull when you enter a BUY trade; that is to say you anticipate that the market will move up in price so you buy now and when the market moves up, you will sell. You have a bullish position if you enter a SELL trade; that is to say you anticipate that the price will fall and you sell the currency in the market first and then when the price falls you buy it back. The concept of a SELL trade is a bit complicated to understand but do not worry too much with it for now.

Before we dive in to understand how traders make money, it is important to understand a few terms relating to forex:

PIP:

When the price for a currency moves, it is measured in pips. For example, if the price of a currency moved from 1.7623 to 1.7673, it has moved 50 pips. The calculation of pips is done as follows: (NOTE: the decimals have been removed)

NEW PRICE: 17673

MINUS -

PREVIOUS PRICE: 17623

PIPS = 00050 (50 pips)

Each pip is associated with a value. In a full trading account, a pip could be worth $10.00 (USD). In a mini trading account, a pip is worth $1.00 (USD).

CURRENCY PAIRS:

In forex, currency is always traded in pairs. You buy one currency against the other. For example British pound and US dollar, it is indicated GBP/USD. If the price for this pair is indicating at 1.9756, this means that 1 GBP = 1.9756 USD.

In a pair of currencies, as the price moves, one of the currencies is moving up and the other moves down. For instance, GBP/USD, if the pound moves up, then value of the USD is moving down. Your expertise will come into play when you can anticipate what is about to happen. If you think the pound will go up, you will enter a BUY trade; if you think the pound price will fall, you will enter a SELL trade.

These are the only types of trades I execute, and it happens instantly through your online platform. There are many other elements of a trade like LOTS, STOP LOSS, and much more but we are not going to get into them for now.

Let’s wrap our heads around the following situation:

You have say, $5000.00 USD. You decide to go to the bank and buy $5000.00 worth of British pound. Let’s say that the GBP/USD price is at 1.9753. You have anticipated that the market will move up about 50 pips. Once you give the bank your $5000.00 USD, they will give you 2531.64 pounds. You hold on to it or put it in the safety deposit box and let’s say that 1 day later the market moved 50 pips up and you think it is a good time to sell the British pounds. If the market has moved 50 pips, then the GBP/USD is 1.9803. If you do the math, you will get $ 5013.40 USD.

I know what you are thinking. You are kidding me right Raza. I went through all that trouble to make $13.40. I agree with you; what a waste of time. This was a positive scenario. If the trade has gone wrong then you would have been stuck with the British pound and when you would have gone to the bank, you might have lost money.

Well, I have good news and bad news folks. First the good news is that you do not drive out to the bank and trade your money, wait for 2 hours or a week, and then go back and change your money. You do everything online sitting on the couch or wherever you are comfortable.  Bad news, the market doesn’t wait for you to trade your money and then move in the opposite direction.  The move in the market of 10 pips can happen in 30 seconds and then go against you in the matter of seconds.  Also, the bank rate of the currency does not fluctuate like this or even in these increments.  Market may have moved 50 pips, but the banks rate may have moved increments of that.  So your best bet to trade is on the internet. 

If we were trading this very $5000.00 USD on the internet through our broker and our platform, we analyze the market and we enter a trade because the price is about to move up, it will take us 5 seconds to do that and sometimes not even that.  Also, you do not bet your entire 5000.00 in the market.  You use leverage.  The way I trade, I only use a maximum 5% of my capital and I determine my value per pip based on the formula ((5% of 5000.00)/50).  I am going to leave out the explanation of the formula out for now.  So that means my pip value is $ 5/pip.  If I executed the above trade in this manner, and the market moved 50 pips and each pip is worth $5.00;

I made a nice $250.00 for my trade.  Have there been days that I have done this?  YES!! 

So what do you want to do? If you think you have a better opportunity elsewhere to double or triple your investment in the next year, or you would rather prefer taking a part-time job and spend time away from what you love doing, or instead of making small targets everyday, you want to get rich quick, then unfortunately

I will not be able to help you. I have not met anyone genuinely making money from forex and getting rich overnight. Forex is a volatile market. It can eat you up if you do not know what you are doing. You respect the market and let the trades come to you.

If you look at the formula “(5%*your investment)/50”, you will see that if you add your profits everyday and trade, you can grow your investment exponentially and pip value increases as well.  Patience Observation & Discipline:  these are the key words that you need to remember. 

If you do decide to trade the forex and learn through anyone that you choose, know this that your ultimate goal should be to preserve your investment.  If you do not know what you are doing, your money is going to be carried away by the big sharks in the forex waters.

Abide by the following principles:

• Be a Bull, be a Bear, but never be a Pig
• Patience Observation and Discipline are your keys to success
• Your investment is ultimate; losing it is not an option
• Small targets a day for a profitable trading life tomorrow should be your motto.

Happy Trading