Forex Trading Ultimate Guide: Part 3

Welcome to the third part of the Ultimate Guide. This part will cover up the rest of the essential topics for beginner traders, and give you a reference point for a more detailed study.

Main article sections

Mastering trading psychology

It is not only a broad background and ability to analyze the market that can make you a good trader. Have you ever noticed how successful people behave? They never lose temper and always think twice before acting. The comprehension of trading psychology is a thing that can improve your game. Wondering, how to stay cool under pressure, enter or exit trades before the market turns whether you are cutting losses or taking profits? Develop your own trading discipline based on MTrading advice.

Set realistic trading goals. It's important to have a realistic estimation of potential profits and losses. As your performance grows, so should grow your expectations.
Consider your risk tolerance in advance, then choose trading strategies fitting the estimation. A low-risk tolerance is suitable for lots of small trades, whereas higher tolerance for risk would better suit larger trades, with the opportunities for larger gains.
Mind your limits: define the target, close at it and enjoy benefits or fix losses.
Get ready for the worst. It sounds pessimistic, but by considering the worst possible outcome of a trade, you can take measures to protect yourself, should this happen, such as by setting a stop loss in advance.
It is the overall performance that counts: You may be tempted to take a higher risk while experiencing smooth trading or put your shirt on in case of repeating failures. Do a favour to yourself - stay calm.

How to analyse the Forex market

Although sometimes rookies count on cards and experience the beginner's luck, it rarely lasts. Tech-savvy traders will tell you: the market analysis is absolutely vital to both short-term and long-term trading. Daily, weekly, and monthly charts should always be at your hand. There are various approaches to Forex analysis, however, three broad categories remain the most widely used:

Fundamental analysis

This type of analysis is for monitoring real-world events that may have an impact on the value of the financial instruments you are going to trade. For instance, the value of the American Dollar might fluctuate following a Retail Sales Report, which will then affect the movements of all currency pairs that include USD. These economic indicators have the greatest impact on the Forex market:

Gross domestic product (GDP)
The number of jobs outside the agricultural sector (NFP)
The Unemployment rate
The index of industrial production
Retail sales
Orders for durable goods
The interest rates of national banks (like the European Central Bank or the US Federal Reserve)

As soon as the economic publication or announcement appears, there are three possible scenarios following:

No reaction (the market had anticipated the announcement)
A strong movement in accordance with the economic data that has been made public (positive news may lead to the asset's value increase)
A strong movement against the economic data shared

The challenge is predicting the most likely outcome and opening a trade accordingly. The right trading approach implies both the news inspection (see our Forex Calendar) and monitoring the impact such news had on similar assets/instruments in the past.

Technical analysis

The technical analysis largely focuses on what is happening in trading charts. It chronicles the price movements of different trading instruments over time, so traders can see patterns in price movements and make trading decisions based on the assumption that these patterns will repeat in the future.

The Japanese candlestick chart is an example of a trading chart format. It emphasizes low and high price points for certain time increments (these increments can be set by the trader in a trading platform):

The opening price for the period
The highest price point for the period
The lowest price point for the period
The closing price for the period

For instance, if a Japanese candlestick closes near the highest price for the period, that means a strong interest for this currency pair during that time period. The trader's decision to open a long trade to take advantage of that interest is highly possible in that case. Since common patterns emerge in the big picture of the charts, it helps to predict future price moves and trade. Once a pattern emerges, this becomes a Forex indicator because it indicates that there is the potential to make a profitable trade. Learn more about Forex indicators in our article about Major Forex Trading Indicators.

Wave analysis

Also known as Elliott Wave analysis, Wave Analysis is a well-known method that reflects the price chart for patterns and the direction (trend) of a financial instrument.

Ralph Elliott's theory resembles the Dow Jones' theory: both recognize that stock prices move in waves.

An impulse wave, moving in the same direction as the larger trend, always shows five waves in its pattern. A corrective wave travels in the opposite direction of the main trend. On a smaller scale, within each of the impulsive waves, five waves can again be found.

