|Support & Resistance with trend lines & horizontals|
|Using Fibonacci at Forex & Shares|
|What are pips and how do they work?|
|What are the costs of trading Forex?|
|What are the risks of trading in Forex?|
|What is Forex?|
|Which Forex orders exist?|
Recognize trends while trading in Forex & stocks
Prices in the stock market move according to a trend. A trend is a general direction that the price takes. In this article we discuss the different market conditions, and we analyse the importance of the trend. When you understand how trends operate, you can learn to recognize trends in Forex and stocks. This can greatly improve your investment results.
What is a trend?
A trend is a development in a certain direction in the longer term. When you invest in shares or Forex, it is smart to investigate the general direction of the trend. This can be done on different levels. For example, you can look at the trend of the economy or at the trend of a specific sector.
When you start investing, you can achieve better results if you understand trends well. But which trends exist?
What trends are there?
- Uptrend: the price mainly moves upwards.
- Downtrend: the course mainly moves downwards.
- Consolidation: the share price moves mainly between two levels.
The price is mainly moving up, buyers are in the majority. You are looking for the right time to buy.
The price is mainly moving downwards, sellers are in the majority. You are looking for the right moment to sell.
There is a battle between buyers and sellers: there is no clear direction. You buy on the lower levels and you sell on the higher levels.
When you plan to invest in Forex or shares, it is important to determine what the market condition is. Is the price going up, down or is it moving between two points?
How can you use trends to buy shares?
By cleverly responding to trends, you can achieve better results with investments in currency pairs and shares. You can easily read trends from the charts. It is smart for active traders to trade along with the trend as much as possible. After all, it is difficult to predict a trend reversal.
As a long-term investor, it is also wise to keep a close eye on the trends. It is smart to step into sectors with a good perspective for the future. This increases your chance of achieving a positive return.
How can you invest with the trend?
The basic principles of trend trading are simple and can be summarized in two points:
- You use historical price movements to determine the current trend.
- Based on this you predict future movements and take a position.
Investing with the trend works particularly well when it is business as usual. During major events such as the credit crisis of 2008 or the corona crisis of 2020, you see that many trends get disrupted. When there is no clear trend, you will have to apply a different strategy.
How do you recognize a trend on a chart?
With an uptrend, higher highs and lows are created, while a downtrend is characterized by lower highs and lows. In trading, it is important to choose the option with the greatest chance of success. In an uptrend, it is wise to buy and in a downtrend, it is wise to sell.
However, a trend is never entirely smooth. The market moves in a cycle in which the general trend is regularly disrupted. Keep in mind that the Forex and stock market are created by the interaction between buyers and sellers. When the price rises during an uptrend, people will take their profits and sell which can make the price (temporarily) collapse again.
A trend therefore always consists of an impulse (the part of the trend that is going in the right expected direction) and of a retracement (whereby the trend temporarily collapses again). In case of an uptrend, the price does not only move upwards, and in case of a downtrend, the price does not only move downwards!
The retracement is shorter than the impulse. When the retracement is longer than the impulse, there may be a trend reversal. You can confirm this by verifying that no new top is formed within an uptrend or no new bottom is formed within a downtrend. With a trend reversal an uptrend changes to a downtrend or vice versa.
How can you trade professionally with the trend?
When you want to trade professionally, it is important to open a position at the moment of the bounce and not somewhere halfway through the extension. It is important to buy at a low price and sell at a high price. So in an uptrend you buy at a low moment in the retracement and in a downtrend you sell at a high moment in the retracement.
How to recognize a trend reversal?
By taking into account the fixed pattern of a trend with extensions and retracements, you can see a potential reversal coming. When an uptrend produces a lower high and a lower low than the previous cycle, the chances of a reversal are quite high.
The same applies to a downtrend: when a higher high and low are formed than in the previous cycle, there is a good chance that we will switch to an uptrend.
The transition from a trend often starts with a consolidation in which both buyers and sellers fail to make the price break out. The longer the consolidation, the stronger the final outbreak up or down. When within the consolidation the usual pattern of an uptrend or downtrend is broken, there is a good chance that a reversal will eventually occur.
Now that you know how to recognize trends in your investments in shares and Forex, it is important to determine where you can best step in. For this, you need to look for horizontal levels. In this article you’ll read how to find them!
