Graduated

Congratulations for making it to the end of our forex trading course. Now it’s time for you to get out there and put everything you have learned into practice. If it is your first time trading then we would definitely recommend starting with a demo account before using live funds.

Remember, stick to your plan, trade with discipline and keep your trades as objective as possible and you will be well on your way to success. Good luck!

“Don’t ever make the mistake of believing that market success has to come to you fast. Trade small, stay in the game, persist, and eventually, you’ll reach a satisfying level of proficiency.”

Ways to analyse the market

When we are trading, we never enter the market blindly. No successful trader has ever made a living out of trading based on gut instinct.

We must analyse the market, the currencies and their countries in order to best predict how the market will behave and where the price will move.

There are two main types of analysis when it comes to trading, these are; fundamental and technical. Let’s break each one down.

What is fundamental analysis?

Fundamental analysts are concerned with the macroeconomic forces that can influence a country and its currency value.

The three main areas that fundamental analysts will look towards are the political, economic and social factors that influence the currency they are looking to trade.

To put things simple, if a country’s economic indicators are looking good, such as low unemployment rates, growing GDP, and low inflation rates, then their currency should strengthen. On the other hand, if these things aren’t looking so good then that could point towards a slightly bleaker future for that currency and it should weaken.

Naturally, fundamental analysis is more commonly used in traders that open long-term trades, such as position trades. Swing traders should also be mindful of the fundamentals as any significant news could heavily impact their open positions.

Here are some of the key areas that fundamental analysts pay close attention to:

  • Interest rate changes
  • Inflation rate
  • GDP
  • Retail sales
  • CPI (Consumer price index)
  • Unemployment rates
  • Political stability and key election dates

What is technical analysis?

Technical analysts focus on how historical price movements and previous market behaviours may help to predict where the market will move next.

This is the main type of analysis that scalpers, day traders and swing traders use, and therefore it is the main form of analysis that we will cover in this course.

There are a vast variety number of technical indicators to pick from, each of which uses historical data obtained from the market to try and determine where the market will move next.

History does tend to repeat itself, so using data obtained from this analysis can prove very profitable to those who implement it wisely.

The vast majority of the technical analysis is done by computers and the algorithms that can be found in trading and charting software. The skill is not in obtaining the data, but more in how that data is used.

Here are some of the top trading indicators that are most commonly used in the forex markets:

Technical vs fundamental analysis

It seems that there is always debate over which type of analysis will produce the best trading results. You will often hear technical traders saying that fundamental analysis is unnecessary as all of the information is already factored into the price.

On the other hand, you will get fundamental analysts claiming that none of the technical indicators work and that trading based on technical analysis is futile.

As always, the truth lies somewhere in between.

There are a lot of technical indicators that are not worth their salt, in fact, the majority of them are quite useless.

However, there are some indicators that give extremely valuable information that provides a great insight into the market dynamics and allow us to make high probability trades. We will be covering these key indicators in this course.

Similarly, it is never a bad thing to have an eye on the fundamentals. It definitely pays to be aware of key dates and how each country’s economy is performing and its current political situation.

The more information you have, the better.

For the sake of scalping, day trading, and swing trading, it is recommended to focus upon the technical analysis and supplement that with a solid understanding of the fundamentals.

There is no need to become an expert economist, but a rudimentary knowledge of what is going on with the currencies and their nations will go a long way.

Trading styles

There are three (or possibly four) main trading methods for you to choose from when you are looking to enter a position. These are scalping, day trading, swing trading, and position trading.

For the sake, of course, we will be looking at the first three methods just mentioned. This is because position trading involves holding a position for months and possibly even years – it’s a buy and hold method that doesn’t really qualify as active trading.

With that being said, let’s break down the three individual methods and explain what each one entails.

Scalping

Scalping is a highly active and fast-paced trading style. The idea of scalping is to take 10’s or 100’s of small profits each day, aiming to take advantage of tiny market movements.

Typically, a scalper will be in and out of the market within a few seconds up to a maximum of a few minutes.

It is for this reason that a scalper will predominantly be looking at the charts on very low time frames, such as the 1 minute, 5 minute, and the 15 minute. Some traders even prefer to go lower than that.

To be a successful scalper you must be able to react quickly to market movements and have a high level of discipline. You must know when to take your profit and know when to cut your losses.

One small blip can ruin a whole day of successful scalping, which can be very frustrating. If you can maintain high levels of focus and can concentrate for long periods of time without getting distracted, then scalping may be a good option for you.

Screen time: High

Number of trades per day: 25+

Timeframes: M1, M5, M15

Day trading

As the name suggests, day trading is the opening and closing of trades within the same day. Day traders normally scan the market for a trade, set up a position, enter it, and then close it all on the same day.

You don’t need to have the same laser focus and concentration that a scalper would, however, it does still require discipline.

Typically, day trading is best suited to those of us who don’t like to keep our trading positions open overnight. If you prefer to get a good night’s sleep without worrying about what your trade is doing, then day trading is probably your best bet.

This is the reason why day trading is so popular – you can open your positions, make a profit, close your laptop down, and the job is done.

Screen time: Medium

Number of trades per day: 0-5

Timeframes: M30, H1, H4

Swing trading

Last but not least, we have swing trading. This is very similar to day trading however the positions are kept open overnight and can be held anywhere between two to six days – sometimes even a few weeks.

As this is a more hands-off approach, it is best suited for people who don’t want to be staring at a screen all-day yet don’t mind having open positions.

The markets tend to fluctuate quite a lot, so swing positions may be at a loss for days at a time before finally turning into profit. This requires a certain mental toughness and the discipline to stick with your trade and to trust your own analysis.

This is a very popular form of trading as it does not require a lot of time to manage, however, it does leave traders at risk during the weekends and during market closes, which upon reopening can produce volatile and abrupt market movements.

