What Is Forex?

Forex is short for foreign exchange, which is essentially trading in international currencies. The process works by trading a single currency for another and a specific trade price in an over-the-counter marketplace. To give you an idea of its size, since it is the largest traded market of any kind in the world, it is estimated that over $4 trillion is traded each and every day. To compare, the New York Stock Exchange has a daily traded turnover of about $70 billion.

To break down the process of how it actually works is that it is the process of purchasing one foreign currency, while simultaneously selling another, primarily for the purpose of speculation. The values of foreign currencies will appreciate and depreciate in relation to each other by the fact of changing factors of economics and political activities on a global scale. The goal of traders of Forex is to make a profit from these up and down moving values of one type of currency against another, by speculating actively on which direction the rates of foreign exchange are likely to move.

There is no physical location of a Forex marketplace, as all of the trading is done over computers on a worldwide basis. The market is open 24 hours a day from Sunday night through until Friday night. The trades follow the clock, starting from Wellington, New Zealand on Monday morning (their time), going on to trading in Asia, from Tokyo and Singapore, then moving to London, and ending Friday evening in New York. Then, the following week, it starts all over again.

The Forex market is influenced heavily by world events in the economic and political arenas, and trades will begin to occur as soon as events happen, since the market is always open. As a currency trader, it is important to be aware of this type of news, because these types of new news releases that affect various countries can give an indication as to whether their currencies will move up or down.

So in essence, the Forex market offers quite a few great advantages for someone who is dedicated and is willing to study how the market actually works. The reasons behind Forex being so wildly popular all over the world fall into several categories.

The Forex market is very accessible to everyone who wants to participate. All a person needs is a computer that is connected to the Internet, and a hookup to a broker with a trading platform. It is not difficult to find a reputable broker, but you should take your time and find out all that you can in regard to the broker’s background and capability of helping you get started.

The fact that the market is open 24 hours a day gives a trader the opportunity to react at any time that political or economic news moves the market in a direction of opportunity.

The gigantic volume of trades on a daily basis makes it the most liquid market in the world, which means that with normal market conditions, a person can buy and sell currencies as he or she pleases. A person will never have to worry about a currency not being available for trade.

The focus of Forex is very narrow, unlike the stock market with thousands of different stocks to worry about. The Forex market deals with just eight major currencies, more or less, which means very little room for confusion, and it is easier to get a good idea of what is going on at all times.

Due to the sheer size of the market, it is impossible to corner the market, thus influence pricing just from that standpoint. Even the large multi-national financial institutions cannot influence this behemoth of a market for very long, so this makes it very attractive for the smaller investor, as it levels the playing field.

Making a Profit

The object of trading in a Forex market is to make a profit. Profits can be made if currencies are going up in value, or if they are going down in value. You just have to determine which way the trend is going to go. Once you are trained properly, you will be able to place trades with some degree of certainty that the odds will weigh in your favor.

A person does not have to be wealthy to trade on the Forex market, as minimum amounts can range from $25 to $200 to get started. The reason that the initial investment is not very large is because of leveraged trading. What that means is that a person can invest $25 and be trading as much as $5,000 worth of currency. Of course, this carries great risk, because if you make the wrong decision with leveraged money, you will owe that money. Of course, if you make the right decision, you will make a nice profit.

How the Process Works

In Forex trading there is always something going on, as every shift and movement of the currency values can mean a profit or a loss.

In a general sense, there are eight major currencies that are the most traded:

USD - US Dollar

EUR - Euro

GBP- British Pound

JPY - Japanese Yen

CAD - Canadian Dollar

CHF - Swiss Franc

NZD - New Zealand Dollar

AUD - Australian Dollar

Now, the system works by trading always in pairs. Each trade involves the simultaneous purchase of one currency, and the sale of another currency. The trading involves 18 main currency pairs, which are:

USD-CAD EUR-JPY

EUR-USD EUR-CHF

USD-CHF EUR-GBP

GBP-USD AUD-CAD

NZD-USD GBP-CHF

AUD-USD GBP-JPY

USD-JPY CHF-JPY

EUR-CAD AUD-JPY

EUR-AUD AUD-NZD

When an individual buys or sells a currency pair, each particular pair has a bid and an ask rate. As an example:

Pair Bid Ask

GPB-USD 1.6134 1.6137

Bid means sell, and Ask means buy, so an individual could either sell at the bid rate, or buy at the ask rate.

Sell the pair at the Bid Rate Buy the pair at the Ask rate

Meaning: Meaning:

Sell 1 GPB/ Buy 1.637 Buy 1 GPB-Sell 1.634

Since the movement of the values of these pairs is always changing, there are two opportunities for profit. Profit can be made by buying a pair, and then selling when the value moves up, or selling a pair (selling long in a stock transaction), and then buying at a lower rate (similar to selling short in a stock transaction.)

Obviously, the key to being successful is knowing what trends will cause the values of these pairs to move up and down, and making your decision based upon your research and what influences will cause the values to move in which direction.

Training for the Beginning Forex Trader

When a person is getting started in Forex, you will have to find a broker who you can trust and work with. There are some things that you should be looking for when choosing a broker.

