Guide To Forex Trading

Tip No. 2 - Get Smart!

Get Smart - Right Size Your Trades!

After you have made a few trades, go to your account and find the statistics page. There you will find important information such as the number of winning trades you have made, the average win and the average loss. These three figures allow you to find the Kelly Ratio which, put quite simply, tells you how much of your capital you can afford to risk in a single trade. After all, you do want to trade as much of your capital as you can safely afford to in each and every trade you make!

Here is the formula: Kelly Ratio = p-(1-p)/[W/L]
where p= percentage of winning trades
W = average win
L = average loss

So if you on average win only half the time, p=0.5, and if W = 4 and L = 2 then your Kelly Ratio would be 0.5-(1-0.5)/[0.4/0.2] which comes to 0.5 - 0.5/2 or 0.5 - 0.25 which equals 0.25. That tells you that you can afford to risk 25% of your capital on each trade without getting out of the game easily!

For a detailed explanation on how the Kelly Ratio works, go here.

Tip No. 1

Start Trading!

The first thing you want to do is to practice with your virtual forex account. Remember, there is no such thing as a right trade or a wrong trade. Any trade which works for you is a right trade. So log into your forex account. Forex is traded in currency pairs eg. Euro/USDollar, USDollar/JapaneseYen and so on. Try to find a trend in any currency pair. A word here about forex trends - these trends in forex tend to last for days together at a time. This is what makes trading forex so easy, even for the beginner. Look at the 5 minute chart, then the 15 minute chart, then the 30 minute chart, then the hourly chart etc. right down to the daily, weekly and monthly chart. Do you find a trend? Does the chart go up, up and up or down, down and down? If not, find another currency pair and repeat the process. Once you do find a currency pair which is trending, apply some indicators - good ones to use would be the 20 and 40 period moving average and the bollinger bands. Do you see a chance to make a buck? Try to buy the currency pair which is trending up at a dip. You can even sell a currency pair which is moving down, but more on that later. When you open the order form to make your buy you have the chance to enter a limit at which the order will execute and a stop loss (exit stop) and a exit limit, which is all similar to trading in stocks. You want to ensure that your profit with a successful trade is atleast twice your loss in case you get stopped out. So if you buy Eur/USD at 1.333 and you put a stop loss at 1.233, then your exit limit should be atleast 1.533 - that's all there is to it!

You are more likely to be successful if the Eur/USD has in the recent past gone up to 1.533 at the minimum or if you enter when the Eur/USD has just reversed a losing streak. Also try to get a hang of fundamentals, so if there is a news item that the Euro is strong against the USD, that is a positive to buy the Eur/USD.

Now practice, practice, practice. Until you have atleast 10 trades with different currencies. You will have the statistics to go on to the next step, once you have 8 - 10 trades.