Screen time: Low

Number of trades per day: 0-3

What timeframes: H1, H4, D1, WK

Brokers

In order to trade on the forex markets you need to have an account with a broker. A simple Google search will bring up hundreds of different brokerages all fighting for your custom, but to be honest it is a bit of a minefield.

It can be confusing and overwhelming for newbie traders to pick a brokerage, but don’t worry, we have gone ahead and picked out one of the best for you.

Our personal brokerage recommendation – NAGA

Why Naga?

Naga is a fantastic broker that offers over 500+ tradable asset classes including, forex, stocks, commodities and even cryptocurrencies.

Of course, we recommend sticking to forex trading but if you do like to trade any other assets then you have the added convenience of keeping it all with the same broker.

On top of that, the platform is extremely friendly to inexperienced and newbie traders. There is no minimum deposit required and they offer a wide range of deposit and withdrawal options, unlike some of their competitors.

They have a top notch customer support team and are fully regulated so you can be sure that your funds are safe.

Here is a list of the key benefits you can expect from signing up with NAGA as your broker.

  • Ultra low fees
  • No minimum deposit
  • Multi-currency accounts
  • Great customer support
  • NAGA Mastercard
  • Regulated by CySEC
  • Copy trading (copy top traders positions automatically)
  • Educational content to help you with the platform and other basics that you may need help with.
  • Fully supported DEMO account available.

How to set it up

The best and easiest way to start trading with NAGA is to download MT4 directly from their website. NAGA will already be connected which means you don’t have to mess around connecting the broker yourself.

Download MT4 directly from NAGA here – https://www.naga.com/register?is_flexible=true&cmp=4u9u7h3a&refid=1086

If you already have MT4 set up then you can register for a NAGA account here:

https://www.naga.com/register?is_flexible=true&cmp=4u9u7h3a&refid=1086

MetaTrader 4

Metatrader 4 is a massively popular trading software that you can download and use for free.

It’s a fantastic tool that forex traders can use to view real time price movements, open and close positions, view and edit charts and graphs, and access all of the technical indicators that we have mentioned throughout this course.

In the past it was solely for the use of forex trading, but now you can trade futures, equities, CFD’s, and more, all using this one platform.

It’s a great one stop shop for everything you need when you trade, so we highly recommend that you download it. It’s extremely user friendly and it offers a massive range of currency pairs – way more than you would ever need access to.

How to set it up

Okay, so let’s run through the steps that you need to take to get started.

Step 1: Download Metrader 4 (MT4.exe) – You can download it from https://www.metatrader4.com/en/download

NOTE: You can download MT4 for PC, iPhone, iPad & Android

Step 2: Open an account with MT4. Here you can decide if you want to use a live account or a demo account. If this is your first time trading then it is recommended that you start with a demo account to get to grips with things before going live.

Registering with MT4 will require that you upload some identification documents, so make sure you have those to hand.

Make a note of your account details, username and password for future reference,

Step 3: Now you need to link your broker account to MetaTrader 4. To do this, simply log in to your brokerage account from the MT4 interface.

NOTE: For those of you that don’t have a broker yet then check out or next section for our personal recommendation and how to get set up.

How to open a trade

Alright, now that we have our account set up with MT4 and our broker is linked to the software we need to learn how to open a trade.

Firstly, select the currency pair of your choice by clicking on the “Window” tab that you can find at the top of the interface.

Select the currency pair by clicking on the ‘Window’ tab at the top of the MT4 platform, and then select ‘New Window’. All of the main currency pairs that you should be trading are there.

You can then click ‘New Order’ on the MT4 toolbar or press F9 to open an ‘Order’ window.

The screenshot below displays the ‘Order’ window for the EUR/USD currency pair. From here it is a relatively straightforward process. Simply enter the trade size that you wish to open your position with and then choose either “Buy by Market” or “Sell by Market”.

Doing this type of order will automatically fill the order based on the current market price. While it’s okay to do this sometimes, it’s far better to enter a “limit” trade and choose your entry spot carefully with the technical analysis that you conducted.

To do this, open the drop down list by clicking on “type” and select “pending order”. Here you can set up a buy or a sell at specific price points in the market.

Set take profit & stop loss order

When you place your order you will be presented with the option to enter the price point for your take profit and stop loss orders. It is very important that you know these areas before you trade.

If you have followed our course properly then you will know the importance of discipline and trading consistently using the correct RRR. This is the point where the theory turns into practice.

Every time you open a position, make sure you have at least a stop-loss order placed at the same time. This will ensure that your trading account is safe from any flash crashes or big market swings while you are in your position.

You can enter your take profit and stop loss orders manually into the field or you can use the arrows to automatically populate it with the current market prices.

Economic Indicators

When you’re out there conducting your fundamental analysis and researching the latest developments on the markets you are going to come across a lot of economic indicators. GDP, CPI, employment rates, etc, etc.

It’s all well and good finding this information, but what does it really mean and how does it impact the value of a currency?

In this section, we will break down the main economic indicators that you will come across and discuss what each of them signifies and how the markets will typically react to them.

Gross Domestic Product GDP

Let’s start with one of the big ones, GDP. Unless you have been hiding under a rock or you have never watched a news channel before, you will most likely have heard of GDP before.

Gross Domestic Product is the widest measure of the overall health of an economy. It is a way to measure the market value of a country’s goods and services. Because of this, it is used to determine how well or how poorly the country is performing economically.

It’s such an important indicator that this is what economists use to determine what stage of the business cycle we are currently in. If we see two consecutive months of negative GDP, this is what we call a recession. As soon as we enter a positive month the depression is considered to be over.

This is a good indication of the current sentiment around a currency. If the country’s economy is in a recession then there will be a higher likelihood that the value of that currency will fall. Something to keep in mind.