You can find trends within Forex and stocks on different time frames. The long-term trend is often leading and can last for months or years. But you can also find trends on the shorter time frames. When investing, it is wise to start with the larger time frames. This way you can determine what the dominant trend is.
Once you’ve recognized the right long-term trend, you can start looking for smaller trends to capitalize on. For this, you can analyse shorter time periods.
What are the current investment trends?
It is always advisable to study current trends. Sectors are constantly evolving and a certain investment can suddenly go out of fashion. In the last part of the article, we discuss some investment trends you can take into account.
More and more people find it important to be conscious of the planet. They do this by investing in sustainable funds. Companies that are engaged in sustainable activities are doing better and better. A good example of this is the enormous increase in the Tesla share. Tesla shares rose more than the shares of other car manufacturers in 2020, while Tesla’s profit figures are lower. People like to step into the hype of electric driving.
Weed and other legalizations
Investing in weed is becoming more and more popular. This is because weed is being legalized in more and more countries. A formerly illegal industry has now suddenly become a sector worth billions. By responding well to this trend, you can potentially achieve a good return. However, it is important to pay attention: not all newcomers will survive.
More and more people use the Internet to buy products and services. The coronary pandemic will only contribute to this. Companies with a strong online position, therefore, have many opportunities to make high profits. However, it is important to keep a close eye on the competition. On the internet, it is a lot easier to launch a competitive service.
Companies engaged in new technologies are doing well. Examples include companies that are involved with the development of self-driving cars or the internet of things. Robotics and artificial intelligence also play an increasingly important role in our society. It can therefore certainly pay off to keep your eyes and ears open for companies engaged in innovations.
Even with temporary trends or hypes, you can achieve good results with your investments. During the corona crisis you saw that pharmaceutical companies or companies developing corona tests performed better than usual. During the Bitcoin hype of 2018, crypto companies did very well. However, you have to be extra careful with temporary trends: there is a great chance that the price will drop again when the public loses interest.
What are the costs of trading Forex?
The cost of trading Forex isn’t always clear because it is shown in pretty technical terms. In this article we explain what the costs of trading in Forex are, so you know what you’re getting into.
Spread determines the price
The biggest cost comes from the so-called spread. The spread shows the amount you pay when you open or close a position. You only pay the spread once, closing a position you don’t pay the spread again.
But what is the spread? The spread is the difference between the buy and sell price and forms the source of income of the broker. With Plus500 the minimum spread on the EUR/USD pair is, for example, 0.00006 cents (0,6 pips, measured on the 29th of march 2018) per traded unit. In general you can calculate the spread by subtracting the purchase price (e.g. 1.3914) from the sell price (e.g. 1.3192). Do note that the exact spread can change!
This spread is the price you pay the broker per traded currency unit. If, for example, you open a buy position EUR/USD for 10,000 units, your total spread will be 10,000 x 0.0002 cents, which comes to 2 euros. When you open the position you start out with a loss of 2 euros.
Last but not least, we have finance costs when trading Forex. With modern brokers you can trade using leverage where the broker pays most of the purchase amount. You pay a slight financing interest over the total value of a position.
Per currency pair you trade in, you can simply calculate what you’ll pay in fees. With broker Plus500 you can look up the percentage per trading product. Now multiply the percentage you pay per day you have your position open. Here is an example to clarify.
We opened a position of 10,000 EUR/USD. With Plus500 the financing interest on this currency pair is 0.0185 percent per day. In total, you pay 0.0185 x 10,000 = 1.85 per day. Needless to say, it’s best to trade fast and focus on the short term when trading Forex.
Note: Over the weekend you pay interest for both Saturday and Sunday. The markets are closed which means you are unable to close your positions.
Let’s take another look at the fees. Let’s say you open a position of 10,000 EUR/USD and the price goes up from 1.3192 to 1.3341. Your investment now goes up by 0.0149 per unit, a total profit of 149 euros. On average, the currency pair EUR/USD moves 1 cent per day. Let’s say you close your position within 5 days.
You’ve already paid the spread of 2 euros, and you must also pay 5 times the financing fee of 1.85, which comes to 9.25. In total, the costs are 11.25, which comes to 0.1125 percent!
Trading Forex cheaply?
All in all we can conclude that trading Forex is pretty cheap. You only pay financing costs when your position is open for more than a day. Because the transaction fees in the form of the spread always correspond to the size of your positions, you can make money regardless of your stake.
