The Most Advanced Way to Trade FOREX

You can open a Forex brokerage account with as little as $100.

Big players make big money trading currencies. Hedge funds, banks and commercial firms execute more than 95 percent of the $4 trillion traded daily on the foreign exchange market. By 2009, the volume of trades placed by retail Forex investors surged by 25 percent, reports SmartMoney. Believing that it's quick and easy money, a beginner can lose thousands of dollars before detecting the problem: trading Forex requires skill. The most advanced way to trade Forex combines technical knowledge, money management and preparation.

Trading the News: Fundamentals

Watch the bounce after a news event to understand how prices fluctuate.

Trading the news can bring profits, pain or puzzlement. Every day, the United States, Britain, Japan, Australia and countries in the European Union issue an economic report card on a particular sector of industry. These events correlate directly with price movement. As an example, better-than-expected numbers on the U.S. non-farm payroll report can cause the dollar to rally with buyers raising the price. Use the economic calendar available at the DailyFX website to plan your trades (see Resources).

Trade Setups

Learn flexibility. The best traders understand the market changes direction without warning.

A trade setup represents an opportunity with a higher probability of success. You need a firm grasp of technical indicators and the ability to assess when to enter and exit a trade. As a hypothetical example of a simple setup, suppose that on the daily chart of the U.S. dollar/Japanese yen, the Relative Strength Index registers 65. If the pair breaches 70 (the setup) and begins a reverse movement, the experienced trader would enter an order to sell. If the price kept rising, he'd reassess the timing. An amateur would stubbornly stick to his guns, thinking he can outsmart the market, place a sell order and promptly begin losing money. Fear, greed and unchecked emotions have the potential to ruin a trading strategy.

The 2 Percent Rule

Use stop-losses on every trade.

Legendary trader Paul Tudor Jones has a famous mantra: Preserve capital. You incorporate this principle by risking only 2 to 5 percent of the equity in your account on any given trade. For instance, if you have a $15,000 account and you used 2 percent to trade the British pound/U.S. dollar pair, the position would cost you $300 (15,000 x 0.02 percent = 300). That's a manageable risk. If traders integrated this rule into their strategies they could experience an immediate and significant reduction in losing trades.

Follow The Big Guys

Remember that people move markets and the news reports perceptions.

You can access the same material used by market movers and shakers. For instance, the analysts at the Bank of New York Mellon publish market forecasts for their clients and the general public (see Resources). The staff at FX Street reports breaking news on the major pairs, the minors and the impart of economic events around the world (see Resources). And add the Commitments of Traders report to your list. Released every Tuesday by the Commodities Futures Trading Commission, the COT itemizes the buy and sell positions on currency futures (see Resources).

References

• SmartMoney; Forex 101; Sarah Morgan; November 2010
• Federal Reserve Bank of St. Louis; "Technical Analysis in the Foreign Exchange Market: A Layman's Guide"; Christopher J. Neely; 1997

Resources

• DailyFX: Economic Calendar
• The Bank of Mellon New York: Global Markets
• FX Street: Currency Trading News
• Commodities Futures Trading Commission: Commitments of Traders