Top 15 forex trading tips every trader should know

A crucial aspect for many beginner forex traders might be to avoid taking on too much too soon, as this could become overwhelming. Many more experienced traders would agree that there are ample opportunities in the forex market daily; however, they’ve learnt which opportunities would be beneficial and which won’t.

When starting, it might be best to keep things simple and not overcomplicate the process. One way you could do this is by having only one position open at a time and analysing only that one position to see how it plays out before entering another.

Another way to simplify things is to use only a limited number of technical indicators; many traders end up using too many indicators, which could sometimes produce conflicting signals.

That said, you could start with maybe only two indicators to assist in potentially avoiding any false signals. In a later section, we’ll look at the various indicators you could implement in more detail.

Starting with a demo account could be a great way to better understand how the market works. It would also allow you to test different strategies without risking real capital.

The only difference between a demo account and a real account is the funds you trade with; most brokers will have a set amount on their demo accounts available for you to trade with and develop your skills. The pricing of financial instruments on these accounts is all relevant to real market pricing to provide you with the most realistic trading experience.

Your forex trading plan can be seen as a comprehensive framework to guide you through the trading process.

The overall plan generally consists of specific rules and guidelines to follow, such as what financial instruments you might want to trade, when to enter and exit a trade according to your chosen strategy, and how much capital you’re willing to put in and risk per trade. The information entered into the trading plan will be specific to you and your trading goals and objectives.

Your trading objectives could be something you want to achieve in the short term, such as limiting the number of losses per trade. Your goals, on the other hand, could be something longer-term, such as growing your portfolio by a certain percentage every month or annually.

It might be essential to remember to keep your trading goals realistic and potentially achievable through patience and discipline. Another reason for a trading plan is to assist in maintaining discipline by only focusing on the rules and guidelines set out in your plan instead of making trading decisions based on emotional impulses or instinct.

Now, when it comes to trading styles, there are four different trading styles traders generally look at, which are:

• Scalping: Traders adopting the scalping style of trading tend to have the shortest-term approach to the market as they open and close a position or multiple positions lasting only a few seconds or minutes, closing all positions before their preferred trading session closes. They also solely focus on technical analysis as they believe that the fundamental aspect won’t necessarily influence price movements because they enter and exit positions in such a short time.
• Day trading: This style of trading is also a short-term trading style where traders open and close positions lasting from a few minutes to a couple of hours, never leaving a position open overnight to avoid overnight fees. Day traders also solely focus on technical analysis; however, they might look at the fundamental analysis aspect of the market when there are important news or economic releases.
• Swing trading: These traders take a longer-term approach to the market, keeping their positions open for a few days to a week or two before closing them. Swing traders use a combination of both technical and fundamental analysis when researching a financial instrument they’re looking to trade.
• Position trading: This is the longest-term trading style, as traders who adopt this style generally keep their positions open for a few weeks to a few months, and some might even keep them open for up to a year, depending on their initial analysis of the instrument. Position traders mainly focus on fundamental analysis, looking at macro and microeconomic data to make informed trading decisions.

In general, the majority of forex traders favour shorter-term trading styles. However, each style is valid, and choosing a style might depend on certain factors stipulated in your trading plan, such as the amount of time you’re looking to allocate to trading or the amount of funds you have available to trade.

As we saw in the previous section, traders could use two different types of analysis: fundamental and technical analysis.

Let’s look at each of them in more detail:

• Technical analysis: This form of analysis involves predicting future price movements, identifying possible trading opportunities, and determining possible entry and exit points by examining historical price data and statistics. Technical analysis traders believe that everything they need to know is available on the charts, rarely considering the fundamental aspects. They might also apply certain technical indicators to further assist in their analysis.
• Fundamental analysis: Traders using this form of analysis examine both macroeconomic and microeconomic data to determine whether a currency is undervalued, overvalued, or fairly priced. Some of the data fundamental analysis traders look at might include, but are not limited to, interest rates, a country’s GDP stat, and political and economic news events.

The style of trading you might adopt will determine which of the two forms of analysis will be more prevalent when navigating the markets. However, it might be worth noting that one isn’t better than the other; it mainly comes down to personal preference and your preferred trading style.

Most traders will generally incorporate aspects from both forms of analysis into their trading as both have their own advantages and disadvantages.

The forex market is open 24 hours a day, five days a week, following the time zones of four major financial capitals: Sydney, Tokyo, London, and New York.

This allows you to trade any time of the day, no matter where you’re situated in the world. However, it might be worth noting that trading volume and liquidity generally increase during specific sessions, especially when there’s an overlap, for example, when the London and New York session overlaps due to the increase in market participants during the two sessions.

Knowing the different trading hours for the forex market could help you identify the best times to trade within your current location’s time zone.

A trading journal is a way of keeping a record of all your trading activities and emotional experiences with every trade. It is an essential tool for any trader, whether novice or experienced.

This could be seen as a diary where you document every detail of every trade, starting with your initial analysis, which could include when to enter and exit a position.

