Photo - Jasper Lawler
Jasper Lawler Market Strategist, CMT
Education, Learn to Trade Forex | September 21, 2022

How To Trade Forex | First Trading Strategy – Key to Markets

How To Trade Forex | First Trading Strategy

We have broken down the process of how to trade forex into 5 distinct skill sets that all forex traders must master to succeed then put them together into an example forex trading strategy.

1. Price action
2. Technical indicators
3. Fundamental analysis
4. Risk Management
5. Trading psychology

1) Price Action

The forex markets run 24 hours a day, 5 days a week, and prices fluctuate constantly. You can track these movements in price in several different ways.

If you were to type in google the value of the Forex Pair EURUSD, you would find the live rate of that forex pair, plotted on a graph, on sites like Yahoo Finance. This is what we call “price action”.

Put simply, price action is the movement of an asset’s price plotted on a chart, over time. Price action forms the basis for all technical analysis of a currency pair.

Source: Myanfx.com

Forex traders use price action to identify recurring patterns in price charts and use these patterns as signals to where price might go. The mainstays of price action analysis are finding areas of support and resistance, analysing price trends and plotting chart patterns. A price pattern is a “recognizable configuration of price movement”. These patterns are normally identified by traders using a series of trendlines and/or curves.

Forex day traders work on a very close time frame, often using charts that update every few minutes.

2) Technical Indicators

Technical analysis tends to involve a combination of analysing the price action and technical indicators.

Technical indicators are mathematical calculations and statistics, used to help interpret what the price action could mean. Their purpose is to make trading decisions easier. Instead of looking at the ‘raw price’ – indicators display the movement of the price or momentum in more visually-appealing ways.

Technical indicators can be used to help set entry and exit rules based on what the indicators are doing or by intensifying certain conditions in the market like overbought/oversold conditions and momentum divergence.

The following chart shows an EMA indicator overlaid on top of the price and a MACD indicator underlaid underneath the price chart.


Source: Medium.com

Below is the list of some of the most popular technical indicators

• Accumulation/Distribution Line.
• Average Directional Index.
• Aroon Indicator.
• MACD.
• Relative Strength Index.
• Stochastic Oscillator.

3) Fundamental analysis

Fundamental indicators are mainly used by professionals to work out the underlying value of currencies based on the countries they represent and function within. Fundamental indicators take into account economic and political factors to add context to price.

Fundamentals are more frequently used by professionals because there is so much information for one individual to take in – but there is an increasing number of tools on the market that are making this data available to retail traders.

Economic calendars with information on employment data and interest rates are now considered a requirement for any retail trader.

Fundamental indicators include…

• Gross Domestic Product (GDP)
• Money supply (M2, M3)
• Interest Rates
• Consumer Price Index (CPI)
• Industrial Production
• Import/Export data

4) Risk Management In Forex

There is always a risk when it comes to trading forex. Whether a forex trader manages that risk effectively is normally the difference between being profitable and being inconsistent.

Successful forex traders know how to control the risk they are taking. To grow your money in the markets here are some things that you must be able to learn and implement…

1. Keep a good risk-to-reward ratio.

• Don’t take on a big risk for a trade with a smaller reward.
• Know the expected return of the trade you want to make.
• You stick to your risk management strategy and don’t take any trade with an r/r of less than 1:1.5.


Source: MQL5.com

2. Only trade with money that you are prepared to lose.

• Using money that you can afford to lose means that you are not gambling away your future if you were to lose.
• You can trade with less emotional attachment to your money, making it easier to follow the rest of these steps.

3. Always use stop losses and take profits.

• This limits the amount you lose tying in with the risk-to-reward ratios.
• Making sure you take profits will ensure trades don’t turn around on you.

4. Evaluate your risk tolerance

Before you start trading, you need to work out how much risk you are willing to take on in the markets, this will depend on:

• Your age
• Your knowledge of FX trading
• Your experience
• How much you’re willing to lose
• Your investment goals

5. Don’t risk too much per trade.

• The recommended amount of risk per trade is 1%-2.5% of your account balance.
• This gives you space to fail and learn (which is inevitable in the markets) without losing all of your money.

6. Keep your strategy consistent.

• Don’t get overconfident and increase your risk or increase your leverage, especially if you are just starting out.

Money management and risk management are two key skills that are essential for anyone trying to teach themselves to trade forex. Fiscal discipline, not trading with your emotions, sticking to a rigid strategy.

Trading psychology

We have written an entire series on trading psychology that we recommend you read to explore this topic in full. The basic premise is that your own emotions and state of mind can play a huge part in your decision-making process. Without coming to grips with yourself and your psychology, it is nearly impossible to master the financial markets.

Example trading strategy

A good starting point for beginner traders, who are often trading while having a full-time job is swing trading.

Swing trading is a short-term forex trading strategy where trades are held for longer than 24 hours but typically less than a month. This could mean 2 or 3 days or several weeks. The advantage is that it takes less time and dedication than day trading but there is more practical experience than position trading or investing.

Swing trading takes into consideration all of the above factors, from looking at fundamental indicators to using chart patterns and risk-to-reward ratios to execute the trade.

1. First, you would assess the economic and fundamental situation surrounding the currencies you want to trade. If you were looking to trade GBP/USD you would compare the economic conditions of the economies of the UK and the USA.

You might compare the unemployment figures of both economies, the level of inflation and the interest rate policy decided by central banks.

2. Next, we move on to the technical aspect, here is where you will look at price action, and different price indicators like the MACD or Stochastic Oscillator. Chart patterns also come into play here, traders use these patterns as timing indicators, when the pattern forms they will execute the buy or sell.

3. Risk-to-reward ratios are the next step, before the trade is executed, traders will make sure that the ratios fit in with their strategy.

FAQs

How do beginners trade in forex?
There is a plethora of information available, from youtube to courses, there are literally hundreds of ways that you can access information about the forex markets.
Can I Teach Myself To Trade Forex?
It’s not hard to learn technical information about the Forex market, what is important and hard, however, is learning all the added factors that can make you a good trader/investor.
Can I Trade Forex with $100?
Using the tools laid out in this article you can form your trading strategy, there are a variety of different tried and tested strategies that you can learn.

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