Note: It takes a long time to compile the data that goes into the GDP calculations. By the time the data is released most of the information is already known, so usually, it has little to no impact on the market. However, if the GDP figure is far from what is expected then it can certainly cause chaos in the market.

Non-farm payroll

Non-farm payroll, or NFP, is a key economic indicator for the United States economy. As the USD is by far the most traded currency in the world, chances are you will be trading using it at some point in the future.

NFP  is intended to signify the total number of paid workers in the U.S. excluding farm employees, government employees, private household employees and employees of nonprofit organizations.

It is one of the most significant economic indicators for the U.S. economy and the fluctuations in the market prove that.

It is normally released on the first Friday of every month at 8:30 am EST. You will definitely want to keep an eye on that date. Even in the days before the figure is released the market becomes particularly volatile in anticipation of the release as there are thousands of traders trying to second guess the market.

There will be a general expectation as to what the figure will be, but of course, this expectation is not always correct.

The higher the payroll number the better for the U.S. economy. This is definitely one to keep an eye out for, but be warned, the markets can get extremely volatile in these moments.

Consumer Price Index

The consumer price index, or CPI, measures the costs of goods and services by calculating the average price of a specific basket of goods or a service.

When the CPI changes this is a reflection of the rate of inflation which is a very important figure when it comes to currency trading.

It gives us an objective view of how quickly prices are rising or falling in the economy. This number is also released monthly in the United States and in the UK, so you need to keep an eye on these dates.

This metric is used to determine if the economy is on track with the projected inflation rates. If they are then this is good for the economy and will usually attract investment, if not then the currency may weaken.

Employment Indicators

Employment is one of the key indicators that signify the strength of a country’s economy and how well the government’s policies are performing.

There are a number of indicators you can follow to get employment statistics, one of the most significant is the NFP.

There is an Employment Monthly Report that is released once a month that displays the employment rate and the unemployment rate (given as a percentage of the total labour force).

The lower the unemployment rate the better it is for the country’s economy.

Interest Rates & Central Bank meeting

Any change in the interest rates is typically met with a huge reaction in the forex markets. These rate changes affect everybody and everything surrounding the currency; the buyers, sellers, importers and exporters.

The Central Bank of a lot of the major forex currencies has regular meetups each month to discuss the current state of the economy. Sometimes the bak can make drastic decisions such as altering exchange rates or implementing quantitative easing strategies.

These are huge events in the forex world and the markets will usually wait in anticipation during each of these regular meetings. Unless you have some key insider information, it’s best to be cautious and avoid trading around these periods.

Retail Sales

Retail sales measure exactly how much consumers are spending in stores that sell goods. It counts all the receipts from our high street spending, grocery store visits, DIY trips, you name it.

This gives a great insight into how consumers are behaving and essentially how the economy is performing. If consumers stop spending money, the economy will stop working. Money makes the world go around, after all.

Retail sales figures are crucial indicators to the strength of the economy because if the consumers are spending, it means the profits of companies will be up and share prices will follow. This will attract investment and usually gives a boost to the country’s currency.

Fundamental analysis

As we mentioned previously, fundamental analysis is an approach to analysing the market by looking into the social, economic, and political issues that may affect a country and its currency.

These are all vital components that drastically influence the supply and demand of the currency, so it is worth keeping an eye on them for the periods that you’re trading.

Fundamental analysis vs technical analysis

The main style of analysis that we have covered in this course has been technical. This is the use of indicators, oscillators, as well as the analysis of price action and candlestick reading.

While this is great for short/medium term trading, fundamental factors will always have the biggest effect on the markets.

Truth be told, most traders ignore the fundamentals of the currencies that they are trading. The general argument is that they do not need to concern themselves with macroeconomics while they are trading the smaller time frames.

While there is certainly some logic to this, it is a flawed and naive outlook. The more knowledge we have and the better understanding we have of the markets, the better.

Fundamental analysis can help us to identify potentially turbulent times in the market, shifts in sentiment, and times of great uncertainty – all of which are situations we would be better off watching from the sidelines.

Trading using technical analysis alone is kind of like trading with one eye open. Eventually, you will miss something and run into an unpleasant surprise.

After all, the support and resistance lines you draw on your chart are no match for a central bank adjusting its interest rate or a shock referendum result (ahem, Brexit).

Economic calendar

So how do you keep up with all of these events? Well, the good news is that you don’t need to be an Oxford certified economist. After all, this is “fundamental analysis” not expert, in-depth analysis.

You can simply follow an economic calendar to keep an eye on all of the key dates and important events that happen in the forex world.

An economic calendar is one of the most important tools for traders who wish to keep an eye of the market fundamentals. It essentially lists all of the major economic events that occur across the globe in one easy to read format.

Rather than trolling through all of the news sources yourself and creating your own diary, you can simply take a look at an economic calendar and see all of the important upcoming events for the currency pair you’re trading.

Some of the things that a good economic calendar will list are:

  • Interest rate changes
  • Central bank announcements
  • Political elections
  • Economic indicators (GDP, CPI, employment rates etc.)
  • Company quarterly earnings reports
  • Key speech dates

This is a massive time saver. It brings together all of the information you need in one place. With some economic calendars, you can even filter the results to display the exact event you are looking for. Very handy.

Tip: Even with the use of an economic calendar it is still better to stick to one or two currency pairs when you first start out. It’s easy to get overwhelmed and fall into a state of analysis paralysis. Save yourself the hassle and knuckle down on one pair and become a master of that before you move on.

News sources

If you really want to get your teeth stuck into the fundamental analysis by keeping your ear to the ground on the latest of the forex markets then you will need to find a good news source.

