Newcomers to retail forex trading truly suffer from information overload at the outset. Trying to make sense of the multitude of topics generally turns the majority of beginners off in a big way, which in turn leads to their ultimate downfall as a trader. Effective trading is not gambling. Veteran traders would prefer to call it “managed speculation”, since the objective is to manage risk and only execute when the odds favor your trading strategy. One simple way to stay on the right path is to remember at all times a basic axiom: Forex trading is all about the “PIPS”.
Your initial introduction to foreign exchange will more than likely tell you about a “pip”. All currency pairs have a standard quote format with a specific number of decimal points. The number of decimal points may range from two to five, but generally speaking, a “pip” is slang for the fourth decimal point digit. If a quote to buy Euros with U.S. Dollars is $1.2479, and it drops to $1.2469, then it dropped 10 pips. You will soon become accustomed to using this term, but the lesson here is to also associate “PIPS” with “Preparation, Information, Practice, and Strategy”. Keep this “anagram” in your mind and live by it, and you, too, may graduate from being a “beginner” to becoming a real live “trader”, a title that can only be earned, because there are no shortcuts to success!
- Preparation: Awareness is key to building a solid knowledge foundation. Once built, all other training can then produce effective results. There are many tutorials on the Internet that will introduce you to the basics, but as your interest increases, you will want to read as much as you can about the topic of forex training. Websites, videos and books are devoted to this subject matter. The more acquainted and familiar you become, the more positive your trading experience and confidence will be. At some point, you may even want to learn more complex trading techniques by enrolling in a formal forex training class. As with any other performance-driven activity in life, the best advice for a newcomer is to accept your “amateur” status and learn from a mentor. Observe the experts and learn why they are such pros. They will teach you the ropes, advise you on how to select a bank and broker, avoid fraud and scam artists, and how to wisely use leverage and make money at this craft.
- Information: Information from a variety of sources will drive the preparation of your daily action plans. You will gather “clues” and become a detective searching for the all-important trend. Anything that affects currency price behavior is regarded as a “fundamental”. Technical Analysis will assist you in analyzing currency-pricing data and will become your best friend. “TA” is the study of charts of previous prices that will help you to forecast the future direction of currency rates. Sometimes referred to as the “technicals”, they provide insights for trading strategies, when to enter and exit the market, and how to protect your downside risk. Software trading platforms will do most of the work for you on the technical side, but interpreting the various patterns and trends to ascertain trading signals will be your responsibility. Good judgment evolves with experience.
- Practice: There is no substitute for experience. “Free” virtual demo trading accounts were created with this purpose in mind. Practice on the demo account with the “virtual” cash provided before putting any of your real capital on the line. The two primary reasons why many beginners fail at forex trading are impatience and inexperience. Practice forming a strategy, executing trade orders, protecting against risk of loss, and locking in your gains. Successful traders swear by their practice regimen. You will, too!
- Strategy: You have to develop a disciplined approach to the forex market, execute by the numbers for buys and sells, and prevent your emotions from interfering with the process. There is a psychology to trading, and you can be your own worst enemy if you do not follow a fixed routine. Managing your expectations and curbing greed and fear are paramount. Study up on the topic, and choose a trading style that mirrors your personality. For beginners, it is also wise advice to focus on only one currency pair at first. Do not risk more money than you are prepared to lose. There are many ways to trade in the currency markets, but if you feel your psyche is not up to the task, then there are other options available where actual trading can be delegated to experts, but that is for later.
Is this all there is to it? Of course not, but it is a start. You must earn the title of “trader” by constantly improving your skills, knowledge base, and emotional wherewithal. The forex market is always delivering new lessons to learn, and its “personality” can change in an instant, demanding all traders to adapt to the new situation at hand. You must be able to act quickly and assertively, driven by a decision-making process that you have fine-tuned and committed to habit during hours of practice sessions on your computer.
But, always remember: Forex trading is all about the “PIPS”.