Learning to Trade the Forex Market

Getting started

The beauty of forex is you can get started right away without any money and without having any idea what you are doing. To do this you open what is called a demo forex account. In your demo account you trade with fake money and you have fun learning how to trade for real. Your goal is to build a sustainable track record of successfully trading with fake money. Once you have done this you will be ready to try trading with real money.

The transition from fake money to real money can be tricky. Sort of like learning to fly in a flight simulator and then flying a real airplane for the first time. Each time you enter the flight simulator your skills will be improving and your confidence increasing, until you get to the point you feel you are ready for the real thing. In theory, if you master the flight simulator, the real airplane will not be a problem.

In reality, as you're walking toward that real airplane for the first time, your heart will be pumping and you will be scared. Likewise when you are about to pull the trigger on your first real money trade your heart will be pumping and you will be scared.

Flying a plane for real and trading forex for real are similar in many ways:

1. If you are reckless flying the plane you will get yourself killed. If you are reckless trading forex you will lose all your money
2. Flying entails taking off, obeying the rules of safe flying, and landing safely. Forex trading entails entering a trade, controlling your risk, and exiting safely.
3. When flying an airplane your success requires you get all three (takeoff, safety, and landing) right. In forex trading your success requires that you get all three (entry, risk, and exit) right
4. The best pilots always put safety first. The best forex traders always put safety first.

Flying a plane and trading forex for real are different in one key way

1. To become a pilot there is government mandated formal education and professional training requirements; as a result of this formal education and professional training, few pilots crash and burn. To become a real money forex trader there is no government mandated formal education and no professional training requirements; as a result, almost all forex traders crash and burn

Formal education and professional training

Whether you want to be a jet fighter pilot or a weekend recreational pilot of a two-seater, you need formal education and professional training to insure your safety and success. If you want to become a full-time forex trader, a part-time forex trader, or just dabble from time to time you need at least some education and training to insure your safety and success; especially if you're serious about making money from forex trading.

Education choices - getting started

I suggest you start withBabyPips.com; it's described as “a free, funny, and easy-to-understand guide for teaching beginners how to trade the forex market”. Here you will learn about the forex market, forex trading, technical analysis, and fundamental analysis. There is also practical advice on choosing a forex broker and how to go about opening your broker account and getting started with your forex trading. If you prefer reading a book, “Forex for Dummies” is a good place to start. Brian Dolan, one of the authors, is a brilliant guy and he has done an excellent job in laying out the forex basics in easy to understand language. I wrote an article “Forty five ways not to lose money trading forex”, which can easily be located with a Google search; many traders have told me it helped them a lot. You may want to read that one; knowing the common mistakes new forex traders make may be helpful.

As you study the basics, you will likely find the technical tools that you think will suit you. It's a good idea to do further research on those technical tools; three excellent free sources of further information on technicals (and fundamentals) are Investopedia.com, fxstreet.com, and forexfactory.com

Your broker will supply free charting software for you. Personally, I like netdania.com charts; they are very user friendly and there is a free demo version, which I have been happily using for the past 5 years.

Technical tools I use

I love trading. I was a professional forex bank trader for 20 years. I retired in 2004 and have been trading my own account since then. I like to trade everything from one minute charts to daily charts. The technical tools I like best are:

1. Simple moving averages
2. Range breakouts
3. Momentum breakouts
4. Swings
5. Fibonacci retracements
6. Gartley patterns
7. Candlestick patterns
8. Bar reversals
9. Correlations
10. Daily high and low

There is plenty of free information about all of these technical tool available on the internet

Fundamental tools I use

1. Market view - what currencies are traders focusing on and why
2. Central bank speak - what are the key moneymen in each country saying and why
3. Interest rates - how much interest you get for holding onto a currency matters
4. Economic news - the reality of employment, retail sales, and housing matters

A good free website to track all the upcoming important scheduled economic news is forexfactory.com. Kathy Lien is excellent at the fundamentals. Her daily comments can be found at fx360.com.

Where do you begin?

Of course, if you are a new forex trader it takes time to figure out your niche and if you have a job you will need to choose a particular focus of your forex trading. I still think it helps to at least get some exposure to all the tools, both technical and fundamental, that work best in forex trading, and then choose the ones you like. There is plenty of free information on the internet to choose from.

Consider formal education and training

Once you've done your independent study you may choose to try trading forex on your own. If you have the available resources, it may be a good idea to get specialized training / mentoring; there are some good ones out there.

The argument that if a trader was any good he would not be teaching is not without merit. However, there is this to consider. A good trader manages risk effectively. Trading has its ups and downs but getting paid to teach trading is a winning trade every time. Why not do both and improve the slope and the volatility of the earnings curve.
That is not to say there are not a lot of disreputable forex educators out there. Do your due diligence and you can find a good one.