Market news and data are available through many sources, you won’t be hard-pressed to find the information. If you prefer to use the TV to get your news then you will likely find some around the clock coverage on the markets.

Other than that, the internet is your best bet. Stick to the larger and more reputable sources for the most reliable information. Here are some examples of good sources for forex news.

  • Bloomberg
  • Reuters
  • The Wall Street Journal
  • UK Investing

Risk vs reward

What is risk vs reward ratio?

If you have spent some time trading before or if you have studied other traders then you will likely have come across the term “risk reward ratio”. This is a crucial aspect of trading that we must understand if we are to become profitable in the long run.

The risk reward ratio is simply the amount of capital that we are risking for the potential gain that we are targeting.

How to calculate R-R-R

Whenever we want to enter a trade we should calculate our risk/reward ratio first. All we need to have is our entry price, stop loss price, and our target price.

Example one

For the sake of simplicity, let’s use round numbers to explain how this works.

Let’s say we are going long on a currency with an entry price of $100.

Image

First we need to ask, how much would we lose if we lost our trade:

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Next, how much would we profit if our trade won? From this we can work out what our risk/reward ratio is 60/20 = 3:1. In this example our reward is three times the size of the risk.

Now let’s use an example using pips. Let’s say we are entering a scalping position trying to make a 10 pip gain and we set our stop loss at five pips.

In this case we stand to lose five pips if our trade loses and we win 10 pips if our trade wins.

10/5 = 2:1

In this example, our risk to reward ratio for the scalp would be 2:1.

Easy enough, right? But what does this mean and how can it help with our trading?

Why is risk vs reward important?

When we know what risk reward ratio we will be trading with we can easily find out what winning percentage we need in order to be profitable traders. This is very handy to know as you can always stop and take stock of how you are performing and just how far away you are from becoming a winning trader.

Let’s take a look at what we would need to do to break even if we trade at some different risk to reward ratio.

Image

The problem with too high a RRR

As you can see, the required winning rate drastically reduces as we increase our risk to reward ratio.

Sometimes when newbie traders see this, their eyes light up with the sight of the low winning rates, and they think that it would be easy to attain these levels and instantly become a winning trader. While there is some logic to be found in this, there are a few drawbacks that we need to consider.

Firstly, the higher we go with the RRR, the longer our trades will last, and the more exposure we have to the market. As we have mentioned many times throughout this unit, trading is mostly a mental game.

The longer we expose ourselves to the market, and the longer we have open positions, then the more chance there is that our emotions will get the better of us and interfere without trading.

Secondly, if we have a long RRR, we will get stopped out more often than not, and we will have to overcome dealing with many consecutive losses, which can be a tough burden for even the most seasoned of traders.

Lastly, traders will often cut their trades short when they are in these types of trades and will take their profit early. While at first, this may seem like a bad idea, but what they are actually doing is dooming themselves to being massively unprofitable.

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If they cut their winning trades short every time, they will not be reaching that four, five, or six times target that they were aiming for.

That means that they will not be making up for all of those small losses that they have racked up, and they will often never reach the high targets that they set.

Note: It is entirely possible to be a winning trader using high risk to reward ratios, but it is much more difficult. For newbie traders, it is recommended to stick to a lower ratio while starting out until you can find your sweet spot.

What RRR should I use?

It all depends on what type of trader you want to be, however, most traders seem to agree that somewhere around the 3:1 RRR is somewhat of a sweet spot.

When selecting a 3:1 RRR, you will still hit a large portion of your trades without getting continually stopped out and left feeling demoralised.

A 25% win rate using this RRR is definitely achievable using the strategies that we have already brought you in this course, you just need to stick to your trading plan and ensure you trade with discipline every time.

One of the main dangers comes with cutting your winning trades short, so be aware of moving your stop loss to a breakeven position when you don’t need to.

Constantly manage your trade for signs that your initial theory has now become invalid. If it has, it is perfectly fine to exit.

Final word on RRR’s

At the end of the day, the risk to reward ratios are not set in stone. You should chop and change them to fit in with your trading plan and set your targets based upon key levels that you identify in the market.

If you want to set a trade up with a RRR of 3:1 but you see that there is a significant resistance level where 2:1 RRR would be then it would certainly make sense to adjust your trade to avoid that.

The risk to reward ratios should be used as a tool to guide us with our targets and help us trade, not to hinder us from applying solid trading fundamentals to each trade.

Risk management basics

Forex is all about having a plan and sticking to it. As soon as veer away from the plan you are unnecessarily exposing yourself to the market in ways that you didn’t prepare for.

Whether that be trading with more money that you are prepared to lose, or using a different strategy than you have practiced and planned to stick to, straying from your plan can be costly.

That said, let’s look at some key areas of risk management for you to follow when trading the markets.

Position size

You need to work out exactly what percentage of your trading balance you are willing to risk on each trade, once you have that information you can decide what size of lot you are going to buy and how many of them you will purchase.

Most professional traders risk 1% or less of their account every time they enter a trade.

So if you have a $10,000 account then you should be risking no more than $100.

You should keep this number consistent at all times. Do not risk 4% on one trade, 1% on the next and then 3% after that.

Choose your account risk and then stick to that at all times. Consistency is key.

Setting stop losses/ pip risk

Now that we know how much we are willing to lose on our trade we need to calculate where to set our stop loss.

We will go into much more detail on stop losses in the next section, but for now just remember that the stop loss should be set at a predetermined distance from our entry point that signifies our maximum amount of risk per trade.

To do this, we must calculate how much one pip movement is worth to our account and then set our stop loss accordingly.

For example, if one pip is worth $1 to us and we have a $10,000 dollar account then the maximum we can afford to lose using a 1% risk is 100 pips.

Taking profit

This is secretly one of the hardest parts of trading, where to exit when we are in profit. We must use ur indicators and trade research to determine key points to exit our trades.