Additional information could also include the type of strategy you might use for the specific trade, the current market conditions, reasons for taking a trade, the outcome of the trade, and your emotional state before, during, and after the trade.

A trading journal also serves as a learning tool, allowing you to revisit past trades, review your performance, and learn from winning and losing trades while also enabling you to gain insights into your strategy and if adjustments need to be made.

There are many different currency pairs for you to choose from, and all of them fall into one of three categories: majors, minors, and exotics.

Major currency pairs comprise pairs from the world’s biggest economies, such as EUR/USD, GBP/USD, and USD/CAD. All these currency pairs will have the US dollar present because it’s the world’s primary reserve currency.

Next is the minors; these currency pairs are still from the world’s biggest economies. However, they don’t include the US dollar, for example, EUR/AUD, GBP/AUD, and NZD/JPY.

Lastly, there are the exotics; these currency pairs include one currency from the majors and another from an emerging economy, such as USD/ZAR (the US dollar against the South African rand) or EUR/THB (the Euro against the Thai baht).

Major currency pairs are generally some of the most traded currency pairs because they are the most liquid pairs. This means many participants are willing to buy and sell a currency pair without majorly affecting the exchange rate, which also results in smaller spreads.

With that said, the minors and exotic pairs might experience higher levels of volatility, meaning higher and more frequent price fluctuations, which some traders could see as advantageous when looking for possible trading opportunities.

Forex trading, like any form of trading, involves risk, which is why a risk management plan might be an essential part of your trading arsenal.

A risk management plan involves having you take certain precautions to protect your capital when the market moves against you or when you experience a series of losses.

One of the steps within your plan could include limiting the amount of capital used for every trade. The goal is to keep the remaining funds safe so that if you experience a loss, you can potentially afford and recover from it. Another goal of a risk management plan is to keep losses smaller than profits, which is where a risk-reward ratio comes into play.

A risk-reward ratio states the amount of money you’re willing to risk compared to the profit you might want to make. For example, a risk-reward ratio of 2:1 on a $1000 account means you’re willing to risk $10 in order to potentially make $20 per trade.

Generally, most traders will risk no more than 1-2% of their capital per trade and no more than 5% across all open positions. However, this could differ for each trader, as everyone has a different approach to risk.

You could also use tools to protect yourself from significant losses.

One of the most popular risk management tools is a stop-loss order. This tool works by having you place the order at a predetermined price level a certain distance from the current market price. When the market moves against your position and triggers the stop-loss, your position will close automatically, preventing any further losses.

Unfortunately, this won’t protect you from slippage; however, placing a guaranteed stop-loss will protect your position from slippage.

Another type of stop-loss you could use is a trailing stop-loss. This involves placing the order a certain number of pips or a percentage away from the current market price, with the order automatically adjusting as the market moves in your favour, only stopping when the market moves against you. This type of stop-loss will also close your position automatically once triggered.

One common mistake many traders tend to make is focusing on only one indicator. This could give a false signal, causing you to possibly trade against the trade.

On the other hand, using too many indicators could result in conflicting signals, so combining only two indicators that could correlate with each other might be better.

Below are four different indicators that could be used interchangeably.

Relative Strength Index (RSI)

The Relative Strength Index (RSI) is a popular momentum oscillator indicator determining areas where price could be seen as overbought or oversold. It calculates the ratio between a currency pair’s highest and closing price and lowest closing price over a specific period.

The indicator has a solid line moving between 0 and 100. There are two horizontal lines, one at the 70 level and one at the 30 level.

Theoretically, when the line is at or above the 70 level, the price could be seen as overbought, whereas if it is at the 30 level, it could be seen as oversold.

This suggests that the price could soon reverse when trading at or above the 70 level or at or below the 30 level.

Stochastic Oscillator

The Stochastic Oscillator is also a momentum oscillator indicator used to determine areas where the price could be seen as overbought or oversold. It takes the most recent closing price data and compares it to the previous trading range spanning 14 days.

The difference between this indicator and the RSI is the solid moving line. This indicator has two solid moving lines: the first is called the indicator line, generally presented as a solid white line, and the second is the signal line, generally presented as a solid red line.

These two lines also move between a range from 0-100. However, the two horizontal lines are instead situated at the 80 and 20 mark levels.

As theory suggests, when the price moves at or above the 80 level, it could be seen as overbought, whereas if it moves at or below the 20 level, it could be seen as oversold.

You could also use this indicator to look for a potential price reversal towards the downside when the indicator line crosses below the signal line at or above the 80 level; however, if the indicator line crosses above the signal line at or below the 20 level.

Moving Averages

Moving averages are lagging indicators, which means they are used to confirm the trend, not identify it. They take the closing price data of a currency pair over a certain period and simplify the visual data by presenting it as a solid moving line.

So, if we take the 20-day moving average, it uses the closing price of the last 20 days, adds the prices up, and then divides it by 20 to get an average price range. This data is then presented in a single moving line to provide a better overview of the overall trend movement for the last 20 days.