Look for a broker with small spreads. The spread is the difference between the price at which a currency can be purchased and the price at which it can be sold at any particular point in time. The spread is measured in pips. Brokers for Forex do not charge a commission, but this difference in pips is how they make their money. As you compare brokers, if you chose a broker with a lower spread, this means you will save money in your trades.

You will also want to investigate the quality of the broker. In many cases, Brokers are affiliated with large banks or other financial institutions, simply because of the large amount of capital that is needed in trading and financing the margins. The broker should be regulated by the Commodity Futures Trading Commission (CFTC) and be registered with the Futures Commission Merchant (FCM).

Most brokers provide tools that you can use for trading. These tools include computerized trading platforms; both practice modules, as well actual access to the Forex market itself. The practice modules will offer a chance to operate with real time Forex currency pairs, yet use practice money. This is for the purpose of learning how to use the trading platform and learn your way around the process before you actually commit any money of your own.

A full service broker will also provide economic and political sources of up-to-date news and commentaries, as well as links to every topical source of information that could have bearing on how you trade currencies. You should research different brokers and find out what they offer and why, as you make your decision to enter this market.

Examples of Leverage

Leverage is a term that is used to describe the amount of margin, or loan that you will be able to utilize in your Forex trading. Leverage is considered to be a key factor with Forex, because the differences in prices are set to just fractions of a cent, thus at those miniscule differences, it would be difficult to make any money. Leverage then is the ratio between total available capital to actual available capital. This determines the actual amount of money that will be lent to you by the broker.

For instance if you are given a leverage ratio of 100:1, that would mean that you would be loaned $100 for every $1 of actual capital you have. Many of the brokerages will make available as much as 250:1 leverage for trading. You should keep in mind, however, that the lower the leverage, the lower the chances are for a margin call to be made, and take that into consideration.

Types of Accounts

There are several types of accounts that are available, depending on the amount of capital that you have to commit to the effort of Forex trading. For a person with little or no experience in Forex trading, the usual place to begin would be with a mini account. A mini account would require you to trade with a minimum amount of capital, say an amount of $300, for example. This amount would offer you a high amount of leverage, which you would probably need to make money on this amount of capital.

A standard account would be in the $2,000 minimum to get you started, yet would require less leverage.

Finally, there are premium accounts where different higher levels of capital bring the investor more perks along with additional services and tools. After studying the different types of accounts a broker has to offer, you will want to work with the right broker who can offer you the best type of account for your needs.

Brokers to Avoid

There are some brokers to strictly avoid, and you won’t necessarily know who they are at first, unless you ask around, find out from forums and fellow traders, and do your homework. If you are working with a major broker from a known financial institution, you really should not have a problem with them, but it is only the specialty brokers, of whom you know nothing, where you can run into difficulty.

One thing that a broker can do is to buy or sell prematurely near preset points, only to increase profits for themselves. This is called hunting and sniping. This basically serves to increase their margins at your expense, and while it is unethical, it is not entirely illegal.

Brokers can also make a margin call at any time that they feel that they are in jeopardy in a trade. Say you initiate a trade with borrowed money, and your position takes a steep dive before rebounding back. In cases like this, some brokers will liquidate your position on a low margin call like that, even though you might have enough cash to cover it, leaving you in a precarious position. Once again, if you deal with a reputable broker who is well known, all of these procedures will be spelled out in advance for you.

Signing up for an account with a Forex broker is similar to getting an equity account with a stock brokerage firm, and the only difference here is that you will be required to sign a margin agreement. The essence of the language in an agreement such as this is that you agree and understand that you will be trading with borrowed money, and that the brokerage firm has the right to come in and take action with your orders to protect its interests. Once you sign up, then you will be ready to conduct trades right away.

Practice

Most brokers will have a practice account. This is merely a way for you to get used to the software that is offered by the broker as well as learning how the market moves and how you enter into it and make trades. You will experience the actual marketplace, but you will be using “play money”. This practice training will acquaint you with the moves you will make, the research you will do, and the actual trades that you will experience, just for fun. But keep in mind that Forex trading is like learning how to ride a bicycle. Things will be a little wobbly at first, but once you get the hang of it, the ride gets smoother as you ride along.

Most brokers will have lessons where you try different kinds of trading strategies in order to familiarize yourself with them as you actually apply them to the model. This is an excellent way for you to get started and be ready when it comes time for you to trade currencies for real.

The Most Fundamental Forex Trading Strategy

The most basic strategy that is used by most traders at some point in their careers is the strategy of following trends. This is a popular method of staying on track, it is simple to identify and use, and it can many times get you out of trouble if you have buy and sell rules that were poorly thought out or executed.

There is a saying among the seasoned Forex traders and that is that, “The trend is your friend.” This has proven to be true over years of time, and those who have used this basic philosophy have found it to be a major stepping-stone to further success in Forex trading.