We should always enter a trade with a key idea of where our entry and exit points are, both stop-losses and profit taking areas.

Again, we will go over this in detail in a few sections time.

Keeping disciplined

As we have mentioned many times over this course, consistency and discipline is vital. Follow your trading plan, stick to your risk management strategy with effective position sizes and always place appropriate entry and exit points.

Why is it important

Having a solid risk management strategy that you adhere to is probably one of the most important aspects of successful trading.

Making a mistake with a trading indicator, placing a support or resistance incorrectly, or even hitting short instead of long are all redeemable errors. We are human, we all make mistakes. However, if we don’t stick to our risk management strategies, these small mistakes can wipe out our entire trading balance. This is exactly what we are trying to avoid.

Good things come to those who wait. Trade patiently, diligently, and with discipline and you will be half of the way there.

Note: If you stick to these tips and practice proper risk management you will likely never put yourself in a position of wiping out your account.

Take-profit

What is a take-profit?

Taking profit is essentially what we want to be doing each and every trade we take. A take profit is the place where we set our exit trade to get out of the market for a profit.

Similar to a stop loss, we should set our take profit trade at a predetermined place and not just a random point.

Newbie traders often make the mistake at aiming for a certain price level or a predetermined percentage gain.

These are just arbitrary levels and are not based on any sort of technical analysis and will almost certainly mean that you’re leaving money on the table.

Why is it important?

Taking profit is arguably one of the most emotionally and technically challenging aspects of forex trading.

People often struggle with taking profits early and seeing their trade run away on a huge move that they have now missed out on. This can really test even the best trader’s mental strength.

Mastering the art of taking profits is crucial for successful forex trading. If we get out too soon we could see our trade run away and we have missed out on profits.

On the other hand, if we don’t set appropriate take profit levels we could see our winning trades become losing trades if we have unrealistic targets.

Where to set our take profit trades?

There are many methods that we can use to take our take profit levels, here are a few of the most common:

  • The key support and resistance levels
  • MACD crossovers
  • RSI overbought/oversold levels
  • RSI divergences
  • Use your predetermined risk rewards ratio (more on this in the next section)

Look for critical levels in the market that could prove as obvious obstacles. If you are in a long position, it probably wouldn’t be a good idea to set your sell order above a significant resistance point.

Every trade you take will present a delicate balancing act between being over cautious and being too greedy. To eliminate this, set your targets at key levels in the market that take out the subjectivity in your trades.

Multiple take profit zones

Some traders find it beneficial to spread out there take profit orders over two or more areas in order to take their profit incrementally.

This can really help with the mental side of trading as once you have reached your first TP (take profit) level your trade will remain in profit even if it dips below your initial entry point.

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This is usually more common in swing trades that are targeting larg pip movements over one to a couple of days. If you plan to do this then it makes sense to set the TP orders at or just before key levels in the market.

In the next section, we will look at risk-reward ratios that will help you to set better targets for your take profit orders.

When & when not to trade

Most of the information you will find when you begin your trading journey will be on how to best spot market opportunities and identify signals when they present themselves.

While, of course, that is extremely useful information, it could be argued that it is equally important to know when NOT to trade and to avoid the market all together.

Whether it be for a personal reason or due to macroeconomic events out of your control, there are certainly moments where you would be better waiting on the sidelines to trade another day.

Personal reasons to avoid trading

First of all let’s look at some times when you shouldn’t trade due to personal reasons. Some of these may seem obvious but you would be surprised how many people ignore these warning signs and blow away their entire trading capital.

Trading when highly stressed/ tired

If you are stressed/tired then you will not be performing at your best and your decision making will be sub par. It’s far better to take a rest and come back when you are feeling fresh again.

If you must do something to do with trading then it would be far better to use this time to study or to paper trade rather than using live funds.

During emotional times

Trading is no different to any other job that you may have in the real world. If you have some serious family issues or if you are under a lot of mental pressure then it would be better to take some time off.

If you ever feel like your emotions are getting the better of you then save the trading for another day.

Trading when surrounded by too many distractions

It’s essential that you are 100% focused when you are trading. You should always be monitoring your positions for how your trades are performing and how the market behaves. It’s hard to learn from the market if you are constantly distracted.

Trading after a heavy loss or during a continued losing streak

After a big loss there is no way you can trade with a clear head. Step away from the computer and come back another day when you have refocused and recovered from the loss.

It would be even better to analyse the trade to see what you did wrong so that you can avoid making a similar mistake in the future.

When you are at work

This ties in with a few of the aforementioned points. If you are at work you likely will not be able to focus and you will be distracted on multiple fronts. Also, we don’t want you to lose your job just yet! Wait until you’re bringing in the big bucks first.

Fundamental and technical reasons to avoid trading

The market reasons for not taking a trade are situations that are way out of your control.  Certain events have the potential to send shockwaves through the market, causing huge swings and periods of volatility.

Here are a few examples of such events. During these times, it’s almost always better so sit out and watch from the sidelines.

Large news events

News often plays a big role in the price fluctuations in the market. Some currencies are heavily tied to commodities while others will move depending on how their stock markets perform or sometimes even individual companies.

Keep one eye on the news and make sure you understand what impacts the currencies that you are trading.

Political elections results

This is one goes without saying. Keep an eye on key election dates as the price can fluctuate wildly based on election results.

High profile speeches and budget releases

High profile speeches and budget releases can affect the market considerably. Be aware of when they take place and wait for them to pass by so you can avoid the market uncertainty and resulting speculation.

Bank holidays

A large portion of the trading volume comes from the banks. When they are closed during the bank holiday it means the markets are far less liquid than usual. This can cause market stagnation and occasionally erratic price movements.