Theoretically, traders could confirm the trend by looking at the moving average in relation to the price. If the moving average is above the price, it suggests the market is in a downtrend. If it is below the price, it indicates the market is in an uptrend.

Traders could also use the moving average crossover strategy to look for potential reversals in the market. This strategy involves having two or three moving averages cross over above or below each other.

In other words, if the 20-day moving average crosses above the 50-day moving average and the 50 crosses above the 100-day moving average, it’s known as the golden cross. It signals a possible change in trend direction towards the upside.

Conversely, when the 20-day moving average crosses below the 50-day moving average and the 50 crosses below the 100-day moving average, this is known as the death cross and signals a possible change in trend direction towards the downside.

Support and resistance

Support and resistance levels show how market supply and demand play out. These levels form over time as the price starts to enter a ranging market, where it repeatedly fails to break previous highs or lows and instead reverses.

Resistance levels form when the price fails to break above previous high points and instead reverses towards the downside. At the same time, support levels form when the price fails to break below previous low points and instead reverses towards the upside.

You could look for opportunities in the market when the price is trading at one of these levels, looking for a potential reversal or a potential breakout of one of these levels. When the price breaks below support and moves back up to test that level, it becomes future resistance.

Whereas, if the price breaks above a resistance level and moves back down to retest that level, it becomes future support.

Trading with leverage allows you to open a bigger position with only a small amount of investment capital called margin.

You are essentially borrowing funds from your broker, enabling you to open these bigger positions. Once the position is closed, those funds return to the broker, whether you made a profit or a loss.

Trading with leverage magnifies your potential profits, but it also magnifies your possible losses. This is because the results once the trade is closed are calculated based on the entire position size, not just your initial margin used to open the position.

No strategy is perfect, and it could turn out that it might only work sometimes because, ultimately, the markets are unpredictable. However, there is a way for you to test your strategy to assess how well it would have done during past trades and how you could implement it and possibly adjust it moving towards future trades.

This is called backtesting. It involves going back in time on the charts and looking at historical data while using your strategy to see how well it would’ve performed had you used it back then. Then, using that data, you assess whether possible adjustments need to be made to potentially create a better strategy for yourself in conjunction with your current trading goals and objectives.

This also allows you to examine the history of the currency pair you are trading by reviewing the data to find possible patterns or hints as to what might happen. That said, it might be essential to keep in mind that while backtesting is helpful, past performance doesn’t necessarily guarantee future results.

When the market is closed on a weekend, you could take some time to examine the weekly forecasts for possible trends or news that could influence your trades. 

You could also self-analyse past trades you took during the previous week. This could assist in determining what worked and what didn’t, allowing you to make possible adjustments - if needed - before entering the new week.

Many different emotions could get in the way of making calculated trading decisions; this could be true when making a profit or a loss. Certain emotions such as greed, fear, anxiety, temptation, or doubt could negatively affect your decision-making process, possibly resulting in overtrading or revenge trading.

Overtrading refers to opening a large number of positions simultaneously, disregarding a trading plan completely, and only focusing on making a potential profit.

Revenge trading generally happens when a trader suffers substantial losses and wants to make that money back by opening positions only based on that mentality instead of focusing on the trading plan and sticking to a strategy.

If the market seems to be “standing still” and not much is happening, or if you find yourself suffering a series of losses, it might be best to take a break. Take some time to clear your mind and restart the following day or week, depending on the length of your break. 

Resisting the urge to “chase the market” to compensate for the loss of funds or force the market to move in a specific direction might be essential.

Choosing a broker is a critical part of trading. Before selecting a broker, you could research the various brokers who offer their services within your jurisdiction, read through their reviews, and see what they have to offer to see if they match your trading style.

One of the most critical factors to consider when choosing a broker is to ensure that the proper financial authorities correctly regulate them within the jurisdiction where they might be operating.

Here are some other essential factors to consider when deciding on a broker:

• Do they have competitive spreads?
• Do they offer a range of financial instruments to trade?
• Do they provide access to leverage?
• Are the client’s funds safe and secure?
• Do they provide excellent customer service?
• Do they provide a well-structured and reliable trading platform?
• Do they offer educational resources for traders?

Trade Nation has been regulated by the UK Financial Conduct Authority (FCA) since 2014, as well as various other financial authorities, including the Seychelles Financial Services Authority (FSA), the Australian Securities and Investments Commission (ASIC), the Securities Commission of the Bahamas (SCB), and the South African Financial Sector Conduct Authority (FSCA).

The tips outlined in this article are intended to assist you in developing your overall trading journey. Trading is a skill, and like any other skill, it takes time to develop through constant practice, a combination of education, planning, persistence, and discipline.

One important factor to consider is education; whether you’re a novice or an experienced trader, you can never learn enough.

The forex market is the biggest financial market in the world and is considered the most dynamic and active market. Sometimes, you need to adapt your strategy or trading plan, so it might be essential to make some time every week to learn new things about trading and the forex market.