There is no perfect method of trading in Forex that would bring in perfect results every time. That has never happened, and nor will it ever happen. Since we don’t live in a perfect world, we need to learn how to trade in a world that is not perfect, and come out on the other side relatively unscathed. Trend following is a method that helps to keep the Forex trader on track in spite of miscalculations, market aberrations, and other distractions that bring about imperfect results.

It is a fact that a trading strategy that uses trends as its basic premise is used, and has been used, by the majority of successful Forex traders for some time, as a fundamental method of covering the bases.

The key to riding a trend is knowing when it is beginning and when it is going to end, and of course, that is the question that everyone wants answered. One main strategy that is universally accepted is that when you find you are in a trend that is moving upward, you should be in a buying mode. If the trend is moving downward, you should be in a selling mode.

Trading Style

Veteran traders will tell you that any trader should, and will, develop their own style of trading, as there are several methods that can be adopted. The reason for this is that as a person becomes successful in trading, he or she will note what steps were taken that caused the success to occur, and repeating those tactics will develop into a style of trading. Personality and financial capabilities also have a lot to do with trading style.

Many people will try to develop a trading style that is not natural for them, but you should let it develop, and not try to force it. Keep studying and experimenting, and try different styles while you are in your practice mode, and that will help you find the style that puts you most at ease.

Day Trading – A Style

Day trading is a style used on Forex where trades are transacted and completed within one day. The length of the trade can be from a few minutes to a few hours, from the opening of a trade to the closing of the trade.

This is a popular method and style of trading because it is simple, and it brings quick results. It is possible to operate in the style of day trading because it’s likely to have the trader making a profit in a short period of time with a small amount of money involved.

There are a couple of factors that must be present if a person is to be successful in day trading. The first is that the individual must be able to make the correct forecast as to the price movement, as there are several factors that influence the volatility of the price movement. This is where the understanding of trends comes into play. The situation of the immediate market must be tracked, facts collected, and conclusions must be made about short-term actions of the currencies.

Secondly, the trader must be attentive, and be at the scene, not being involved in other activities, because he or she might miss crucial points where action needs to be taken. It will be important to act fast so the entrance and exit points can be well established and acted upon.

One tactic used in day trading is called scalping. When a trader uses scalping, several positions are opened at once and monitored simultaneously. The idea is to get in and then get out when a small margin of profit materializes. The trades are closed with just a few pips of profit on each trade. The accumulation of earnings from all of the different trades adds up, and becomes the major source of income for the trader.

An additional tactic when it comes to day trading, is news trading. In this method, the trader monitors the appropriate news regarding a particular country’s currency, political, or economic situation. If he or she can be in on the trend of the news, the direction of a currency can be anticipated. For example, if it is learned that a particular country is going to take a certain action in relation to the currency of that country, it could indicate that the currency will advance or decline in price in the short term.

Day trading can be a source of income that is more or less planned, once the day trader gets the hang of things. There are advantages and disadvantages of day trading, however:

The advantages of day trading:

* Day trading can be carried out with smaller sums of capital.

* The trader can stop the action at any time.

* The risk is spread among several trades, and if the market is judged to be moving in the correct direction, it can be very profitable, but the risk is minimized.

The disadvantages of day trading:

* There can be significant emotional pressure.

* There is a lack of time during a trading session.

* The trader has to devote their entire attention to trading during the time the trades are open, and act quickly when there is a change.

In conclusion, day traders have to stick to their craft and resist interruptions, and react quickly on every trade that is in the hopper.

The Style of Intraweek Trading

Intraweek trading simply uses a longer period of time to have trades remain open, as it may seem at times that the market is not doing a thing, but of course that is not true. The Forex market is always doing something and the following characteristics are found in intraweek trading:

* Trades remain open for ten days.

* All trades are geared to take as much profit as possible on a movement by the market.

* At most, no more than two positions are opened in a week’s time.

* There is a higher requirement for funds to be put into the trades than that of day trading.

* Multi-hour charts are used and followed during the time that the positions are open.

The Advantages of Intraweek Trading:

* There is not a lot of daily pressure put on the trader, as market moves are gradual.

* There can be very high profitability.

* There are periods of free time that exist during a session of trading.

The Disadvantages of Intraweek Trading

* Larger amounts of funding are required as opposed to day trading which can be done with minimal amounts of capital.

* The trader may be outside of the market during a correction in a trend.

* It is not possible to stop a trade at any given moment.

* The trader must hold an open position in a currency for 24 hours.

These two styles, the day trading style, and the intraweek trading style are two of the most popular styles, as they are easy to implement and track. Of course, there are other styles, but these are two of the most fundamental of them all and many Forex traders use them.

The Art of Controlling Losses With “Stop Loss” Commands

Stop loss is simply a way of controlling just how far your trade will go on before it is stopped by this automatic command. The idea is to limit losses when the market goes in the wrong direction, so you don’t lose all of your capital in one trade. It is only used in open positions, and when the price of a trade is going in the wrong direction, it will close the trade automatically.

The value of the stop loss command is that the trader is not always able to monitor all of the trades that are on the board at one time, so the stop loss points can be set prior to opening the trade. That way the trader knows that if he totally forgets about the trade, there will still be a salvageable amount of funds left. If the trade goes the way that the trader is betting on it going, then the stop loss is a moot point, and it will go away when the trade is closed out for profit.