Which Forex orders exist?
When you start investing with a broker, you can choose from different types of orders. By choosing the right options, you can maximize your profits and minimize your risk.
What is a market order?
A market order can be seen as an instantaneous order. The broker will try to open the order as soon as possible after which the position will be tracked. The loss or profit made on the position will be immediately tracked. You can read more about profits and losses when trading CFDs in our dedicated article.
The use of a market order is not recommended when you invest in a very volatile currency pair. The price can spike, causing you to suddenly pay much more than intended. On more stable pairs like the euro dollar, however, you can safely use a market order when you want to open a position immediately.
If the price on EUR/USD is 1.2, and you place a market order, you immediately open a position at the current price of 1.2.
Long or short order
You can choose to place a long or short order. With a long order, you speculate on a rise of the price, whereas with a short order, you speculate on a fall of the price. In this way you can bet on good and bad news.
Placing a long or short order is easy with most brokers. For a long order, you simply use the buy option and for a short order you use the sell button.
Use limit order
A limit order is an order that is not executed until a certain value is reached. Again, you can go both long and short. By setting a limit order to a low value (buy) or a high value (sell), you can open positions strategically and fully automatically and achieve a good result.
If, for example, the price keeps on hitting a certain resistance during the week, after which the price rises again, you can place a limit order there. When the resistance is hit, automatically a position will be opened. When the price then rises again, you will obtain a good investment result.
Setting orders is easy with an online broker. Illustrative prices.
If the price on EUR/USD is 1.2, and you place a limit order for 1.25, the position will open as soon as the 1.25 price level is reached.
Stop loss / take profit order
It is also possible to place a stop loss or take profit order. The position is then automatically closed at a certain value. It is always advisable to place a stop loss: in this way you limit and determine the maximum loss. Sometimes it can also be attractive to use a take profit. That way you can close the position at a certain value at which the price often tilts.
By tactically determining the moments when you take profits and when you take losses, you can optimize the profits on your Forex positions. It is always advisable to already think about an exit strategy before you open a position: that way your decisions will not be influenced by your emotions.
What is a trailing stop?
A trailing stop can be useful when you expect a rise followed by an almost immediate correction. A trailing stop is, in fact, a moving stop loss. With the trailing stop, you determine an amount of decrease at which the position should be closed. This value, however, moves with the price.
If you have gone long and the price goes up, the trailing stop will also move up. That way you’ll be able to maximize your profits, and you’ll be able to take advantage of the complete rise! Watch out, however, that you don’t set the trailing stop too tight. If you do so, the position might be closed too early while the rise still has to start.
Special Forex Orders
A Good ‘Till Cancelled (GTC) order remains active on the market unless you cancel it. The broker will never cancel the order, and you are responsible for monitoring it.
A Good for the Day (GFD) order will only last for the day in question. At the end of the trading day, the order is automatically removed if it has not been executed.
The One-cancels-the-other (OCO) order makes it possible to cancel order B when order A is executed or vice versa. This can be useful when you are not sure where the price is going, and you want to anticipate on both a potential downward and upward breakout.
The One-Triggers-the-Other (OTO) order is an order whereby the other orders are placed when this order is executed. In this way, for example, you can have certain stop orders placed after the position is opened.
These special Forex orders are not available at all brokers. For most Forex traders the standard orders are more than sufficient.
What are the risks of trading in Forex?
If you are going to trade in foreign currencies or Forex, you must realize that there are many risks involved. As a beginning investor, you might overlook these risks. But what are the risks of investing in Forex? And how can you protect yourself against these risks?
How to manage risk when trading in Forex?
- Always use a stop loss to limit your losses.
- Be careful with high leverage: you can lose a lot of money.
- Check the broker’s reliability: is the broker licensed?
- The exchange rate often moves according to a fixed pattern, but patterns can be broken.
- Do not aim for too high a return: risk and return are linked.
What is Forex trading?
With Forex, you invest in foreign currencies. When you trade in EUR/USD, for example, you buy euros for dollars. If the value of the euro subsequently increases in relation to the dollar, you will make a profit. There are always extra costs connected to investing in foreign currencies; for every transaction, transaction costs are being charged. These costs are often not high, but can mount up considerably if you trade in foreign currency a lot.
Do you want to know more about Forex trading? Then read our comprehensive guide to Forex trading:
What are the risks of investing in Forex?