Look at the following chart made up of eight waves (five net up and three net down) labelled 1, 2, 3, 4, 5, A, B and C.

Waves 1-5 form an impulse, while waves A, B, C form correction of it. The impulse forms wave 1 at the next largest degree, and the three-wave correction forms wave 2 at the next largest degree.

Popular forex strategies

Trading strategies are methods that traders use to determine when to buy and sell assets in the financial markets. Strategies may be based on technical analysis, fundamental analysis, wave analysis, quantitative methods, or a combination of decision factors.

Now it is time to refer to the most popular Forex strategies. They include:

Strategy 1 - Forex Scalping

Trading strategy that involves buying and selling currency pairs in very short increments (a few seconds/hours). This strategy allows to make many small profits till they accumulate. Read more in our Forex Scalping for Beginners article.

Strategy 2 - Intraday trading

Intraday trading deals with buying and selling of stocks on the same day, during the trading hours that are determined by the exchange. Stocks are bought and sold in large numbers strategically with the intention of booking profits within a day.

Strategy 3 - Swing trading

The medium-term trading approach focuses on larger price movements than scalping or intraday trading. Trades can be set and checked on within several hours or days, with no need of constant observation during the day.

Strategy 4 - Forex hedging

This risk-management technique implies a trader can offset potential losses by taking opposite positions in the market. In Forex, this can be done by taking two opposite positions on the same currency pair (e.g. by opening a long trade and a short trade on the EUR/USD currency pair), or by taking opposite positions on two correlated currencies.

Strategy 5 - The Forex martingale strategy

Supposes that for every losing trade, you double the investment made in future trades in order to cover your losses, as soon as you make a successful trade.

For instance, if you invested 2 USD on your first trade and lose, on the next trade you would invest 4 USD, then 8 USD, then 16 USD and so on. A risky and not suitable for beginners strategy.

Strategy 6 - Forex grid strategy

Uses buy and sell stop orders to profit on natural market movements. Orders are usually placed at 10-pip intervals and allow to automate the trading strategy.

Improve your trading experience with our free demo account:

Trading tips for beginners

We are finishing the Forex Trading Ultimate Guide: Part 3 and want to make sure you are going to take trading seriously.

Here are some final tips to sum up and integrate your knowledge into successful trading:

1. Always do your own research. The less you know, the bigger is the risk. Watch videos on Forex trading, read educational articles and tutorials, attend trading seminars and join Forex trading webinars and after that analyze all the information you have received.

2. Do not hesitate to test on a Demo Account. Demo venue will bear your every fall while you are mastering all new strategies. Keep going until the results are conclusive and you are confident in what you are testing.

3. Don't overcomplicate things. Don't overload your charts with indicators, or your strategy with handles or switches. The more complicated your trading strategy is, the harder it will be to follow, and the less likely it is to be effective. To find out how well a strategy performs on average in different markets, you need to carry out the necessary backtesting and research. Being able to use a few tools in an effective way is the most important thing.

4.Easy-going on volatile markets. Volatility keeps trading moving and can destroy it at the same time. You need to accept that once you are in the market, anything can potentially happen, and it can completely negate your strategy.

5. The trend is your friend. Whether you are a rookie trader or a tech-savvy, it is better to believe what you see not what you think is going to happen.

6.Mind both opening and closing. Opening trade is of the same importance as the exit. Your trading strategy has to consider the mechanism of closing a deal, not to suffer from heavy losses.

7. Write everything down. You should gain yourself an approach of a business owner: make yourself a plan, ensure constant monitoring and regular auditing. Starting a trading journal is an absolute must.

8. Put down there daily the reasons to open or close a trade, your achievements and mistakes, points for further research. Don't forget to log every trading there whether successful or not. Analysis of good trades will boost your trading confidence and motivate you to push harder and go further. The analysis of bad trades will help you to improve. Grab our book to learn more!

Stay tuned! Follow the updates in our Education section.

Learn the Forex Trading Sessions;
See and remember the Basic Forex Terms for Beginners.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.