There are basically three types of stop loss settings that can be made, the fixed stop loss, the sliding stop loss, and the combined stop loss.

The fixed stop loss is initiated when opening a position. It cannot be changed until the deal is closed. For example, the trader sets the fixed stop loss position at a point that is 10 pips below the current bid price, and so it remains until the price actually reaches that point (a slight loss, but not a disaster), or the trader closes the trade manually, hopefully at a profit.

The sliding stop loss can be modified at any time, depending on the movement of the prices. Also called the trailing stop loss, it is modified, or sliding, and resets itself as a price moves along a continuum. In this way, there is some discretion as to whether a stop should really stop, or continue a bit further if the trader expects there to be a correction. It can be used as a reminder for the trader to pay attention, and modify it as he goes.

The combination stop loss can set stops at either end of the spectrum to guard against a premature stop, but by using a trailing technique, and giving it limits to an appropriate level so that if the market corrects, and goes the opposite way, you don’t miss out on a big move of the market.

Risk Management In The Forex Market

One of the keys to successful trading in any market situation is learning the ability to manage the risk appropriate to the medium in which you are trading. This would be true whether the trader is in the stock market, the futures market, and especially the Forex market. Due to the fact that there is so much leverage available to the average Forex trader, it is incumbent upon the trader to have a definite system for handling the money that is being put toward the Forex investments.

The Forex trader must be disciplined to the point that he or she follows a system as to how much money is to be committed per trade. In fact, the ability of the trader to manage losses is as critical as having success in the management of winning trades.

There are three basic principles that anybody that is thinking of trading with Forex should learn and understand before they begin trading.

1. Even though the Forex market is exciting and can be a lot of fun, it must be kept in mind that there is risk involved in trading and it is possible to lose money. So rule number one is very simple: do not trade with money that you cannot afford to lose.

2. The second rule is to never borrow money to go into trading with Forex. This does not include your leverage money that is provided by your broker.

3. The third rule is to set up and stick to a budget. Once you hit the amount of money that your budget says you can trade, that is when you stop for the day.

It is best to plan for a conservative investment strategy. Learn a sound strategy, which you know that you will be able to get a reasonable result from without risking too much. Never risk your entire capital base on one trade. While it is possible that one trade could make you rich, it is just as possible that it could make you very poor too, so take your time and go slowly.

When you make conservative investments, you will be playing the odds and if you do have a setback, you will still have the time to study what happened, and then be able to improve your trade techniques to overcome whatever caused you to lose money. If you don’t take the time to make conservative investments, you may be out of Forex before you have the time to make that adjustment.

There are many choices available in Forex trading and investing conservatively in several different trades can hedge your bets and give you some security in the process. When you have losses, look at them as educational events and learn from these instances. Look at losses as stepping-stones to success, rather than getting worried too much about them.

By starting out slowly, and then scaling up as you go, you get more experience as you go. Take your gains for a while, and reinvest them in the same conservative manner, until you have built up a nice nest egg, and then your investment capital will grow.

As you continue to invest in small, incremental amounts, your knowledge and experience will grow exponentially, and you will be wiser and more stable for the experience. Remember the difference between gambling and trading. Gambling is betting the whole amount of your capital on a big trade, and usually being very disappointed by the result. Trading is operating with a calculated risk, but having it based upon solid information, so that with small gains and minimized losses, you can build toward the future in a measured and thoughtful manner.

When continuing to operate your Forex investing strategy in this manner, you will minimize the worry and uncertainty, and you will be learning valuable discipline and lessons on investing that will stand you in good stead for the remainder of your Forex career.

Some Things That Are Important to Know in Order to Succeed

Forex trading with currency pairs is very simple to trade, but they are not that easy to make money with. You are going to have to do your homework. Don’t fall for all of the hype from all of the people clamoring to sell you programs that make this process totally automatic. The only thing automatic about those kinds of programs is the flow of your hard-earned dollars into the pockets of the people selling you those programs.

You have the opportunity here to make a nice income, but only if you take the right steps and educate yourself about how this market works as well as learning how to digest the correct information.

The first thing that you are going to have to learn about is how to read the charts. Reading and understanding the charts are your primary secrets to success in Forex, as they are a valid resource in Forex trading, and any solid strategy is going to involve this process.

When people see “beginner” on any tutorial, or lesson series, they automatically assume that the process is going to be easy. Well, for anything worthwhile there is going to be a learning curve, and that is certainly true for Forex trading. While the learning process is not necessarily “easy”, it is not exactly rocket science either. Think of “beginner” as simply meaning that you are going to start at the beginning and go from there.

When it comes to the charts, their purpose is to allow you to predict the future movement of a currency by the analysis of its past movements in price, and this is the crux of what we need to know in order to come out ahead in a Forex trade.

You should not be intimidated by the charts, even though they can get detailed, but they are really not that difficult to deal with, and you will find that when you learn to have the ability to decipher what they mean, an entirely new world will open up to you in regard to Forex.

