This post was most recently updated on January 1st, 2018
Whenever you acquire any new skill, fundamentals and sound foundational understanding is always a good practical strategy. The Forex basics I’m going to mention involve really the essential things I wish I had learned early on in my Forex trading journey.
Forex Basics #1 – Money Management
Whatever type of trader you become, day trader, swing trader, scalper, long-term investor or even automated trader using Forex expert advisers, applying money management is absolutely the most important thing in Forex trading. You will be trading for years, trying every system under the sun, and when you look at your trades and account, money management will ultimately determine if you were a winning trader or a losing trader. Many traders who learn to trade Forex, love the thrill of scoring a big profitable trade. To be honest I’m no different. Martingale trade systems are very popular, especially with automated trading systems. I’ll get into more specifics in future posts, but Martingale trading systems, a system that basically increments, in 2, 4, 8 times when a trade is losing is really one of the biggest mistakes even very experienced traders make. Money management involves learning to properly size the position of your trade so that the reward you make, justify the risk you took. Gamblers often use Martingale or doubling down on their bets when they gamble. And yes, in a sense online trading Forex is in a sense a form of gambling. However, the difference between gambling and online trading Forex is that in Forex trading, you the trader can limit your risk and exposure. With a profitable strategy with positive expectancy, over time you can at least feel confident you will be profitable, even if you do take losses. Online sound Money Management will keep your online Forex trading from becoming pure gambling.
Forex Basics #2 – Be able to Identify the Trend
The old chart above is a method I’ve always loved. Trading Chaos by Bill Williams. It’s a very comprehensive system that applies many of the Forex Basics and essentials of technical analysis. The beauty of the system is how it can be applied in almost any market, and almost any time frame, money management also is woven into the system by applying what Bill terms as a reverse pyramid position sizing technique.
Definitely one of those Forex basics you have to be able to do, regardless of the system you trade. If I show you a chart of the currency pair you plan to trade, would you be able to tell me if the trend is up, down or sideways? What’s the short term trend? What’s the medium term trend? What’s the long term trend? If you’re starting out, a good system is one that can answer these questions very easily. That’s not to say that knowing the trend will automatically make you a winner, but at least you’ve trimmed some of the risk. With the Chaos method above, you’d be able to answer the trend question. You have a map of where you are with regards to price action and direction.
Now the Chaos method may be a little confusing very new trader, but for the intermediate level trader that already has a few years experience will definitely acquire this very important skill of identifying trends.
Reading the book to me is still better than just watching videos. The winning trades for me more than repaid back what I paid for it.
Forex Basics #3 – The Learning Never Ends
No one masters the Forex market. Markets are dynamic, ever changing. You as a trader have to adapt and be able to adjust to different conditions. It never hurts to acquire a new skill. Whether it be another strategy of money management, or another technical analysis tool. Being able to adapt , learn, and be able to deal with losses and draw downs is part of the trading business.
As I’ve acquired more experience over the years, one thing I am able to do now, that I wasn’t able to do the first few years of trading is be able to identify a good system, from a bad one. A system that has potential vs a system that will fail over the long term.
What trading will teach you is what type of person you are with regard to risk. The emotional highs and lows will test your persistence and even mental toughness. One of your biggest allies, besides experience will be your knowledge. Learning from your past mistakes, adapting and making the proper adjustments will be why you became a winning trader.