Basics2018-11-21T18:56:18+00:00

Beginner’s most crucial decision

Many excited beginners overlook the basics and proceed to trying Forex out with fast/easy money in mind. There are warnings of this mistake in website’s earlier sections and there is also now, since it is way too common and unfortunate. If this mistake is made, the sequence of events goes something like this example. Every trader, also a more experienced one, should definitely read this eye-opening summary about trader’s development steps. The following aspects are rarely true, if the beginner proceed impatiently, just by “trying things out”:

  • Chosen broker is reliable and does not change trading conditions when moving to live account.
  • Randomly chosen strategy with many indicatiors is thoroughly demo-tested.
  • The aforementioned strategy is not one of thousands unreliable, so called, indicator messes.
  • Trading robots (EA) and websites about easy money are avoided. What are they? Read this.
  • Trader proceeds strictly with chosen strategy, not adding indicators and “just this one time” rules.
  • All aspects of Money Management are understood, calculated and followed properly.
  • In live-trading (own money) beginner is naturally gifted, handling feelings like fear and greed.

Even though all the aforementioned would be true in some lucky/gifted beginner, many crucial basic aspects would still be left unacknowledged. Without those, one would end up trading blinded, so to speak, and will face unpleasant surprises, losing money. Right from the beginning, it is wise to embrace the proper basics, that are used by almost all professional traders at banks and investment companies. Those are, for instance, market sentiment, trendlines, patterns, S/R levels, pivots, fib-retracements; simple and logical things. Without those profitable Forex trading is not possible. Here is another enlightening example on the issue. It was written by a pro-trader with over 13 years of experience. For the sake of contrast and as a warning, below there are some example pictures of other “professionals” trading screen. These “indicator mess” strategies can unfortunately be stumbled upon on some sites and forums, like this. It is worth seeing this mess once, to know what to definitely avoid in own trading.

The above is the unfortunate and highly destructive phenomena, due to which most of the beginners lose time and money. No one will learn a professional and profitable trading with that “indicator mess” approach. When going through linked content of this site, beginner should avoid drifting elsewhere! The website structure is well-considered and it will, in logical order, provide everything that is needed in the beginning phase. It’s worth mentioning that practising on demo-account, while going through trading basic is, of course, a totally different thing, than warning examples of reckless “trying everything out” approach. The theory below will not be understood and properly implemented without MT4 program and demo account. And even though opening a live-account will become relevant much later, demo-practising should be done right away with a reliable broker, who will not change trading’s terms and technical aspects upon moving to real money account. In Brokers section there is a broker discussion and suggestions, as well as comprehensive guide to Metatrader 4 (MT4) program.

Glossary and concepts

Now as the most common beginner mistakes are acknowledged, let’s proceed to clarify Forex’s main glossary. It is a good idea to familiarize oneself with this file and even print it out. When the meaning of terms is understood, it is more convenient to start reading the other material. As mentioned before, English is the language for Forex trading career, and so, it should be used right from the beginning. The choice of Forex basics’ source was rather simple: it is the most recognized Forex knowledge website in English. Professional traders suggest it to beginners on all forums due to its’ comprehensive and accessible content. This babypips.com is actually a synonym to beginner’s guide among traders – the place where I read my Forex basics years ago. Its’ somewhat odd writing style and visuals may surprise at first, but from my own experience I can say, that the information there is definitely easy to comprehend.

Basics of technical analysis

The idea is not to just give one a link to babypics.com, but to guide the reader through most essential aspects, based on personal learning experience back in the day. As the beginner proceeds systematically, having read the aforementioned glossary, the principles of trading and this website’s strategies get perceived much faster. Searching for an easy “shortcut” would definitely slow down and disrupt the learning process! It is not a good idea to change the order of sections, to jump between pages or to drift elsewhere, for instance to those aforementioned websites on “fast/easy” money. The widely known truth is, also from my own experience, that professional and profitable trading requires the knowledge of the basics presented below. The following step of beginner’s trading career is probably the most demanding, but at the same time the most important and eventually the most rewarding one. At this stage, persistence and a few days of reading and demo practicing is all that is required. 17 sections, one by one!

Forex basics. Although most of these were already briefly discussed, it’s good to glance through them again. Currency pairs section is the significant one.

Market structure. Knowledge of the market structure is the the basis for trading, which is needed e.g. when studying market news and analysis.

Trading sessions. Currency pairs have a hour-related rhythm. Notice the four major stock markets’ local time.

How to actually trade. The basis of all, these must be comprehended! Sections require plenty of time, concentration and demo practicing.

Market analysis types. From the beginner’s perspective, technical analysis is the most important, but briefly familiarizing oneself with fundamental analysis is also beneficial at this stage.

S/R-levels. The basis of technical analysis and a professional trading altogether. It is indeed worthwhile to see these different trading aspects in practice with demo account.

Pivot points. Similar effect as of S/R levels, but these are calculated based on price development, usually daily. Indicator can be used to calculate and draw the particular levels in trading platform.

Candlestick patterns. The basis of a professional PriceAction approach and also of website’s strategies. Print out and learn the patterns, and then try to locate these on demo-account’s history charts.

Fibonacci. Conventional tool (of e.g. MT4 paltform) used by professional traders. Simple and straightforward, yet many beginners still manage to use it incorrectly. While reading the fib theory, one should practice drawing the levels on demo-account charts (M15 timescale and upwards). Notice how the price adheres to them.

