Forex Trading Tips for Beginners

Whether you are a Forex novice or a current investor in another equities or derivatives market we hope these tips for trading the Forex market help you as you embark on being a part of this exciting and dynamic market.

Currency values are determined by interest rates.

If you want to know where the big trends are in the currency markets, learn to understand what Central Banks are likely going to do with interest rates. This is where the big money is made.

The reason why the Aussie Dollar went to $1.10 against the US Dollar in 2011 was that the official interest rate at the Reserve Bank of Australia was 4.75%. This meant that anyone parking money at the Central Bank here in Australia would earn 4.75% guaranteed. If you put your money with the Bank of England, US Federal Reserve or the European Central Bank around the same time your return would be less than 0.5%. So there was a flood of money coming into Australia for a stable return of 4.75%.

Fast forward to 2018 and what is the current RBA interest rate? Only 1.5% a full 3.25% less than it was in 2011. And what is the price of the Aussie Dollar vs the US Dollar? Around 35 cents lower than it was in July 2011 simply because the return on investment leaving your money at the RBA is only 1.5% and no longer 4.75%. Also, the interest rate at the US Federal Reserve is no longer 0% and is 1.5%, the same as Australia.

When was the last time the Aussie Dollar was just 0.50c to the US Dollar? In 2001 when interest rates at the US Federal Reserve and the Reserve Bank of Australia were the same.

Major currency trends are driven by interest rate differentials and what investment banks and hedge funds believe Central Banks will do with interest rates in the next 6 to 9 months.

A chart alone will not tell you where price is going next.

Currency trends that create money making opportunities are not determined by technical charts alone and believing a technical chart will tell you where price is going next is one of the biggest mistakes novice traders make.

Investment banks and hedge funds focus heavily on understanding credit cycles at Central Banks and how economic data such as Growth and Inflation will influence a Central Bank to adjust monetary policy (interest rates) and where the major money flow will likely go and where and what currency they should be buying or selling. A technical chart can be useful to see where a price has been previously and provides traders with an opportunity to see potential value propositions in a trending market. The trend is not being caused by the previous price action, the trend is being caused by investment banks and hedge funds buying or selling a currency based on fundamental facts.

If you would like to make meaningful profits as a Forex trader then it is critical to understand more than just charts.

You can afford to be right less than 50% of the time and still make money.

Part of being a successful forex trader comes down to understanding some simple numbers which many novice Forex traders don’t appear to grasp. For example, when you trade it is possible to make meaningful profits only being correct around 50% of the time. Yes, only 50% of the time! This is possible by ensuring every winning trade you make twice the profit of every losing trade. How can you do this? Understanding the core fundamental drivers and carefully managing your risk on each trade.

It’s not about how many times you are right or wrong when trading and investing. It’s about how much you make when you are right and how little you lose when you are wrong.

If you lost $100 on every losing trade but make $200 on every winning trade you only need to be right 38% of the time to break even. Even if you are right only 45% of the time you would still make money.

And guess what? When you are trading it’s a 50/50 probability. There are not 8 horses in the race and you need to pick the one winner. It’s a 50/50 probability. Part of trading success is a simple numbers game and the way to ensure you give yourself a great opportunity to win big and lose small is to understand the markets core fundamental and technical drivers and combine this with tight risk management.

The security of your money is crucial.

When you trade Forex you will need to have a trading account with a Forex broker and the security of your money once it is deposited with the broker is extremely important.

One mistake many Forex traders make is to open an account with a foreign Forex broker in another country thinking that just because their website looks reputable and they offered you a good deal your money is safe. Wrong! Many novice investors have lost fortunes opening accounts with offshore brokers only to see those brokers disappear with their money.

If you live in Australia and you open an account with a local broker who is registered with the Australian Securities and Investment Commission your money is protected by Australian law. You have access to use the Australian Financial Ombudsmen and your rights as an investor are substantially higher than having your money offshore. Some important points when considering a forex broker?

Can you visit your forex broker’s office? Why not pay them a visit?
Can you call your broker 24 hours a day? A reputable broker will have a 24-hour dealing desk you should be able to call.
Is your broker registered with ASIC? If they are not then it is often a sign of shonky operator.
What bank does your broker deposit your money with? You should know where your money is at all times.
Where is your money held? If it is offshore then your money is less secure.

 

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