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How to Begin Forex

Maybe the first part of this should be "How Not to Begin Forex."

I did it just about as "wrong" as you can. I will try to cover some of my mistakes below, in hopes that they might keep someone else from parting with a lot of money, and staying up all night to do so.

Modern Day Bucket Shops
Broker Selection

This is one of the most critical mistakes I made. I didn't review any of the brokers that I was considering, and ended up paying a lot for that mistake. The problem is something like "I don't want to risk a lot of money initially, so the mini account looks good." The problem with the mini account is that I don't think it hooks up very well with the big players, therefore your broker often takes the opposite side of your trades. The analogy that comes to mind is like the baby pool, at your local country club. Yes, it is a pool and you can get wet in it, but it is not connected to the big pool and you are not going to do many laps in the baby pool. How many times did I watch the price go after my stop, hit it and then reverse significantly, the other direction. It gets very discouraging when you pick a winning trade, and lose anyway.

One of the best sites I have seen yet to help you evaluate brokers is: www.ForexPeaceArmy.com

For more on bucket shops please read "Reminiscences of a Stock Operator" by Edwin LeFevre, if you haven't already. This is a classic about the life of Jesse Livermore, who even today is still considered to be the world's greatest trader. It is definitely worth your time, especially if you are trading or contemplating trading. His insights into not only trading but how to interpret the news are amazing. A lot of brokers these days are in essence "Modern Day Bucket Shops." This is especially true for the smaller accounts at these brokers, the minis and micros.

Charting Japanese Candles Indicators MACD

Don't try to determine market direction without being able to look at a candle chart and understand it. I would simply watch the number and then "guess" the direction, without looking at any charts. This was a huge mistake. Your chance of ever being right approaches zero at the speed of light. (See the links in the upper left of this page.)

Watch Out For The News

I remember once having just placed a trade (fortunately for me it was a demo account) when all of the sudden the trade was moving against my position so fast that I couldn't even get out it. I was not really "news" wise at that time and was actually trading during the non-farm payrolls announcement, of which I was not aware. That is a huge mistake. Always, before you place any trade be sure of what news is coming when. Generally speaking, unless you want to play news announcements, it is best not to trade too close to news time which is usually 8:30 am Eastern. Occasionally there will be news announcements such as the FOMC which usually comes out around 2:15pm Eastern

Software

For software I prefer Metatrader. This software gets fair reviews, is very intuitive and can be customized to your liking. It is very easy to switch from daily charts to five minute charts, quickly. When I first started I didn't have a preference. Big mistake!

World Hours

For quite a while I kept the world hours running on my desktop. This really helps to know what is going on where. You will soon find out that London is the most active trading session. A lot of trading usually occurs at both the open and close of the London session.(See the links in the upper left of this page.)

COT Charts

The commitment of traders charts are very helpful to find out where the "big dogs" are putting their money. I have to thank Peter Bain for this tip.

Your Own Style

No two traders, trade the same. Over time you will find yourself more comfortable with some trades and not so interested in others. Some are good at short swings and others like to take a more long term approach. Don't ever feel like you have to trade exactly like anyone else.

Summary

It is possible to waste a lot of money "learning" to trade forex. You can take the "dumb" approach (like I did) -trade a demo account till you "win" a few trades and then open a live account and lose a lot of money. Or you can be smart -open the demo account and simultaneously spend the money you would waste on your first live account on Peter Bain's program. There is no 100% assured path to success in forex trading -but this is as close as it gets.

Only 5-10% of traders consistently have positive trades while 90% have lost their initial deposit within six months. Forex trading is a "zero sum" game with some really big players (the banks, trust funds, hedge funds and large corporations) and some really small players, individuals like you and me. Not really an even playing field. Knowledge is your best bet to try to level this playing field. There is no better place to discover that knowledge than with a successful veteran trader like Peter Bain.

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Japanese Candlesticks
The Long-Legged Doji
Market Indecision or ... Market Manipulation
Non-Farm Payrolls April 4, 2008

The above candles are 15 minute charts (USDCHF) from April 4, 2008 at 8:30am Eastern, at the time of the release of the embargo on the non-farm payrolls for March. The first image shows three doji's in a row, the middle doji (red upward arrow) is very long-legged. This is indicative of extreme market indecision. I had decided to ""sleep-in" since here in Arizona this was 5:30 am, probably a wise decision. Forex trading is risky when it is calm, very risky at the time of a major news announcement, like the nfp today.

If you could make a great trade on this nfp, you are a real wizard. I have just seen too many of these where you get these wide swings very rapidly which usually run your stops, and you just give money away.

This is the 5 minute chart where you can see a little better what actually happened. The nfp today was really "bad" news for the dollar. A loss of 80,000 jobs and a rise in unemployment to 5.1%. The dollar drops initially, but soon rebounds and then for a few minutes settles about where it started. How many times can one find this type of "opposite to what you would expect reaction to the news?"


Another possibility could be market manipulation. It is strange to get such a long-legged doji, -right at the time of the non-farm payrolls announcement. Also, this doji was in the middle of two other smaller doji's. For approximately forty-five minutes, the price was held relatively constant during the "most major" of news announcements.

The dollar finally starts down to end slightly lower than where the initial drop reversed. This example, based on real charts from today's nfp, demonstrates how tricky it can be to try to play the nfp. Even with some advanced knowledge, it would have been difficult to have a successful trade on this news. The only play was to sell dollars with wide stops (risky) and not try to exit after the initial nfp swing.


Japanese Candles
Morning Star Evening Star
Terminal Market Indecision
FOMC Interest Rate Announcement August 8. 2006

Discussion

The above candlesticks (5 minute charts) came from the FOMC interest rate announcement on Tuesday 8/08/06. The USD/CHF shows a morning star pattern soon followed by an evening star. The GBP/USD shows just the opposite. One lesson I have had to learn the hard way is that your own interpretation of the news is not what is important ... It is what the Market thinks about the news. The initial red candle (USD/CHF) is the market's reaction to the FOMC pause on interest rate hikes. This is followed soon by a shift in market sentiment (hammer) and a reversal (green candle) as indicated by the morning star pattern. This was the market's reaction to the wording surrounding the rate hike pause (ie promise of further rate hikes soon in the fall). This sentiment, however, was not too long lasting either (spinning top) as the green candle soon reversed as indicated by the evening star. Just the opposite occured with the GBP/USD currency pair. This was a nice display of some really pretty spinning tops and a hammer.




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Happy Forex Trading

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