Market open/ close

It’s a good idea to try and avoid the market/open close as it can often bring increased volatility. Traders are frantically trying to open/close their positions which can cause erratic price movements.

A word on overtrading

As the markets are open 24 hours a day, five days a week, there are a huge number of opportunities for traders to take advantage of. This is both a blessing and a curse.

Overtrading is one of the major reasons why traders lose money. You should not be entering a position at every signal that you see. As the old saying goes, “good things come to those who wait.”

It pays to wait for clear cut setups where a number of your indicators are all pointing in the same direction. Stick to your trading plan religiously, don’t chase your losses, and keep your trading decisions as objective as possible.

Stop-loss

We have mentioned stop-losses many times in this course so far, and for good reason, we need them! Time to dive a little deeper into the specifics.

As you know, the forex market can be volatile and difficult to predict at times. Even the best traders get it wrong and find that the market moves in the exact opposite direction to what they predicted.

Even if all our indicators are pointing in one direction it is still entirely possible that the market can move violently in the other. A major economic event, a new banking policy, and even strong rumours can affect the price out of nowhere, we must be prepared for this.

A lot of newbie traders will make the mistake of riding the trade it and hoping (praying) that the market will turn back in their favour. Others will cut their loss immediately as soon as they see it turn red and unfortunately, both of these strategies are incorrect.

What we need is a stop-loss. Simply put, a stop loss is an order that we place into the market that automatically executes when the price hits a certain level. It removes all the stress and anxiety from trading without a stop loss and acting the market run away with our entire trading balance at risk.

Sometimes it’s best to cut your losses and live to fight another day.

Where to place our stop loss

As we touched upon earlier, we can calculate precisely how many pips we are willing to lose for each trade.

If we know that we only want to risk 1% of our account, we should calculate how many pips that equate to, and then we know the maximum point at which we can place our stop loss. However, this is NOT the best strategy. We should always set our stop-loss at the point of invalidation.

This means that we should place our stop loss at the point where the reasons why we entered our trade are no longer valid.

For example, let’s say that we expect the price to bounce off a support and reverse into an uptrend. Rather than setting our stop loss at 100 pips below the support, we could set it at maybe 10-15 pips below the support.

That way, we know that our initial trade theory has been proven to be wrong (the support did not hold), and we can exit for a small 10-15 pip loss.

For the sake of this trade, it would be unnecessary to lose all 100 of our allocated pips based on our risk management strategy.

This is the MAXIMUM you are willing to lose on a trade, not how much you should lose each time.

Trailing stop-loss

Other than a setting a regular set stop-loss we can also utilize what is called a trailing stop loss.

A trailing stop loss will move based on fluctuations that occur during the trade.

For example, if you set a BUY order on EUR/USD at 1.1000 with a 50 pip trailing stop at and the market moved up to 1.1050 then the trailing stop would move up to 1.1000.

Every-time the trade moves in your favour the trailing stop loss will trail behind by 50 pips. This is a great way to lock in profits and attempt to ride successful trades out for as long as possible.

The stop loss will only trigger once the market has moved against you by 50 pips.

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Moving your stop-loss to your entry position

One thing that traders like to do is to move their stop loss to the point of entry when a trade goes in the favour. This can be a great tactic as it essentially removes all risk from the trade and it effectively a “free shot” at making extra profits.

While this can often be a good idea and can real help remove the stress from a trade it can also mean that you turn some winning trades into break even ones

Sometimes the market can fluctuate violently and it can take out your stop loss before carrying back on its trajectory.

If this happens you can see your trade closing before you get to your profit taking zone and you have just missed out on a winning trade.

While it’s okay to do this sometimes, it’s almost always better to set your stop loss at the point of invalidation.

Creating a trading plan

First things first, we need to create a trading plan. As the old saying goes, “fail to prepare, prepare to fail.”

If we just hit the markets any time we like without giving much thought to what our plan is and why we are doing what we are doing, then you can guarantee that you will be recording losses before you know it.

Granted, you may get lucky for the first few times, but eventually, that luck will run out, and the lack of planning and a clear strategy will undoubtedly show.

A trading plan, not a trading strategy

When we say trading plan we don’t mean that you need a clear idea of where you will enter and exit a trade, instead we mean you need to have an overall sense of what your goals and ambitions are for trading and what sort of funds and time you can allocate towards these goals.

The trading plan should be personal to you, honest, and realistic. This is what is going to help you decide, what, when, and how much you want to trade.

This should be the foundation of your trading and should be referred back to when you feel yourself getting into a rut, or even to stop yourself getting carried away when you’re on a winning streak.

A solid trading plan should help you to keep a logical trading mind and keep your emotions in check by helping you to make more objective decisions and fostering a trading discipline which is so vital to becoming a profitable trader.

How to make a trading plan

Here is a template to follow when making your plan, be sure to include all of these elements and anything else you feel is important.

1.   Write down your main motivation for wanting to trade

As with anything in life, it never hurts to stop and take stock of what we are doing and why it is we are doing it.

Why do you want to start trading? Do you want to become a full-time trader, add a little extra income to your full-time job, or do you want to become a fully-fledged expert, and find a job on Wall Street?

Whatever it is, write it down and keep this in mind when you are trading. It helps to keep things in perspective later down the line.

2.   How much time can you commit to your new trading career?

How much time are you willing to commit to this new hobby/career? Are you a stay at home parent who can commit 40 hours per week or do you run five jobs and have only a few hours spare? Can you trade during work hours, or not?

If you only have a limited amount of time you need to plan efficiently and make sure you are fully concentrated when doing so. Set aside some dedicated trading time and stick to it, no more, no less.

3.   Clearly outline your goals and what you want to achieve

Similar to the first point, but this time you should write down exactly what you want. Use numbers!