Many investors often paint a very rosy picture of forex trading, but in reality there are many risks involved.
Foreign exchange risk
When you invest in Forex, you are always subject to a foreign exchange risk. This is the risk that the currency you buy will change in value against the currency you sell. For example, if you buy dollars for pounds, the dollar may depreciate in relation to the pound. You will then lose money on your Forex trade.
Forex is the largest international market in the world. Under the influence of supply and demand, the prices of currencies fluctuate constantly. When more people want pounds, the rate of that currency will rise against other currencies.
Your loss is only final once you close the position. By applying a good strategy, you prevent losing your entire investment due to a falling exchange rate. You do this by limiting your investment positions and by using a stop limit order. With a stop limit order, your position is automatically closed at a certain loss.
Be careful with the leverage
In reality, there are risks involved when trading in foreign currencies. In many cases, investments in foreign currencies are made using leverage. When using leverage, the broker adds, for example, $9 for every extra $1 invested. If the price of that currency then rises by $0,10, the investor immediately earns $1. But the same happens the other way around; if the currency falls by $0,10, the investor loses $1.
Leverage thus increases not only the potential return, but also the potential loss. Therefore, be careful when using leverage!
The Forex market is the most liquid market in the world: everyone is constantly trading currencies. When, for instance, you take the plane to a sunny destination, you exchange your hard-earned money for the local currency. On average, it is therefore also easy to sell your currencies again, certainly when you trade in the major currency pairs such as combinations with the Euro, Dollar and Pound.
Nevertheless, there have been situations in which countries influence the currency markets. Especially in the case of currencies that are used less often, a government can actively manipulate the exchange rate. Sometimes governments can even prohibit the selling of currencies abroad. When you’re going to trade in exotic currency pairs, the risk of a lack of liquidity will consequently be bigger. In that case, you could lose money when you’re unable to sell the currency at the desired moment.
When you trade in Forex, you use derivatives. Derivates are sold by a counterparty which could go bankrupt. When this happens, the company might not be able to deliver, and you could lose your deposit. Fortunately, for private investors this risk is minimal. This is because brokers who provide services to individual investors have to follow strict rules.
You do run this risk when you trade in over-the-counter (OTC) products. These are contracts that are not traded on an exchange, but that are offered by a bank. It is not advisable to trade these types of products, as they are less transparent.
Risk of losing everything
You won’t be the first Forex trader to lose your entire deposit. Outstanding losses can quickly mount up, causing you to lose your entire deposit. When you are no longer able to bear the loss-making positions, a margin call will normally follow. If you do not subsequently deposit additional funds, your positions are automatically closed and your Forex adventure is over.
Therefore, only trade in Forex with money you can afford to lose and realize that there are great risks associated with Forex trading.
Not for the long term
When trading in Forex, you generally pay financing costs on your position. This is due to the leverage described earlier. The broker deposits a large part of the amount, and you pay interest on this every day. This is why investments in Forex are only suitable for the short term.
Unexpected events can make the best Forex strategy fail. You always run the risk of rising interest rates, inflation or disasters that can suddenly send the price of a currency in a different direction. Therefore, always be prepared for the unknown and do not blindly trust your analyses or technical indicators.
It is important to not see trading in Forex as a guarantee. Only invest in foreign currencies with money you can afford to lose. Start with a small amount and practice until you have mastered the trade. By doing so, you can avoid making a huge loss.
Warning from supervisors
The FCA advises investors to avoid risks by always doing proper research before they start investing. For the novice investor, it is important to know whether they are running unnecessary risks. Therefore, as an investor, you should always first check whether the provider is properly licensed. This is possible by checking the register of your local financial regulator; a reliable broker always has a licence from a financial watchdog.
Furthermore, as an investor in foreign currencies, it is important to realize that the returns provided by providers do not guarantee that these will actually be achieved. Therefore, draw up a clear plan and consider for yourself what a realistic return could be.
Bear in mind that, in general, the rule is that a higher return also entails a higher risk. It is important to always use a stop loss. With a stop loss, you ensure that your positions are automatically closed in case of a certain loss. You can also use a take profit to automatically make a profit at a certain value. This way you minimize the risks of trading in Forex!
General lesson: don’t aim too high!
Many Forex investors aim for too high a return when they are just starting out. It is important to remember that you can only achieve higher returns if you also take a higher risk.