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Understanding the Basics of Fundamental Analysis in the Forex Market

Traders typically approach financial markets in one of two ways: either through technical analysis or fundamental analysis. The reality is that history is full of traders who have had very successful careers as traders that employed both of these types of analyses.

In fact, in Jack Schwager's best-selling classic, Market Wizards, two of the traders interviewed are Ed Seykota and Jim Rogers. Rogers is quite adamant in his statement that he believes it is impossible to make a living as a technical trader. He goes so far as to say he has never met a rich technician. Seykota actually shares the exact opposite story. According to Seykota's own interview, he was a struggling trader when he traded according to fundamental analysis. It was not until he became a technician that he started to make a living trading financial markets.

As stated, successful traders throughout history have employed both technical and fundamental analysis. In this article we are going to break down the basic principles of fundamental analysis in the forex market.

Fundamental Analysis is commonly defined as a method of evaluating a specific security in order to determine its intrinsic value by analyzing a host of economic and financial data. In the foreign-exchange market, a security would be a currency. Market participants are continually analyzing the emerging fundamental from a country in order to determine the intrinsic value of the country's currency. There are several key economic indicators that every trader should understand on a basic level. Fluctuations in the data of these key indicators will generally cause the value of a currency to rise and fall.

Interest Rates

These are the single greatest driver of currency value over the long-term. Most Central Banks announce interest rates each month, and these decisions are watched very scrupulously by market participants. Interest rates are manipulated by Central Banks in order to control the money supply in an economy. If a Central Bank wants to increase the money supply, it lowers interest rates, and if it wants to decrease money supply it raises interest rates.

Gross Domestic Product (GDP)

GDP is the most important indicator of economic health in a country. A country's Central Bank has expected growth outlooks each year that determine how fast a country should grow as measured by GDP. When GDP falls below market expectations, currency values tend to fall and when GDP beats market expectations, currency values tend to rise.

Inflation

Inflation destroys the real purchasing power of a currency, and, therefore, inflation is very bad for the economy in most circumstances. Each year a normal rate of inflation between 2-3% is expected, but if inflation begins moving beyond the upward targets set by the Central Bank, a currency value will actually rise due to expectation of an imminent rate hike. Higher interest rates tend to fight off inflation.

Unemployment

We will discuss consumer demand in a moment, but people are basically what drive economic growth; therefore, unemployment is the backbone of economic growth. When unemployment levels increase, it has a devastating effect on economic growth; consequently, when the labor market contracts and unemployment increases, interest rates are often cut in an attempt to increase the money supply in the economy and stimulate economic growth.

Consumer Demand

As stated in the previous point, people are what drive economic growth; as a result, healthy consumer demand is essential to the normal, healthy functioning of an economy. When consumers are demanding goods and services, the economy tends to move forward, but when consumers are not demanding goods and services, the economy falters.

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Forex Trading: How a GDP Announcement Can Boost a Currency ???

The Australian GDP announcement for the second quarter of 2012 showed that the Australian economy grew much more than expected. The economy grew 1.3%, compared to official estimates of a 0.5% growth. After a month of pessimistic economic news for Australia and in the wake of further interest rate cuts, such a result came as welcome news for the nation and sparked activity in forex trading.

The Australian Dollar (AUD) rallied in many of its denominated currency pairs, showing particularly strong gains against the US Dollar (USD).

The AUD has staged a recovery in forex trading ever since the unexpected half-point interest rate cut made by the RBA on May 1. The encouraging GDP figures account for the last spike seen in the graph above, showing a strengthening AUD despite the RBA cutting the rate by a further quarter-point at the start of June.

Fittingly for forex trading and currency pairs, there are always two sides to every coin. Just as the AUD strengthened on the back of the GDP announcement, the USD has almost simultaneously weakened after economic data released by the US Bureau of Labour. US non-farm payroll figures, a key economic indicator for the country released on June 1, showed growth in the employment sector that was far below national estimates. What this has served to do is strengthen the calls for another round of quantitative easing, which in the short term would devalue the USD due to its inflationary effect. Such a move could spark further movement in forex trading against the USD, and possibly towards the Aussie.

It is important to see how a GDP announcement and other economic news can influence a currency pair. You can keep track of all the latest forex trading developments with IG Markets. They provide a dedicated forex focus, which keeps track of all the recent movement in the major currency pairs, as well as an extensive collection of analysis and frequent market updates. You can find the forex focus by clicking this link.

The above information should not be construed as investment advice. Please consider the Product Disclosure Statement available from IG Markets. CFD trading can result in losses that exceed your initial deposit. In addition, you do not own or have any interest in the underlying asset.

Thomas Roberts, Financial Writer, IG Markets

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