Technical analysis is what the charts allow you to do, in taking stock of what is really going on, as the charts measure the price changes over a given period of time. The analysis is based on a set of rules that give parameters for measurement of movement and what it means.

The one thing to take from all of this is that the simplest of rules always gives the best results. By application of the same rules to a situation it is easier to measure the past in order to predict the future.

The most fundamental form of technical analysis is to discover support and resistance levels where a price has made a struggle to break through in the past, as this is the best way to use charts in a market that is volatile in nature. This process is used quite extensively in the identification of trends, as well.

Another good use of technical analysis and charts is to track a moving average of pairs and their pricing. A common tactic is to look at the average price over the last 10 days. With this, you can see what the price is doing over a set period of time that has elapsed.

A third pattern that is simple enough is called the Relative Strength Index or the RSI. In situations where the market is either oversold or overbought, you can get an insight into what might be a soon-to-be reversal in the trend of a price.

Technical Analysis and How It Tells a Story

Technical analysis is really the study of investors and how they react to different situations. The movement in price is the result of the behavior of investors during specific situations. By studying these results, we can then predict what might happen in the future if these conditions and situations occur again. These tendencies and actions by investors that cause prices to move are called sentiment. Chartists consider sentiment to be the number one most significant factor when determining the future of Forex prices. After all, the prices themselves don’t have brains, emotions, and egos, so the investor sentiment is the prime factor.

So technical analysis is simply the reading and analysis of the charts to determine and predict the price movement of the Forex pairs, which helps us to develop our strategies for trading. This is why it is important for you, the Forex trader, to develop a certain understanding and expertise in being able to understand the charts.

There are several ways to illustrate the charts, and it is up to the trader to determine what will work the best. The charts that will give the best illustration of trends early on in the game are what you are looking for here. The following explanations are the most widely used among successful Forex traders.

Line Charts

A line chart is really a graph with a line that intersects the various points that mark the price on a certain date. The line travels horizontally across the page from left to right so you can easily see the ups and downs of the prices.

Typically, a line chart is a day-by-day illustration of the movement of prices to give a single daily value.

Bar Charts

Bar charts will show vertical bars that will illustrate the price of a pair on a given day, as well as also being able to show the high and low price of the day. The vertical bars illustrate the price of the item for that day by the length of the vertical bar, showing from low to high. There are “notches” on the vertical bar, with the left notch showing the price at the opening of the day, and the right hand notch illustrating the closing price for the same day.

A bar chart usually can be modified to show daily, weekly, or monthly bars, which allow a comparison of how the price is relating to different periods of time.

Candlestick Charts

A candlestick chart is a further adaptation of a bar chart, in that price movements are illustrate as elongated vertical boxes. An up day would be shown as an empty or white box, and a down day would be illustrated by a black or shaded box. The length of the box would show the total movement of the price on that day, and the wick on the candle shows the range for that full day.

Candlestick charts are normally plotted on a day-to-day basis, but they too can show weekly and monthly illustrations in order to view longer periods of time for the fluctuations of prices. Candlestick charts are a mainstay for many Forex traders due to the information that is available at a quick glance.

It is thought that the Chinese and Japanese have used the candlestick methods in the rice trading business as long ago as 4,000 years, as the candlestick method gives a very clear picture of what is happening to a price over a period of time, and it leaves a pattern that is easy to read and recognize in most cases.

Working With Support and Resistance

It is very important for a trader to understand the concept of support and resistance. Prices are always dynamically moving up and down, and unless there is some sort of discipline that can be engaged in the process, things tend to stay in a state of helter-skelter.

Support describes the level of a price where the pressure of buying is strong and powerful enough to overcome the pressure of selling. When the price reaches a level of support, it is perceived that more buyers are moving into the market and buying, which will stop the price from falling and begin to move it into the ascending ranks.

Resistance is just the opposite scenario from support, where the selling volume begins to exceed the purchasing volume (supply is beginning to exceed demand.)

Trend lines can then be set in place to represent a period of time and the trend becomes evident. When viewed over a period of time, a trend can be a prediction of future activity to a large degree.

The Trend Concept

Forex trading in the longer term is all about trends. If the trader can learn to see trends and follow them, the results will be good, and profits will be more abundant. Since prices don’t really happen in straight lines when you plot them over time, the chart will illustrate a straight line of the trend. The Forex trader has to see when the trend is going to change and he or she is able to discern that by being able to read the charts properly it will be possible to find the changes in trends.

Trends are directions that these prices take, and they are valuable in terms of knowing how to relate to the changing prices and their patterns. As most trends are examined, it becomes apparent that you are really looking at past performance, and attempting to use that as a gauge for future performance. That is not always accurate, but it is really all that you have.

Trends do give little clues as to when the prices begin to change and move in the other direction, and that is all that a good Forex trader needs to know, because with that information, it is possible to see similarities in past performance where enough similar patterns exist upon which a premise can be built. The premise can become an action point if it is seen to work in more situations than not. Then you have a way to determine when the best time will be to initiate a trade and when the best time would be to close a trade.