For example, “I want to increase my trading balance by 20% within the first 12 months”. That way you can hold yourself accountable and refer back to your goal when you need to.

4.   How much capital can you raise for trading?

This is important. Never risk what you cannot afford to lose. Seriously.

This gets said a lot but it is one of the most important factors in trading. If you are overinvested that you will not be trading efficiency, it is simply impossible.

Losses will be harder to take and you will likely be trading with scared money which could lead you to setting stop-losses too tight and taking profits too soon. Keep it realistic.

5.   Risk tolerance

We will go into this in more detail later on in the unit, but for now, right down how much you are willing to lose on one trade. The smaller the better of course. Somewhere around 1-2% per trade is reasonable.

It also makes sense to have a daily loss limit. If you lose 2% of your trading balance then call off the trading for the day. If you don’t you will likely chase your losses and trade poorly.

6.   Pick a currency pair and a time frame

Don’t be the jack of all trades and the master of none!

It can be very overwhelming to have 30 markets up on your screen with indicators all over the place.

Save yourself the stress and stick to one currency pair and one time frame. That way you can quickly learn how that market behaves and how you can best exploit it.

When you get more comfortable you can branch out when you are ready.

7.   Create a trading diary

Last but most certainly not least, create a trading diary. Keep track of everything. There are alot of great tools that you can use online to help you keep account of your trades.

Some of the most important things to write down are the reasons for entering a trade (hopefully there is more than one), how the trade performed, and a post-trade analysis.

By doing this we keep ourselves accountable for every trade and it highly reduces the risk of erratic and sub-optimal trading.

Be sure to go over your diary regularly. This will help you to highlight any weak points that you need to improve on.

Consistency when you trade

Consistency is absolutely crucial to becoming a winning trader, especially in the long run. So how do we achieve this?

Well, we should be aiming to make our trading as OBJECTIVE as possible. This means we need to take our emotions out of the trading process as much as we can by having a clear trading plan and a set strategy to follow.

This means that a large part of the decision-making process has been removed from the equation, and we can simply focus on scanning the market for good setups, and we can monitor the performance of our trades.

Consistent risk

One of the most vital areas we must maintain consistency in is with our level of risk. If we overexpose ourselves on a trade and end up losing, then we can wipe out a considerable part of our trading capital. This is something we want to avoid.

Calculate how much of your trading balance you are willing to risk on each trade. As we have suggested, this should be somewhere close to the1% mark.

Once you have this figured out, it is best advised to trade with consistent lot sizes so that you can keep your market exposure at the same level each time you trade.

This way, you will become more comfortable with trading that lot size until you are ready to increase your stakes.

Consistent risk-reward ratio

Many people like to trade with a consistent risk-reward ratio as it allows them to analyse their trades on a macro level and compare their actual win rate with their desired win rate.

For example, if you trade with a 2:1 risk-reward ratio, you know that you need a 33% win rate to break even. If you keep track of all your trades, you can easily see how you are performing and just how far above or below breakeven you are hitting.

If you switch between RRRs, it can become hard to keep track of your win rate for each ratio. 

The best way to overcome this is to keep track of your trades and write them into your trading journal every time. Make a note of the RRR you used and record the outcome; that way, you can split test your results and see which RRR is performing best for you.

If you stick to one RRR then you will be able to understand how the market behaves during these types of trades and this will help you improve as a trader much quicker.

The skills required to become a great 1:1 RRR trader are far different than those who trade at a 10:1 RRR – stick to one area and hone your skills there. 

Note: As always, the RRR is not the be-all and end-all. Set your entry and exit points strategically and be aware of key market levels.

Fibonacci

Fibonacci is an extremely interesting concept, not just in trading but in the natural world.

There are specific numbers that we see in nature all the time. Together we call them the Fibonacci sequence and they look like this:

1,1,2,3,5,8,13,21,34,55…

As you may have noticed, the sequence is very simple. The previous two numbers in the sequence add up to equal the next one.

1 + 1 = 2

1 + 2 = 3

2 + 3 = 5, and so on.

Now here is the interesting part. When we divide almost any of the Fibonacci numbers by the one that comes before it in the sequence (excluding the first few entries to the sequence), you get the same number every time – 1.618. 

For example, 144/89=1.618, or 55/34=1.618

This number is now commonly referred to as the golden ratio and it can be found everywhere across the natural world.

We can see it in how pine cones are arranged, the angle at which flower petals are places with one another, seashells, hurricane formations, human faces, DNA molecules, and even the way our galaxies are formed. Pretty amazing right?

Okay, so what does all this have to do with forex trading I hear you say? Well, it turns out that these numbers also give us significant price levels when it comes to trading.

Using charting software, we can plot a Fibonacci tool onto our graph which will display Fibonacci retracement and Fibonacci extension levels that we can use to enter our long/short position. These give us great entry and exit points, so it is definitely worth taking the time to master these tools.

Retracements

Let’s start with the most common tool, the Fibonacci retracement.

When we divide a number by the next one along in the sequence, we get a number that is pretty close to 0.618. When we divide number by the number two along in the sequence we get 0.382; three along, we get 0.236.

Also, when we divide one by two which is located right at the start of the Fibonacci sequence we get 0.5.

Okay, now we have these key Fibonacci numbers, we can turn them into percentages.

So how can we apply this to our trading? Take your Fibonacci tool in your chart software and draw a line from the bottom of the price move you are looking at to the top. This is called the swing low and the swing high.

After you have done that, you can pull down a graphic that will display the key Fibonacci levels that the price may retrace to.

These levels are said to act as hidden support and resistance levels in the market and we can place our entry, exit and stop losses around these points.

Extensions

We can draw Fibonacci extensions in the opposite way. Take your Fibonacci tool and draw a line from the swing high to the swing low and then extend the graphic to see the key Fibonacci extension levels.

