Basic Tips on Forex Trading
Analyzing the mistakes I committed when I began to trade Forex and seeing that many beginners continue with the same mistakes, I would like to contribute with my help to those thinking to trade Forex now.
1.- Which broker must I choose to trade.
If you are really comfortable trading in a mt4 (metatrader4) platform you should know that many brokers offering this platform are not totally honest and they use a script or plugin inside their servers called “virtual dealer” with many options:
- Freezing the server when they consider it necessary.
- When you open a new position the price can be opened many pips above or below the real price.
- Reaching your stop loss even when they price has never reached that level. A dealing desk broker knows all the positions opened, where your stop loss are placed, what you are doing, EVERYTHING. And they usually trade against you because they know that 95% of traders lose money and so they gain. If they see that you win many times at once then they can take measures against your trades.
- Delays when you want to open or close a trade.
If you do not want to use an ECN broker to avoid these problems, you may think not placing a real stop loss and waiting with a mental stop loss to close that position (not showing your cards to the enemy). But this option is not always possible and the broker could freeze the server more than 1 hour (I know it from my past experience) and then you will get a lot of problems to find a solution with the broker about your losses (you agreed with their terms and conditions when you opened your account, take a look at them). But if they paralize the server and you had placed your stop loss yet, and later you check that your positions should have been closed, then the broker will fix your problem.
So, it is very difficult to find a solution when you trade with dealing desk brokers and you will never trade relaxed or safe. I talk from my experience.
My recommendation: choose a reliable ECN broker.
BEFORE TRADING IN A REAL ACCOUNT WITH REAL MONEY, TRADE THE FOREX PLATFORM IN DEMO DURING SOME MONTHS. IT´S NOT THE SAME TRADING WITH REAL MONEY THAN DEMO DUE TO PSYCHOLOGY (YOU ARE NOT USING REAL MONEY) BUT YOU SHOULD LEARN HOW TO USE THE PLATFORM AND OPERATIONS WELL BEFORE RISKING YOUR MONEY.
2.- How much money to deposit and money management.
You should risk less than 5% of your equity or available balance (I prefer only 3%).
For example: if your broker only offers you 1:100 leverage where 1 pip = about $1, and you deposit $1000 then:
$1000 x 5% = $50, so you should only risk $50 and remember: $1 = 1 pip in your broker, so you should only risk about 50 pips.
If your broker lets you change the leverage to 1:400 (in many brokers with this leverage 10 pips = about $1) then you can risk 500 pips = $50, but remember that you will only gain $1 with 10 pips. In this case you can open 10 positions with a stop loss of 50 pips each one (you risk 5% of your equity). If you are trading with 1:100 leverage and with 1 pip = $1 condition, then you can only risk a stop loss of 50 pips in 1 trade, or 25 pips in 2 trades, and you will manage the risk very well.
If you see that your opened trade is with some profit yet, then you should move your stop loss to break even (the price where your trade was opened), so if the price reverses against you then you are not risking your money in that trade yet (you do not win and you do not lose) and you can open a new trade in a different pair following a good money management. An example: when you are in +30 pips, you must decide it with your strategy.
Risk-reward: you should open your position if you see that you can gain more than you are risking. If the rules of your strategy tells you that it is possible to reach 60 pips and you are risking in your stop loss 30 pips then it is ok (in this case 1:2 risk-reward). But never risk more than you expect to reach. If your stop loss is 30 pips and you are looking to gain only 15 pips then look for another and best opportunity in a different pair. The best opportunity is reaching more than 1:1 (if you risk 30 pips in your stop loss then you should look for an opportunity to gain more than 30 pips).
For example (1:2 risk-reward):
Stop loss = 30 pips
Possible target = 60 pips
In this case if you lose 6 trades then you are losing -180 pips and if you gain 4 trades then you are gaining +240 pips: +60 pips profit.
Make your calculations if the risk-reward is 1:3 (you gain money only with 3 trades, even losing 7).
You should build or follow a strategy that let your emotions, greed and fear away. Psychology is one of the most important points (with a good money management) to trade Forex.
In a good strategy you must cut your losses soon and let your profit run, protecting the trades. Yes, it is very difficult for a newbie to cut the losses soon because it is against human nature. I mean that all of us would like to close a trade in profit soon to gain that money and if we are losing in a negative position we always think: it can reverses later, I do not want to lose what I have gained all these days… and that is a suicide when you trade Forex. You can also lose all your money.
Example: you are without a stop loss in -50 pips and when you think that your trade can reverses it goes to -100, -200 and now you do not want to lose such amount of money… (I should have closed that position before…), I am sure that it sounds like a lot to you
So, close your losses quick and look for another opportunity. If your money management and psychology are good then you will gain more than you lose sooner or later.
If you know how to follow the general trend, do it!, never go against the general trend.
NEVER TRADE MORE THAN NECESSARY IF YOU HAVE GAINED GOOD MONEY IN A PARTICULAR DAY.
- Apply a good money management and follow a strategy with few options to change your own rules.
- If you lose some money DO NOT open higher lots to recover your losses. It is very dangerous and you can lose again with that higher lot and so you are letting your entire account in jeopardy not following a good money management. Be patient, if you know that your money management, psychology and strategy are right then you will recover those losses soon.
- Never be afraid or feel bad to cut your losses. Think that this is not an easy business and losses are part of the game. If you know that you will gain more than you lose with your money management and risk-reward, then you will be happy even with those losses, and more relaxed.
- Try to find out what timeframe suits you better with your psychology. Maybe it is trading in 1 hour chart and finishing your trading in some hours, or it is daily chart watching the chart few times a day (be careful with high-impact news, they can change the trend), etc. Think that Market is always right, not yourself.