Sure, there are examples of traders who make tens of percent in a month. However, many of these stories end in tears and the loss of the entire deposit. Therefore, be careful when using leverage and rather focus on lower, but stable returns.
Is Forex trading easy?
Anyone can invest; thanks to the increasingly user-friendly software and the lower entry threshold, anyone can open and close positions. Successful trading, however, is a different story…. Under the influence of leverage and driven by high profit expectations, we sometimes lose sight of the risk involved. By studying the basics of trading and Forex, however, you can develop a skill that will increase your chances of winning!
Did you know that it is possible to get started with CFD Forex trading today? Forex is currency trading: by buying at the right time, you can obtain a positive return! The beauty of this trading method is that you can try it out at eToro with a $100,000 demo, completely risk-free. Use the button below to open a demo account at eToro immediately:
Successful investing as a beginner
Before we start the flow of information that should make you a good investor, let’s take a look at one of the most famous legends in the Forex world: Richard Dennis. My great example proved the ultimate simplicity of Forex trading through a symbolic bet worth a dollar.
Richard claimed that he could teach a completely random group of people enough to be successful investors within two weeks. The group he assembled through an advertisement in the New York Times included younger and older people, men and women, natives and foreigners. This group of people with no obvious similarities had only one obvious similarity: they all knew very little about investing.
After the short Forex course, he let the group do their thing. The results were very impressive: within four years they managed to earn more than a hundred million dollars! Thanks to Richard Dennis’ training, this group of normal, everyday people had suddenly turned into a group of rich professional investors!
Is Forex trading easy?
More and more people are looking for a get-rich-quick scheme. As the above story shows, in theory it is certainly possible to make money with Forex. However, this does not make Forex easy. You have to actively work against your human instinct to get good results.
Would you like to learn how trading in Forex works? In our article about Forex trading you will discover in detail how the Forex market works. Without training, you will in any case not achieve good results in the long term. Use the button below to read our article about Forex trading immediately:
Is it difficult to learn to trade Forex?
It is not that difficult to learn how to trade Forex. Ultimately, the purpose of Forex trading is to predict the future exchange rate. By applying technical analysis, you can, for instance, recognize important levels on which the price often reacts. Managing your risks is also critical.
What many traders come up against is that it is difficult to follow their plan. This is because many of the principles that are important to become successful with Forex go against our nature. Therefore, let’s discuss in more detail how difficult or easy it can be to invest in Forex.
You don’t have to be a genius
Some people may be put off by films where whizz kids study the markets and solve complex mathematical formulas within seconds. Some affinity with numbers can certainly help you, but you don’t have to be super smart to get started with Forex. In fact, mathematics does not play a significant role and even if you have done a university study, you can still invest in Forex.
In my opinion, it is more important that you are disciplined and patient. If you find it very difficult to follow fixed steps or to control your emotions, Forex trading might not be suitable for you.
Fight your natural urge
If you want to achieve good results with Forex, you will ultimately have to fight your natural urge. Evolutionarily speaking, we have not evolved to make money with Forex from behind our computers. Our brains are still set on hunting animals and when we lose our loot, it hurts.
Our brain deals with money similarly: when you lose a part of your money due to a bad Forex trade, you will have to deal with strong negative emotions. You’ll have to make an enormous effort to suppress impulsive reactions. The first tendency then is to immediately open new positions (to go hunting) to gather new resources.
The prefrontal cortex is the part of the brain responsible for limiting your risks. If you want to become good at Forex trading, you must therefore learn to control this part of your brain.
No focus on percentages
It is also important to remember that with Forex, the rate of return is much less relevant. A beginner can with pure luck achieve a return of 100%. When you deposit $300, and you gamble a bit, this can easily grow to $600. A week later this also just as easily drops to $0.
Moreover, many Forex traders life off their investments. They also withdraw money in between, as a result of which the amount in their account does not give a good overview of their total results. If you want to be successful, you should focus on achieving consistently good results and for that, you will have to practice a lot.
It takes time
As with any skill, getting good at Forex trading takes time. The basics of Forex are not difficult, but keeping at it can be. Many people believe that there is a magic pill that will make them instantly become genius Forex traders: unfortunately, this is not the case. Because of this you see that many beginners lose their deposit rapidly and within a few weeks they are out of business.
Nevertheless, if you take the time, it is certainly possible to make money with Forex. Forex trading does have to fit your personality: it is not a standard 9 to 5 job, and you will have to change your way of thinking.
