1. Focus on one or two Currency Pairs
First, focus on only one or two currency pairs. When you're new to forex trading, it's tempting to see opportunities in every pair, even ones you're unfamiliar with.
When I first started trading, I tried some of the more unusual currencies, like the NZD, AUD, and CAD. I didn't know anything about the currencies, so I found myself watching news events for a dozen countries, analyzing all manner of charts, and losing my shirt in new and exotic ways. I got into trades after they'd already passed and got hit by news events I never heard of. I managed my money very poorly. In short, my concentration, capital, and time were spread too thin.
Now I watch only a few pairs at a time, and they are usually overlapping pairs, such as the euro/yen and the euro/dollar. I see trades developing much sooner, and I'm better prepared to take advantage of them, as well as manage them once I'm in the trade.
As a beginner to forex trading, I believe that you should stick to one or two currency pairs. Which ones? I would advise you to go with the currencies that other beginning forex traders have traded most successfully.
2. Pick a Currency Pair that's a Winner
A couple years ago, I reviewed success rates for the 18 pairs with significant volume, and these were the most – and least -- successful for FXCM mini forex traders.
Let's look at the worst first. The Seven Deadly Pairs all have one thing in common: high volatility. That means opportunities for big profits – but also large losses. One of the seven deadlies, pound-yen is actually the fourth most popular currency among our mini traders. Its very volatility – and its popularity as a carry trade – makes it very tempting. But it can be brutal.
In the past three years, it has moved as much as 1,000 pips in a single day several times. Whoever bet right realized a very big profit. Whoever bet wrong probably got a margin call. Approach the Seven Deadly Pairs with extreme caution, and only after you've learned with other slower moving pairs.
Now for the Friendly Five currency pairs. Notice they're almost all Euro pairs. They also have one thing in common, with the exception of GBP/AUD, -- low volatility. But which ones do you start with? The GBP/AUD has shown good results, but I still don't recommend you begin with it. It is not highly traded, not very well known, and it has rather wide spreads. Actually, it seems to be the preserve of our best and most experienced clients – probably the reason it has shown good results.
The remaining 4 pairs are better known and, excepting the EUR/JPY, tend to be nicely range-bound.
Since these pairs have had strong support and resistance lines, they tend to create a lot of high-probability, low-risk trades. And, since they are very liquid, they have tight bid/ask spreads, making them inexpensive to trade, with spreads as low as 1 or 2 pips. As always in forex trading, you need to appropriately manage your risk as there is never a guarantee that profits will be made.
3. It's Your Choice What to Trade
Of course, you might have a good reason for trading a currency pair not in the Friendly Five. For instance, when I started trading forex, I went with USD/JPY.
Why? Simply because I had lived in Japan for two years. I followed a lot of Japanese news and became familiar with their major economic indicators and events. So I thought I had a good head start on understanding the yen pairs.
As I began trading the yen, I got to know some of its price patterns. First of all was the patterns formed by the carry trade, the major factor in most yen movements in the decade before the financial crisis hit. Speculators around the world had been carry trading for years, borrowing low interest rate yen to buy high interest rate Australian dollars or British pounds and earning the interest differential. This trading seems to move the yen pairs in an almost predictable pattern.
You can see the gradual build-up, as speculators buy and create long positions, earning large amounts of interest. Then *THUD* the speculators get spooked all at once and cash out, and the price falls off a cliff. I got to be familiar with this pattern, as well as the events that can trigger the price drop.
All that changed with the onset of the financial crisis in 2007. Since then, I've learned the new patterns of risk aversion in the yen. Since I watch the same currency all the time, I am familiar with its characteristics, even as they change over the years.
4. Forex Trading Research Is Vital
That much I learned by simply watching the price charts and actually trading. But trading experience takes you only so far. To improve my trading I had to know a lot more about yen behavior and the Japanese economy. The importance of sales reports for Japanese convenience stores, for instance. Or how during my evening hours, when it is daytime in Tokyo, an unusually large amount of volume comes from individual forex traders in Japan, and that they tend to be yen sellers.
To really learn forex I started to seriously research the pairs I wanted to trade. It was time well spent. And it was free. There are several forex information sites online, and while I might be prejudiced, I would recommend our own free FXCM research site -- DailyFX.com, not only because it is so comprehensive but because it provides clear guidelines for forex trading.
When you use DailyFX, you discover not only a trading chart of any currency, but when a particular economic event happens, how important it is and its expected outcome.
5. Don't Trade During the News
That brings me to one more vital point that might seem to contradict what I just said. You must monitor news events. And analyze news events. But you shouldn't trade during news events – especially the ones that rattle the market, like GDP and employment releases.
The fact is that during news events+ forex trading can be as capricious as rolling dice. In the run-up to the event or release, currency analysts will have published estimates of the outcome or the number. If the estimates prove to be wildly wrong, traders caught by surprise will often panic and take the market in an unpredictable direction – or no direction at all, "whipsawing" up and down, knocking out traders left and right with big losses.
Instead, wait until the market has settled a bit before picking a trade. That way, you'll be with the large and responsible traders. They'll wait for the mayhem to subside before risking their money, and so should you.
Another reason to avoid forex trading during news events is that liquidity often dries up and spreads widen, which means that getting in and out of trades can be very difficult. It's much better to wait, since liquidity returns and spreads tighten again pretty quickly after the event.
6. Trade in Small Lot Sizes
My final tip for today. Realize that you will make bad trades, and plan accordingly. Trading is a constant learning experience, and you want to make sure your early education as inexpensive as possible. So trade small and keep your leverage small until you've got the hang of it. Then make your bigger trades. A Forex account that offers 1,000 unit "micro" lots is a good way to start.
7. Ready for a Forex Trading Account, Where Do You Start?
The best way to start trading is to open a micro account. It lets you begin with as little as $25.00 – and when you open any account with FXCM, you get a free interactive course that will take you through the basics of forex trading step-by-step.
8. Summary:
Start with only 1 or 2 pairs, until you get good at them
Choose good, low volatility, low spread pairs to start
Make sure you choose a pair you're comfortable with
Do plenty of research to learn your pair
Do not trade during news events
Start small
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as general market commentary, and does not constitute investment advice. DailyFX will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