This is why the study of trends is so important, and why most of the major charting efforts and conclusions are based on trends and how they act under a given set of circumstances. They change when they are influenced by geopolitical, economic, or societal conditions, as well as the laws of supply and demand. Trends offer somewhat predictable actions based upon sets of rules that are applied to the trends so that we, as Forex traders, know when to trade.

Moving Averages

The most widely used indicator that is used by Forex traders is the moving average because it takes into account how prices have been moving over a range of days, weeks, or months. Areas of short-term resistance and support can be easily picked out of the graph.

The main advantage of a moving average graph is that it smoothes out the progression of the data over time and offers a clearer picture of the trend presently. It also shows that moving average signal points can readily show what the trend is doing. The only downside is that the indicators are lagging indicators instead of leading indicators.

So, in the final analysis of moving averages, there are two types:

1. The simple type of moving average chart shows the average price over a specific range of time. As an example, a 60 day moving average chart will show the average mean price from the closing points over the past 60 days.

2. The exponential moving average chart averages the last number of days’ closing prices, but assigns greater weights to prices in the most recent decided number of days, making the chart more sensitive to recent prices, negating some of the lagging influences.

Putting Together a Strategy for Trading Along With Entry and Exit Signals

Given that the best way for a trader to succeed is to have a disciplined and measurable strategy, technical analysis has proven to be the best way to go. The beginner has to learn this in the simplest of ways, even though more complexity can be built into anything in an effort to gain more finite results, and thus better predictive qualities.

But, remember, the simplest is the best approach, so in this beginning exercise we are going to stay with that premise. Even though the strategies presented here are “simple” compared to more advanced ones, these will work very well in helping the Forex trader to not only get started in a meaningful way, but also to become profitable and stay that way. Once you have established your patterns and preferences that work, you will be using these techniques more and more, and you will be well on your way to success.

The place where people tend to get into trouble is where they deviate from proven methods and start to get a bit overconfident in their own abilities. They simply have to settle down and realize that each trade is basically a new ballgame, and that strict principles still have to be followed. If you have a system that is working, you will have to tell yourself that it is more the system, and less of you that is contributing to a successful trade.

By using the following strategies, you will also learn how to discover entry and exit signals, telling you the times when it is good to enter or exit a market. Without these indicators, it just amounts to guesswork and gambling. However, by following proven techniques, you stand a much better chance of success.

The Moving Averages Strategy (continued)

As has been mentioned, the understanding of moving averages will give you a clue and a hint as to the overall direction of the market, and it helps to identify a trend. A trend will show you a good entry signal. The disadvantage of moving averages is that they are lagging indicators, and only show primarily the past. So, you will have to employ some short term moving average charts, such as a 5- or 6-day time span to show a more current pricing structure.

Traders use moving averages as their most basic and most utilized indicator of trends. As the moving averages progress, they become the trend line, ever adapting to the changing of prices, showing trends as they occur.

Now, for the very important signals, which you certainly don’t want to miss:

* If the closing moves anywhere above the moving average, this is a buy signal.

* If the closing price goes below the moving average, this is a sell signal.

Using the Crossover Strategy of Moving Averages

This is an additional strategy that is a great trend identifier; only it adds another quality that is important in investing, and that is momentum. This method employs two moving averages, a “fast” one and a “slow” moving average. As an example, the fast moving average would use 10 bars on a chart, and a slow moving average would use 15 bars on a chart. The slow moving average would then use a greater number of days in its calculation than would the fast one.

The crossover is a very basic signal and is more preferred by many investors because it eliminates all emotion in the process. The standard form of a crossover is when the price of a currency moves from one side of one particular moving average and then closes on the other moving average chart.

Investors can discern changes in momentum when price crossovers occur and this can also be used for entry and exit signals.

The following signals from the Crossover Moving Average Strategy Should be noted:

* When the moving average from the fast chart crosses the slow moving average from below, it signals a buy.

* When the moving average from the fast chart crosses the slow moving average from above, it signals a sell.

The Relative Strength Index Strategy

This is still another overbought/oversold strategy that reflects the supply and demand of a particular currency pair. This creates an index that is used to determine comparative changes between higher and lower closing prices. Information is then provided that assists in giving detailed entrance and exit points, based not only upon the moving averages, but also on the momentum of the trend, which helps to be more accurate in getting it right.

The RSI is depicted as an oscillator and it has a range between 100 and zero. The numbers of 30 and 70 are significant because below and above the numbers, the particular item is considered to be overbought or oversold. So, any value that is over 84 is going to be an automatic sell, because the currency is seriously overbought. On the contrary, any value that is under 15 is considered to be a very oversold situation, and it is an automatic buy signal.

So the following signals from the RSI indicator are worth remembering:

* When the 70 indicator is crossed from above, that is a sell signal.

* When the 30 indicator is crossed from below, that is a buy signal.

The Williams Percent Range Indicator

The Williams Percent Method is another Overbought/Oversold indicator. It also has an oscillator graph measurement that ranges from zero to 100. Alert signal lines are drawn at the 20 and 80 levels

The following results from the Williams Percent Range Indicator Reveal:

* When the indicator displays a value above 80, that is a sell signal.