It can be boring
Another thing that makes Forex anything but easy is that it can be dull. When you are going to trade Forex as an amateur, it is very exciting: in one day you can immediately win or lose dozens of percentages. If you trade according to a system, everything will go a lot slower.
Much of the time you are waiting for the market conditions to be favourable. You then open a position according to your plan and risk only a small percentage of your account on each trade. The biggest part of the time you do nothing.
Professional Forex trading is therefore more a lifestyle than a job. The work can be quite lonely because you don’t have any colleagues, so you also have to make many adjustments in daily life to keep it up.
The pressure to perform
Pressure to perform can also make Forex trading anything but easy. Some people have a successful streak and then quit their jobs. In their dreams they see themselves sitting on the beach, trading for success. In practice this can turn out differently.
When you are completely dependent on Forex for your income, you feel a strong pressure to perform. Many traders therefore start to trade more actively and open more positions. However, this is unwise: a good trader realizes that the best results are achieved by only trading when conditions are right.
This means that sometimes you do nothing for days, weeks or even months. To become good at Forex; therefore, you need the patience of a monk.
No complicated tools
What makes Forex a little easier is that there are no heavy entry requirements. You don’t need 12 monitors to be successful. There are enough examples of Forex traders achieving good results with just their laptop. It is often more important to apply a good mindset and to control your emotions well. When you manage this well, you’ll strongly increase the chance of success.
It is also advisable to first try Forex trading without risk using a demo. That way you will discover whether you have a feeling for it. For some people trading Forex is a liberation, but for others it is more like a prison. Use the button below to directly compare different Forex demos:
What can we learn from this?
Firstly, it is clear that theoretically anyone can be successful in investing. What you need in any case is perseverance and patience. When you combine these two qualities with the necessary knowledge, you can achieve good results. Therefore, investing is not so much about mathematical models or news reports: no, in the end it is all about your mindset and the way you deal with profits and losses.
How can you make money by trading in Forex?
Making money by investing is great. The excitement is hard to describe and the possibilities are almost endless. The feeling of a successful investment is unique and once you understand the system behind Forex trading, it can be profitable as well. But how can you actually make money with Forex?
Earn money with Forex: The basics
The basics of making money with Forex investing are actually simple. The answer to the question “how to make money with Forex” is therefore “by buying or selling currencies at the right moment”. The price of a currency compared to another currency is constantly fluctuating: this happens because the currency is getting more or less valuable relative to the other currency.
But how can you trade Forex? Do you have to go to a foreign exchange office at the airport? No, fortunately not! Nowadays, everybody can trade currencies with a broker. A broker is an intermediary which makes it possible to trade currencies and other financial securities. Opening an account is usually free of charge and, by means of a demo, you can try out if you can earn money with Forex.
Would you like to try Forex trading for yourself? You can do so completely risk-free with a demo! Use the button below & discover where you can trade Forex with a demo:
Currencies are always represented as a ratio when you start trading Forex. For example, when trading EUR/USD you are buying or selling euros for dollars. If the rate is, for example, 1.2, this means that for every euro you receive 1.2 dollars. If the ratio subsequently becomes 1.21 you will make a price profit.
Long and short
When trading Forex via CFDs, there are basically two ways in which you can open a trade. The first is to buy or go long and the second is to sell or go short.
If you open a long position, you will earn money when the price goes up. If you take out a short position, you’ll earn money when the price goes down. When you think that the price is going to rise, you’ll go long and if you think that the price is going to drop, you’ll go short.
Before you can really start trading Forex by using CFDs, you need to know more about the underlying mechanisms. In the Forex information category you can read more about the price-setting mechanisms, and investing in Forex in general.
How to make money with Forex?
You only make money on your Forex position after it has been closed. Your broker constantly keeps track of the result of your open trades. If you have bought EUR/USD and the euro has risen in value, you will have a paper profit.
Only after you have closed the position, this profit become final. The same applies to losses: your open investment position may be loss-making now, but this can turn around at any time.
You only earn money that you can withdraw when you close a profitable Forex position on your investment platform.
Opening a Forex Position
At your broker you can often open a Forex position with one click. Within the Forex trading software, you’ll often see a bid and an ask price.
- The bid price is the price at which the broker wants to buy the Forex pair.
- The offer price is the price at which the broker wants to sell the Forex pair.