Similar to the retracement levels, the key Fibonacci extension levels are: 38.2%, 50.0%, 61.8%,  as well as the 100%, 138.2% and 161.8% extensions.

These levels will initially act as resistance levels for the price to break back through again. Once the price has broken through, they will act as support.

Note: Fibonacci levels should be used as a tool to accompany your other trading strategies and should not be used alone. If you see that Fibonacci support or resistance coincides with another indicator, such as a moving average or RSI divergence, then this may suggest a good position to open a trade.

RSI Divergence

As you may have noticed, the market tends to move about quite substantially. In certain currency pairs, you could see the market dipping into overbought and oversold territories quite regularly.

If your strategy was to enter a long position when the market is oversold and to enter a short when the market is overbought, you would find yourself in quite a few trades.

For most traders, this simply isn’t enough to go on and it may not prove to be as reliable as some people claim.

Luckily for us, the fun doesn’t stop there with RSI. Not only can we search for overbought and oversold regions, but we can also look for instances of bullish or bearish divergence that indicate trend reversals in the market.

What is divergence?

It is worth keeping in mind that RSI is simply a calculation of what has been going on in the market. It is a reflection of past market prices and the relative strength of the price.

Generally speaking, the RSI will follow the price action. However, when it doesn’t follow the market and we get different signals, this is what we call divergence which can be a very powerful indicator indeed.

Bullish divergence

A bullish divergence occurs when the RSI hits the oversold region making a “bottom”, this is then followed by a higher low while the price action is showing “lower lows”.

Simply put, the market is still falling to new lows despite the RSI indicating that it is strengthening. This is the divergence – two conflicting signals.

This indicates a rising bullish momentum and once the price breaks out of the oversold territory this is a signal to enter a new long position.

Bearish Divergence

Bearish divergence is the exact opposite of bullish divergence. It occurs when the RSI reaches overbought territory and makes a high followed by a lower high while the price is simultaneously posting higher highs.

This suggests that the recent upward trend is coming to an end and the buyers are running out of steam.

This would be an obvious time to enter a sell position in the anticipation that the market will fall.

Note: RSI divergences are far less common than overbought/oversold signals but they are arguably more accurate and can be very lucrative when they present themselves.

Relative Strengthen Index

The relative strength index, or more commonly referred to as RSI is another momentum indicator that we use in technical analysis that measures the strength in the recent changes of price.

It is an extremely popular tool, you will have likely come across other traders using this tool and often you can find traders having this as one of their only indicators.

It is relatively simple to comprehend and it gives some fairly simple signals to follow when incorporating it into your trading arsenal.

What is RSI? 

The RSI is depicted as an oscillator on our trading chart and has a value from 0 – 100 and will look something like this on your chart.

The blue line that you can see on the indicator represents the RSI and what level the market is currently trading at.

The RSI will rise when the number and the size of positive closes increases, and it will fall as the number and the size of negative closes increase. As mentioned, the RSI can only fall somewhere between 0-100, however, there are two very important levels to keep an eye on when it comes to picking up trading signals.

Oversold

As you can see from the graphic above, we have two dotted lines displaying “oversold” and “overbought”.

Typically, when the RSI falls to 30 or below, the market is considered to be oversold. The more oversold the market becomes, the higher the likelihood that the market will rebound and the price will strengthen.

Overbought

The opposite is true for when the market is starting to run out of steam. When the RSI rises above 70, this is considered to be in overbought conditions and the market will be more likely to fall back down.

The higher the RSI goes, the more likely the market will lose strength. What goes up most come down at some point.

Trading signals

RSI is a great tool for recognising when market reversals may be ready to happen. If the market reaches overbought or oversold conditions you should look for other indicators to give you confluent reasons to enter a position.

For example, if you see that the market is about to hit a support at the same time that the RSI hits 30 and is now oversold, that would be a great time to open up a long position.

Double bottom & double top

Okay, now it is time to start looking at some patterns that we can see on our charts. Double top and double bottom patterns appear on our charts when the price action of the currency pair moves in a similar way to the letter “W” or “M”.

The letter “W” represents a double bottom as it shows the price rebounding off of the same price point twice. This indicates a bullish trend reversal.

The letter “M” represents a double top as it shows the price rebounding off of the same price point twice. This indicates a bearish trend reversal.

These are very important technical analysis patterns that we can use as traders to try and predict where the price will move in the future.

Double top

Here is a diagram of a double top. As you can see, the market is in a bullish/uptrend and moves on to create a new high (shown as peak 1 in the diagram). The price then falls down before bouncing back up again to create another high (shown as peak 2).

When the price falls after reaching peak 1, the area that it reaches is referred to as the “neckline”. This is a vital price point that we will come to in just a moment.

For this to qualify as a double top, peak 2 must not exceed the heights of peak1. The bullish trend must try to break new heights but fail and then fall back down to the necklines.

So how do we trade based on this information? During a double top, we would enter a sell/short position when we see the price break the neckline after the second top. The breaking of the neckline confirms the double top and usually signals a bearish trend reversal that we can capitalise on.

As you can see from this example, we have two clear peaks and then a clear break through the neckline following the second peak. This would be our entry point for a sell.

Double bottom

No points for guessing what a double bottom is. Yep, it’s the mirror image of a double top.

Here is an example of a double bottom. As you can see, we had the first bottom followed by a rebound up to the neckline followed by another rebound to the second bottom.

We should enter a long position when we see that the neckline has been successfully broken.

Tip: Double tops and double bottoms can be extremely profitable if we can successfully identify them. However, if you misidentify one then it can be very costly.

Make sure you set a tight stop loss and manage your positions carefully. It may be beneficial to paper trade these patterns for a while before live trading them so that you can practice spotting them without putting your trading capital at risk.