I’ll set out briefly what you’ll need to get started trading here. You should be able to take your first trade today.
You should know right now that it is never easy to make money this way. Once you learn all the technicals there is often a lot to learn about your own psychology and risk management. But you’re here and interested, so let’s take a look.
What you need
- A broker
- Some capital
- A rule of thumb about risk management
- A rule of thumb about when to enter and exit trades
- An understanding of how currencies are related
The broker
First off you need to sign up for a demo account with a broker. Make sure they are regulated if you plan to stay with them for your live account.
Brokers you can rely on as of 2020:
- IC Markets
- Pepperstone
- Oanda
You will use the demo account for a few weeks/months to learn the mechanics of the interface and the basics of how markets move. Start your demo account with a similar amount of capital to what you plan to go live with. This will get you used to the various amounts to risk.
You will be offered a mix of MT4, MT5, CTrader or other trading platforms. I recommend MT5 as it is simple and clear. CTrader has some useful sizing and risk features built in, with MT5 you typically add to it from the Metatrader website. We’ll get to that!
Trading capital
This is important for when you go live, as demo can be any amount, but if you match demo to live amounts then you will not have to adjust to differing trade sizes. So don’t just grab the 100k demo account unless you have 100k ready to trade live.
Small accounts can work. 500 GBP/USD/EUR can be fine to practice with on live, if you can trade microlots. Just focus on the percentages risked and made and it will scale up and down to any size account.
Trading risk management - rule of thumb
You can run the numbers on the Kelly Criterion, then trade 1⁄4 of that size, or you can simply say “no more than 0.5% per trade” while starting. It might not look much different to trade 2% but the losses mount so much quicker that it’s tough to get a handle on it if you don’t have a solid system to play out.
If you really want to increase size you can “scale in” to trades, so add another 0.5% if the move is in your favour and pulls back into a dip, or if it initially goes against you but you’re sure of the trade idea, so you can add a little to the position to average it a bit lower. But this is more advanced. Initially just stick to 0.5%, half a percent, and you will see real results and protect your capital - demo and live - while you learn.
Where to enter and exit - your first trading strategy
Many people use indicators extensively when starting, doing reversals from the RSI oscillator or Bollinger bands, but there are pitfalls in these, namely they don’t work when the market starts to trend. Traders with a little more experience start to draw levels around prices that react to being hit. So whole numbers, or psychological pricing, or just support and resistance lines. Support lines support from below and resistance lines resist from above, like a ceiling.
These are drawn at areas where price has turned in recent days/months, and would be expected to again.
Others still use dozens of patterns and bar shapes to enter trades, but the truth is, you can enter nearly anywhere and if your trade risk management is strong then you can keep your account at breakeven at least.
The reason people seek out price extremes, highs and lows, is because a) you can set a stop loss close to it and therefore risk less than midway through the trend and b) because this offers a better Risk:Reward ratio, or RR, or R, as it is known. So your risk is small compared to the potential reward. This is often denoted as 1:2 for 2x reward to risk, or 1:5 for exceptional RR. Otherwise it can be written as 2R or 5R. Measuring risk like this lets you lose up to 70% of trades and still come out in profit if you have 2R and above.
But there are many who will say “just trade what the market gives you” and will encourage you to ignore R. It’s good to be aware of both methods at this stage.
So you can in theory find a support line, for example, to buy (go long) from, then plan your target 2x your risk away. OR you can exit when you see a resistance level above. Price tends to stick to these levels for sometimes and then you can’t tell for sure which way it will leave the level. So exit is the preferred method. For day trading, at least.
How currencies interrelate
The US dollar controls what happens on most pairs. The “majors” are pairs that directly involve the dollar. The “minors” are still major currencies but don’t involve the dollar. Also known as “crosses”, these can produce some interesting effects, depending on how correlated the currencies are. The Candadian Dollar (CAD) is heavily influenced by the price of oil, the Australian Dollar by gold and Asia, the Yen by risk on/off sentiment and so on. These can all be intricately related but you can safely ignore the crosses and minors initially while learning. Focus on EURUSD (the most heavily traded instrument in the world), GBPUSD (aka Cable) or AUDUSD for something not as correlated to European issues.
Then you have to have an economic calendar open - fxstreet or myfxbook calendars are fine, or even the ones provided in MT5 etc. and I would also recommend following @LiveSquawk and @ForexLive on Twitter for the latest breaking news that might move markets.
This post will grow over time as feedback and additional points come to my attention. For now go and open a demo account, get used to how things work and move and then we can get into more advanced areas at that time. Follow on YouTube, Discord, Twitter etc. to stay up to date.
– Collected