There is always a difference between the bid and the offer price: this difference is called the spread. Exotic Forex pairs (the less traded ones) often have wider spreads, while well-known pairs such as EUR/USD are cheaper to trade.
Can you become rich with Forex?
Whether you can become rich with Forex, depends very much on your definition of being rich. When you look at the Fortune 500, for example, you won’t see people who have obtained their fortune by actively trading on the Forex market.
On the Internet, you sometimes read wild stories with great promises: returns of 20 per cent or more per month are sometimes promised. If this were possible, you would own a million after a bit more than 4 years, if you start with an amount of 10,000. If it were really that easy, there would be more Forex millionaires.
In practice, you will see that the vast majority of investors who start trading Forex make a loss. Only 10 to 40 percent of the investors succeed in trading Forex profitably, depending on the moment in time. An even smaller percentage is successful enough to make a living out of it.
If you have enough perseverance, and you study the markets extensively, you can certainly make money with Forex. You will be rich in the sense that you can work anywhere in the world and nobody will tell you what you can or cannot do. Nevertheless, it is important to have realistic expectations: everything is possible, but whether you will succeed… that is the question.
Keep an eye on the costs
When you start trading Forex, costs are critical. You probably start trading Forex because you want to earn money, not because you want to fill the broker’s treasuries. Therefore, it is important to keep an eye on the costs.
When you invest in shares, you often do this a few times a month or even a year. Forex trading is more active: on one day you often open many positions. The transaction costs per investment are then lower, but because you open more positions you still lose a lot in costs.
If you want to make money with Forex, it is therefore important to keep an extra eye on the fees of your investments.
If you want to become successful with Forex, it is important to manage your risks well. You should aim to make money in more than 50% of the cases to reach break-even. This is necessary because the broker also takes a small amount of transaction costs out of every trade.
It is often best to bet or trade with a favourable ratio of potential profit to potential risk. This means that you should only open a Forex position when your potential profit is higher than your potential loss.
This is the case, for instance, if the price is 1,2, and you see that the next level at which the price often bounces is 1,22. You can then set a take profit (the moment at which you automatically take your profit) at this value. If you see that when the price goes through 1,19, it often continues to drop further, you can set your stop loss here. Your ratio between your potential profit and loss will then be 2:1.
By cleverly managing your risks in this way, you increase the risk/return ratio of your investment. This way you can earn money faster with your Forex investments.
What makes Forex trading attractive?
Investing in Forex is attractive because of the high trading volume. This makes it difficult for parties to manipulate the market and therefore the prices moves more predictably. Moreover, because you can take a short position, you can profit under all market conditions: this way you can make money even in case of negative news.
A smart Forex trader in any case keeps a close eye on the news. When interest rates in the Eurozone have raised, for instance, it is more attractive to own Euros. This may positively influence the exchange rate of the euro against the dollar. Remember that much of the news is already incorporated into the exchange rate: you will therefore really have to make predictions about the future, which is very difficult.
Do you want to earn more with leverage?
You can also use leverage when trading Forex. Leverage theoretically allows you to make more money. This is because you can magnify a small price movement. If you invest with $1,000, you can open a position for as much as $30,000 on a currency pair such as EUR/USD. When the price rises by 1%, you will have a positive result of 30%.
It is important to be careful with leverage. It is precisely when you use leverage that you will see many investors lose their money. This is because your losses are much more severe, which means that you can quickly lose a considerable amount of money.
How much money do you need?
You can trade Forex from as little as $100. In most cases, this is not very profitable: if you really want to earn serious money with Forex, you need more money.
Within a good Forex strategy, you’ll never lose more than a certain percentage on your trades. For instance, if you don’t want to lose more than 1% per trade, then with a deposit of $1000 you can only lose $10 per position. You can determine the amount you’re going to earn or lose by adjusting the size of the lots you trade with.
At most brokers, the smallest Forex lot you can trade is $1000. A full lot refers to $100,000.
Watch out for slippage
When you start investing in Forex, it is important to take slippage into account. When the market is very volatile, sometimes your stop loss order is not executed at the value you have set. This can suddenly cause your losses to increase further.
You can use a guaranteed stop loss at some brokers. However, you often have to pay extra commission for this, so you should only use this guaranteed stop in volatile market conditions.
How much money can you earn with Forex?
