by Michael Trinkle | August 24, 2010 4:19 pm
Retail forex trading (foreign exchange) has grown enormously in popularity over the past five years due to its inherent flexibility, ease of access, and advances in software and data handling technology. You can trade nearly 24/7 anywhere from your home computer to the coffee shop down the street. However, the popularity of forex trading has disguised its complexity and high-risk profile, such that many beginners lose interest and money when they encounter the first sign of difficulty.
Forex trading requires specialized training, knowledge, experience and the ability to control one’s emotions to be successful. There are no shortcuts. You must invest the time on the front end, if you want any chance at acquiring profits on the back end. Your early steps must prepare you before any trading commences.
Your first step into the world of forex trading[1] involves preparation and gaining awareness of everything about the field. Read articles and books on the topic, and study the information offered by specific Web sites dedicated to the trade. Check out a forex glossary to familiarize yourself with the terms of the trade. Your objective at this stageof the game is to build a knowledge foundation to expand upon so that the learning steps to come will be more meaningful.
The next step is to take one of the many free tutorials on the Internet, and then enroll in a formal class. Accept that you are a raw “apprentice.” Like any other skill-based profession that requires individual performance to achieve success, you must start at the bottom and learn from the experts. Your mentor will teach you that currencies come in pairs, and that their value is relative to each country’s respective economic health. You will be taught that price behavior is influenced by economic, financial, political and crisis information, commonly referred to as the “fundamentals.”
You will also become a student of technical analysis[2], the ability to discern patterns in pricing movements and the propensity for those trends to repeat themselves. Forex indicators will provide additional knowledge about when it is best to enter and exit a market.
Some indicators work better in “trending” markets and others in “ranging” markets. You will observe which is which, how to use them effectively, and how to develop a disciplined approach to the market down to each and every trade.
Tons of information must also be accessed and assimilated, but your instructor will advise you on how and where to get the most useful information, and then, how to use it to your advantage.
You will also receive instruction on various trading methods. Your choice may reflect your general personality, more active for “scalping” techniques or short-term options, or more geared to longer time horizons of a few days or months. In either case, risk management plays an important role in your trading regimen. Learn how to use stop loss orders or trailing stops to protect your downside. Your objective here is to develop your own disciplined approach to the market, one with a plan before each trade is made.
Are you ready to trade at this point? Absolutely NOT!
At this point, a majority of beginners feel ready to jump into the market and start buying and selling. They may have fun for a short period of time, but failure is inevitable, since no base of experience has been acquired. Brokers know this fact and have created free demo account programs to serve your interests. Again, no shortcuts allowed. You must invest the time, especially on practice demo accounts.
Surveys of successful traders have always confirmed that an inordinate amount of time, anywhere from three months to a year, was required to develop the skill, confidence and know how to be consistent in their trading.
Now is the time to select your bank and broker carefully. Fraud awaits the unwary forex trader, so check references and reviews of forex brokers[3]. Ignore offshore and any unsolicited, yet extremely tempting, offers that come your way. Be alert, skeptical, and if it sounds too good to be true, then run the other way!
You may notice a difference between the real-time and demo system. Take your time getting familiar with the adjustment by using mini-lot trades initially. When real money is on the line, your emotions may try to defeat your best intentions. Your disciplined approach, defining entry and exit points before entering a position, will serve you in that respect.
As you grow accustomed to the stress of forex trading, you can gradually expand your positions. Remember the guidance provided by your mentor, follow this advice, and with adequate training time invested, you, too, may reap the rewards and benefits of the fascinating world of foreign currency trading.
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