Moving averages. Basics, usage notes and Dynamic S/R are the most important sections at this point. This is a simple/common MT4 tool, which can be used in many wrong ways (see the picture 1 above).

Basic indicators and oscillators. These could be glanced through briefly, noting the names Bollinger Bands, MACD, Stochastic. At this point, you should (once again) choose not to make a beginner’s mistake of skipping the basics studies, get excited with charts/tools and try to start “profitable” trading. These aforementioned indicators can be, of course, implemented later, but only when all other aspects are perceived.

Divergence. Essential phenomenon, which can be observed through several indicators, such as aforementioned Stochastic and MACD. On a large timeframe, clear diveregnce is a reliable indicator itself.

Chart patterns. Price progress follows those surprisingly often, especially on a large timeframe. There are profitable pro-strategies, that are based solely on chart patterns. Section contains a few crucial patterns, so the time and patience is needed once again. While reading, it is a good idea to try and find those patterns and price reactions on demo’s history charts. The motivation will get a nice boost, when the rules are observed to function in practice.

Breakouts. A brief glance through is enough. Those are closely related to the chart pattern principles, which where perceived in the previous section.

Market environment. The general nature of price movement. All currency pairs (and also stocks) move according to these principles. Seeing the trend direction is always extremely valuable and it is also a pillar to many trading strategies. It is often said “trend is your friend”. It is obvious, that understanding the nature of the market and the price helps trader quite a bit.

Time frames. Many of beginner’s mistakes and confusions are linked to choosing a timeframe. This section will clarify the aspect, as long as reader remembers to observe the theory in practice on demo account.

Currency correlations. While trading, it is beneficial to keep in mind the correlation of several currency pairs’, especially when one trades several pairs at once. At least the “how to use correlations” and the summary part should be studied. Notice also the gold and oil price’s direct impact on certain currency pairs, and EUR/JPY pair’s special property of representing the market sentiment. The latest will be inspected closer in the NewsTrading and MarketView sections of this website.

There were the most important ones. Although many of these have now been studied and tested on demo-account’s charts, it is still a good idea to continue observing and testing theory in practice. Every professional trader and every Forex guide emphasizes the importance of proper practice; there are simply no shortcuts available. Open MT4 and re-read/retry all the above once again, section after section, with sufficient time. Look for S/R levels on different timeframes, draw proper trendlines and fib-retracements, try to find the most common candlestick and chart patters and also notice how the price reacts on all of these. The goal of the practice is to get fluent MT4 program skills and to be able to notice, analyze and make use of all the aforementioned tools and aspects. This is, again, a consuming yet very rewarding phase! You may have already noticed how in some charts’ cases several tools suggest the same outcome for the price. These are the high probability confluence-zones, which will be discussed later on.

Other required basics

Now as the reading and demo-practicing phase has been completed, the foundation for consistent pro-trading is there. The following aspects are nevertheless equally important. These will be handled faster and more fluently, without the need for demo testing. After studying this part it will finally feel that “all the pieces of the puzzle are falling into place”.

Trading plan. Basic information about choosing the trading plan and its’ practical meaning. Losses at Forex and other markets tend to happen due to trader’s deviation from the original trading plan.

Types of trading. Their properties and differences. Choice is usually made based on trader’s mentality and life situation. For some, fast decision making and many short trades per day is suitable. For others, holding positions for many hours/days with one-time high return in mind works much better. The latest is widely suggested approach for beginners to start with; it is safer but it does require mental toughness for inactivity periods. You will eventually find your own trading type when you start evaluating different strategies and their requirements for time and for money management.

Creating own trading plan. A follow-up to two previous sections. Useful general tips for building own trading method. Also at this point, you should not get excited about indicator-heavy approach and start trading!

Trade journal. It the beginning this may feel laborious and even unnecessary, but according to all professional traders, continuous evaluation of own trading is extremely important. I myself have kept a trading journal of news trades from the very beginning. Later on, it extended also to regular day trading, with positive effects. When the things are given a proper thought and are written down, trader benefits and grows from every mistake and from every success, instead of letting the trades/decisions just go by.

Risk management, leverage, position sizing, stop loss. Although the beginner should properly study all the four large aspects, the most crucial thing to always remember is the correct use of stop loss. It is usually enough to plan trading position so, that the stop less level is 3% of the equity – every single time. This summary with calculations is definitely worth reading, as it will surely clarify the matter. Here is a convenient lot size calculator, the essential tool for money management. Later on, if needed, another lot size calculator directly for the MT4 program can be downloaded from the Advanced section.

Mental discipline. The last but surely not the least! Hasty decisions made in weak mental state, with feelings like fear or greed, is the most common reason for failure in trading. Many try to blame the strategy, all the possible external factors, they even “get mad” at the whole forex market or the universe, but they do not look into mirror nor try to improve themselves. It is a proven fact, that with the same strategy and same broker, one can be making overall profit while the other is losing. Those beginners who take this matter seriously and perceive the idea right from the get-go, will do themselves a big favor and save lots of time and money. I myself find article to be extremely educational, as it covers the most common mental discipline issues and offers practical solutions to them. Here is another good write-up on the matter. Notice the constructive feedback from traders in the comment section below that article. More on mental discipline can be found in the Advanced section. Happy reading!

To conclude the Basics section it should be emphasized, that the content of the following sections has been designed assuming, that all the above is read, practiced and understood. I can say from my personal experience, that rushing and skipping things will harm trading habits and prolong the learning period, making your trading uncertain, stressful and unprofitable.

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