The great thing about Forex is that it is a 24-hour market: there is always and everywhere in the world someone who wants to exchange money. This means that you can decide for yourself when to trade in Forex. Before you start trading Forex, you may want to know how much money you can earn.
This depends entirely on your skills, the market conditions and your investment. You can make estimates in advance based on the risks you are prepared to take. Even better is to first try out your strategy with a demo. That way you will discover by yourself how much money you can potentially earn with Forex.
Executing your first successful Forex trade
Forex is a game of chance and risk. You can never predict the price with 100% accuracy, but by using certain selection criteria, your chances of success increase enormously! In this article we will discuss how you can execute your first successful Forex trade.
Three steps to trading
- Selection: selecting a trade by performing a technical analysis
- Timing: getting in at the right time to make as much money as possible with minimal risk
- Management: managing your positions, limiting your losses and maximizing your profit
How can you select a solid trade?
There are two schools of thought within trading: supporters of the fundamental analysis and supporters of the technical analysis. With fundamental analysis, you look at the news and the situation within a country. Fundamental analysis is important, but trading on news alone isn’t recommended. Traders’ news-based actions are difficult to predict because the price is determined by the perception that people have of the value of the news and how it reflects upon the value of a currency pair.
Ultimately, the technical analysis is more useful. With a technical analysis, you use the indicators to identify certain levels. You can increase your chances of opening a successful trade tremendously without taking into account the (unpredictable) human factor. We quantify something psychological in numbers and analysis, but don’t forget that behind every technical indicator there is an unpredictable human!
In which direction will you trade?
- Trend continuation: following a trend. This is fairly easy to do because a trend will continue over a longer period of time.
- Reversal: betting on the change of a trend. This strategy requires more analysis, and you need a stronger confirmation from the technical indicators to open a proper position.
- Consolidation: opening positions between the two points the price moves within. When the highest level is hit, you can open a short position, and when the lowest level is hit you can buy the security.
In which timeframe will you trade?
You can trade within several timeframes. You can indicate a bar on the daily chart to resemble a day. It is also possible to trade based on the hourly chart, but you’ll have to follow the price a lot more. Ultimately, it’s important as a new trader, to start trading based on the daily chart. Once you have achieved success with this, you can choose to shorten the time span of your trades.
Which technical analysis can you use?
- Candlesticks: essential for prediction the direction of the trend (essential).
- Trend & horizontals: for a strong resistance and support levels (essential).
- Moving averages: for determining the trend plus the resistance and support levels (extra).
- Fibonacci numbers: for determining the resistance and support levels (extra, only essential with reversals).
- RSI: to make sure that a trend can continue (extra, only essential with reversals).
- Triangles and flags: special patterns you can find on the charts (extra).
With trend continuation, you look at:
- General movement: are there higher highs/lows (long) or lower highs/lows (short) being formed? (essential)
- Moving averages: are 50 and 200 EMA in the right order? Do they offer support or resistance? (extra)
- Horizontal line: is there a horizontal line that offers resistance or support? (essential)
- RSI convergence: is the trend confirmed by the RSI? (extra, only essential in case of reversal)
- Bullish/bearish candlestick: is the last OHLC bar in line with the movement of the trend? (essential)
- No resistance or support: is there a strong ‘roadblock’? (essential)
- FIB retracement support or resistance? Big chance of a bounce at this point (extra, only essential in case of reversal)
- Trend line support or resistance? Possibly offers extra resistance or support (extra)
With trend reversal you focus on:
- Strong level of horizontal support or resistance: hard to breach point
- RSI divergence: increased chances at reversal
- FIB extension level: forms an extra resistance or support level
- Candlestick: opposite bar to be expected based on the general trend
With consolidation, you focus on:
- Strong level of horizontal support or resistance: point where the price can bounce back
- RSI divergence: the price direction will most likely reverse
- FIB extension level: point where the price could reverse
- Opposite candlestick: this is where the price will bounce back
- Flat moving averages: indication of consolidation
Executing a trade
Once you’ve identified a possibility, you can open up a position. Timing and risk management are crucial when opening a position.
When I was 16, I secretly bought my first stock. Since that ‘proud moment’ I have been managing trading.info for over 10 years. It is my goal to educate people about financial freedom. After my studies business administration and psychology, I decided to put all my time in developing this website. Since I love to travel, I work from all over the world. Click here to read more about trading.info! Don’t hesitate to leave a comment under this article.