* When the indicator displays a value below 20, that is a buy signal.

The Strategy of Turtle Trading

The Turtle Trading Strategy is a very popular trading strategy and is used quite a bit by Forex traders. The summary of how it works is that it evaluates the previous 20 days of trading and the highs and the lows of the prices during that time period.

Things to Note in Regard to Turtle Trading:

* If the current prices move higher than the previous 20 bars, then that is a signal to buy.

* If the current prices move lower than the previous 20 bars, then that is a signal to sell.

The Moving Average Convergence Divergence Strategy (MACD)

The MACD strategy is another very useful trend identifier, and more importantly it gives good signals pointing out when to buy and sell. It basically takes advantage of the relationships between two moving averages of prices.

Most of the MACD models use a 26 bar exponential moving average (EMA) and a 12 bar moving average. A chart then plots the difference, which is then plotted on a chart in a moving line above and below zero.

An EMA representing a 9 bar moving average, which is designated as the “signal line” is plotted on top of the MACD and becomes the trigger for pointing out the buy and sell signals.

The items to be remembered about the MACD are as follows:

* When the signal line crosses over from the MACD from below, then it’s time to buy.

* When the signal line crosses over from the MACD from above, then it’s time to sell.

The News Trading Strategy

Many Forex traders who are beginners quickly learn that events in the news can strongly affect the price movements of currencies. Since the currencies that are being traded represent many different countries from all around the globe, these newsworthy items will affect different currencies in different ways. The news may be positive for one currency, and negative for another.

You can make time in your schedule, ideally the earlier in the day the better, to sit down and get the latest economic news about the country or countries to which the currencies belong that you will be trading that day. This way you will have a head start on your news knowledge for that day. If the news is earth shattering, you can jump right on your trading platform, right then and there. If it is not that urgent, you can tuck it away for further reference, but you will have formed a good habit that can help you immensely in your efforts.

Traders ignore the news of the world at their own peril, because prices are so sensitive to the news. Announcements about corporate mergers, unemployment rates, interest rate changes, and banking news can all affect the price of currencies in a very quick fashion. Basically a good news event is a buy signal, and a bad news event is a sell signal.

Becoming Good at Trading Forex

As you may have discovered by now, there really are logical answers that make up the strategies in the process of making intelligent decisions when trading Forex currencies. By being labeled a “beginner” you are not being given a title, or being put on notice that “beginner” means that the process is easy. It just means that you are at the beginning of the process. Like most complex processes, you will learn best by doing, much like learning to play the piano. A piano player does not begin that process by launching into Mozart and sounding like a concert pianist right away.

Any process that is worthwhile is developed into a process for a reason. Usually, the reason is so that the important fundamental steps are taken into account, so that the final result is predicated on the correct steps being followed.

One of the best analogies is that of sports, where an athlete must always learn the “fundamentals” of the sport before any progress can be made towards advanced play. So the fundamentals are practiced over and over again until they become second nature and can be performed without thinking about the process at all.

That is the miracle of the human brain, in that once a process is ingrained enough in our minds, it does become second nature and we can perform it without thinking too much about it.

This process is the lifeblood of learning how to trade in the Forex market, but the process is not nearly as complex as many of the processes that people pursue in life, such as the piano example given earlier.

In Forex, you don’t have to spend near the amount of time learning the process, or even practicing it, until you can begin trading for real.

Psychology of Trading

It is good for a trader of any commodity to understand the various psychological drives behind the ins and outs of trading. The purpose of all of the tools that are provided is to take action and take as much of the psychology out of the equation as possible. While you never will get all of the feelings, egos, doubts, and euphoric victories out of your system, you do want to reach a stage of detachment in this interesting field.

The following points are simply to help point out some of the factors where psychological influence can hinder your effectiveness with your trading, so they would be items to avoid by moving these influences into the rules that you set up in your plan:

* You must make it a point to avoid getting too emotional about your trades and their meanings. They are what they are, and your job is to follow your rules for trading and the odds will be in your favor.

* Do not trade at all whenever you are under emotional stress. Protect as much of your capital as possible by closing your trades out, or set your stop losses as close as you can to the general movement of the market.

* Make a project out of using your test platform to learn the skills where you are not using real money. Once you learn the skills for your market moves, the emotional aspect will be minimized.

* Learn to back-test and forward-test in order to be sure that your methods work as they are supposed to work. Once you see that everything is in place, your emotional stress will be lessened.

* Be cautious about using the techniques of other individuals until you have tested them on the “test” platform. What works for one person, may be an emotional nightmare for another.

Avoid the Scams and the Frauds

Unfortunately, like many other fields, the Forex field is rampant with entities that claim that they have the Holy Grail for Forex, and that all you have to do is buy this product or that product, and your Forex worries are over. They claim that everything is so “automatic” that all you have to do is turn it on and your wealth is assured.

This is why it is even more important that you understand the fundamentals and the rules that many people have used on their own, without all of these “modern miracles” that claim Forex nirvana. If you know the real truth, then you won’t be scammed by the half-truths that are out there waiting for the gullible to fall into their trap.

These con artists are easy to avoid, if you simply perform your due diligence on their company, their track records, and their history. It is really fairly easy for a company to put up a very convincing website, loaded with “testimonies” of users, and results that look good, but are probably stretching the truth quite a bit.

The first thing you can do is to do a Google check on the company, and put “scam” after the name. Many of the scams will have page after page of re-sellers who are all touting the program, just to get their commission to hawk the product themselves.

On the other hand, a reputable Forex broker or a purveyor of software will have plenty of referrals that you can easily verify and check up on. For software, a beginner is best off to rely on software from the broker who he or she is signing up under.

Most websites of credible brokers and serious professions are going to give you facts and resources where you can get information. There will also be places where people can learn about the different technical analysis methods of tracking the market, and just a good all round source of education for the beginning trader.

Beware of the websites that show bags of cash and lots of glitz to get your attention. Nothing comes from nothing, and the claims of these organizations are mostly bogus on the face of their language.

A good way for a beginner to get started is to find some independent information at the local library, or from a broker who is in the local area and is housed in a brick and mortar facility. Once a person understands how Forex works and the methodology behind it, then they will be able to spot the scams nearly immediately. So don’t settle for second best, take your time and progress at your own pace, and you will gain more ground that way because you will be well-prepared to move on to the next level.

Your Own Business

All told, the Forex market is not going to go away. There will never be a shortage of product with which to work, or a place to sell for a profit. Think of the process that you would go through to learn a profession of any kind. It takes very specialized training in any field to be really good at it, whether it’s engineering, medicine, plumbing, or electrical work.

Any time a profession requires specialized knowledge, there is a reason. You simply have to know what you are doing, or you will fail in that profession.

There are people that are trading in Forex and are sitting in their home office, which they have set aside for this purpose, and they are earning an income equal to, or exceeding, that of any professional on the planet. The main reason for this is that they have learned the fundamentals, some of the most prominent that have been discussed here, and they have learned how to take action and implement them.

You have the same opportunity as anyone else, but first you must take one step that has not been discussed yet in this book on Forex. Forex is not for everyone, as the concept itself is outside of most people’s sense of reality. You must sit down in a quiet place and take a hard look at yourself.

Take a blank piece of paper and list in one column the things that you wish to obtain, and then in a second column, list all of the obstacles that you feel that you have in obtaining your wishes and desires.

Your first big hurdle is to investigate how much of a price it is going to be to learn how to do the practical application of the “stuff” it is going to take to learn all of this. How do you learn? Are you able to learn on your own, or do you learn better in a classroom setting with others around you, who are addressing the same subject matter?

One thing is for certain, and that is you will have to get the moves down to a science before you place your hard earned money on the table and jump into Forex. It might be that a local junior college, or a brokerage offers classes in Forex. Or there may be legitimate online venues where you could take classes online. There are many major universities who offer regular coursework for free online, so there are probably many ways to get the knowledge.

This is called getting prepared, and when you have a relatively well-rounded feel for what is going on, you can get connected to a well thought of brokerage and begin to practice on their “practice” program. If you can remember how it was when you first learned how to ride a bike, or when you took violin lessons, well-you get the picture. In other words, get well grounded in the fundamentals, then you will be prepared.

Keep It Simple

When you are getting started in Forex, choose one or two simple methods of tracking your trades and charting your strategies. Be sure you know how to arrive at your entrance and exit points in your trades. You should also be very familiar with how current events affect the currency that you are trading, as that can make or break a good trade if that is not taken into consideration.

Many people naturally start out by learning how to day-trade, because it is relatively easy to learn, and you only trade for short bursts of time. Once you get the hang of it, day trading can be a viable way to earn a part-time or a full time income. It is possible to have several trades going on simultaneously, and have them close out at different times, only trading for a few pips of profits. If you have some of the trades that don’t pan out, you haven’t lost that much, and it’s a good way to learn.

The fundamentals of day trading are the same whether they are used here or with more complex and longer lasting trades, so that makes day trading even more convenient and a good learning experience.

Be sure that you master the different charting techniques as far as understanding how they work, and the principles behind them, so that they make sense to you. A good exercise is to take data of a trade history of a currency, and make a line graph by hand and plot the points on a graph. Then attempt a candle chart with the same data. Then give a moving average chart a chance, and even try a MACD chart. They are not that complicated, but by charting them out by hand you will see the logic behind the science and how the enter and exit points happen. Once you have that logic down pat, you have progressed light years, as they say, from just knowing what something is, to knowing how that something works.

You do not have to accomplish everything at once. You may be interested in something like Forex because you do want to change careers, or earn extra money for a variety of reasons. Set your goals to learn bits and pieces of the entire process a little bit at a time. It is the old adage of how you eat an elephant, one bite at a time.

You really don’t have to know all that much about economics, banking, the theories of money, and the laws of supply and demand. You just have to know how the charting works and when you make a trade and exit a trade. In reality, that is based upon lots of things happening, but you will find that the simplest methods always work out for the best.