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If not ‘technical analysis’, then what?  The flip side of this is known as ‘fundamental analysis’.  You need to know the difference before understanding why most Forex traders these days use technical analysis.

Fundamental analysis relies on a more instinctive feel for the Forex market aligned with copious experience over many years of trading.  Without wanting to generalize too much, traders who apply fundamental analysis have been in the business for a long time, long enough to have seen consistent ebbs and flows in different currencies and to know which factors will determine their value.

Before the average punter was able to dabble in the currency markets, Forex trading was only available to major banks and we all know how conservative banks are.  Decades of experience provided a wealth of information and a clear idea on how currencies would behave in whatever the current climate of the day.  Additionally, computer technology was unavailable so fundamental analysis dealt more with observation, gut feel, and copious record keeping.

The mainstream advent of computers into the trading world meant that numbers could be keyed in, jiggled around within defined parameters, and spat out to reveal the most likely path to success.  The most basic way to understand one major reason why most Forex traders use technical analysis these days is to use the illustration of the calculator.  Our grandparents and great-grandparents had to rely on their brain matter to come up with answers to complex sums.  Our generation is trained to use calculators and computers.

Technical analysis is mathematics and statistics-based.  It deals with past performances of currencies and uses technology to analyze future expectations.

Technical analysis is believed to be more accurate because it is based on cold, hard facts but when all’s said and done, there’s no 100% fail safe way to predict the currency market’s movements.  Technical analysts feed historical price data into a computer which then provides information on patterns that have occurred over more than a century of foreign exchange trading.  These patterns are compared with real time movements and predictions are made.

Today’s young guns of Forex trading take advantage of training courses and mentors to learn how to perform complicated technical analysis.  The highly experienced stalwarts continue to rely on fundamental analysis because it’s what they’re accustomed to and frankly, there is no reason to stray off a proven path.

Another reason why most Forex traders use technical analysis is because it’s tangible and easy to track.  It provides facts and figures, not information that can be interpreted one way or another.  That means it enables traders to enjoy uniformity in the information they can use and it creates somewhat of a level playing field.

Technical analysis is also easier to learn than fundamental analysis which takes years of experience to grasp.  Considering the influx of young professionals into the area of Forex trading, it’s not hard to understand why computers are so heavily involved.  Raised on a steady diet of computer technology, instant gratification and easy acquisition of knowledge, this generation has taken to technical analysis with gusto.

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There is never a guarantee for success where money-making is concerned.  Considering how important money is in society, risking it is fraught with danger, and engaging in Forex trading is certainly not without risk.  But here are some steps that can help you to create your own profitable Forex trading system.

What is a Forex trading system?

A Forex trading system is a set of strategies used to find out how a currency will fare in the market.

Inexperienced Forex traders should not commence investing without implementing a trading system devised by more seasoned traders.  Mechanical systems are set up by experienced traders, based on the information they have gathered and signals that they have come to understand.  These systems are integrated into sophisticated computer programs that beginners can buy and will give indications to the trader as to when is best to sell and when is best to purchase currencies.

1. Obtain an automated Forex trading system

Whilst you are still learning the ropes of Forex trading, obtaining an automated trading system is recommended.  You can use it as you would a colour-by-numbers approach to painting pictures.  It guides you and in turn, you learn what works best.

2. Start putting your intuition to use

Once you have a feel for Forex trading, and you’ve made some gains – and no doubt, experienced some losses – you’ll develop an understanding of how it all works; not just in terms of numbers, but in terms of the way the world currencies fluctuate.  Keep an eye on the news of the world and pay attention to events that might cause an upturn or fall in a particular country’s economy.  Cautiously apply your intuition based on the information you have and you will gain a better insight into how to make profits next time.

3. Educate yourself

Forex trading can be extremely complicated.  Arm yourself with the right information before you begin using real money.  You can even use practice accounts available from most, if not all, broking companies.  Continue to learn as you go.

4. Never risk more than you can afford to lose

With money as in life, if you can’t afford to lose, then you definitely can’t afford to play.  Losses are normal in Forex trading but you can minimize the damage that your losses bring to you by only trading with money you can afford to lose.

5. Trade on popular currency pairs

There’s no sense in trying to play the maverick.  Stick to the facts: if you are unclear as to what you’re doing, seek advice and/or stay with the safe options.  By trading on popular currency pairs, you will find yourself in a comfort zone, a safe place in which to learn and grow.  The five most popular pairs are USD/EUR, USD/JPY, USD/GBD, USD/CHF and EUR/JPY.

6. Plan for long-term involvement

If you see your Forex trading system as something that will bring you huge profits in a short space of time, you are unlikely to succeed.  Currency markets change even on an hourly basis.  The highs and lows can be massive, or they can level out, depending on major events happening in the world.  See your Forex trading as something you will work on long term so that you can get a taste for how it works in a variety of situations and volatilities.

Forex trading requires a reasonable attention span, some focus on detail, understanding of currency markets and a good deal of patience.  The other ingredient you need is a plan.  You wouldn’t head out for a trek in the woods without a compass; don’t begin Forex trading without a trading system.

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At first glance, Forex money management seems like the boring cousin of the real fun: the actual trading.  But if you plan on making any real gains in Forex trading, you will learn that money management is equally as important as the way you trade.  Arguably, the most successful Forex traders are those who apply money management techniques to minimize losses and maintain steady wins.

The first point at which you will need to apply money management when you begin Forex trading is before you actually outlay any money at all.  Experienced traders recommend starting small and learning to understand the markets before betting the proverbial farm in the hopes of scoring big in the early days.  The most common – and sagest – advice is to never risk more than about 1 per cent of your total equity on any single trade.  If you only risk 1 per cent, then you can afford to have your trades go bad 20 consecutive times and you’ll still have 80 per cent of your equity remaining.  These are great odds, of course, and will ensure that you don’t lose before you begin to gain.  This philosophy also helps to increase your confidence slowly and steadily.

The second piece of advice comes when a new Forex trader asks how much they should begin their trading with.  The most logical – and sometimes overlooked – answer is to only use what you can afford to lose.  That way, if all is lost, you haven’t lost a roof over your head!

Now there are also ways to prevent damaging losses once you begin trading the Forex markets.  They are called stops and there are four different stops that you or your broker can employ to protect your interests.

1. The Equity Stop

This is where you decide in advance what you are prepared to risk on a single trade and you don’t allow yourself to risk beyond that percentage; say, 2%.  Once you become a seasoned trader, you might like to increase this figure to 5% but keep in mind that if you make ten wrong trades in a row, your account would be depleted by 50%!

Drawback: No allowance is made for positive fluctuations.  If you live by your 2% equity stop – or tell your broker to do so – you may miss out on more lucrative gains.

2. The Chart Stop

The trading charts generated by technical analysis can be good indicators of market movements.  Traders who are technically-minded and who thrive on the mathematics and probabilities often excel at the chart stop, but also incorporate equity stops into their calculations.

Drawback: By the time the information is available on the charts, and you have a chance to analyze it for your own trades, the market will have moved again and the data may be slightly, or hugely, outdated.

3. The Volatility Stop

Based on the chart stop but more complex, this one uses volatility in lieu of price action to gauge the associated risks.  Unless you are an experienced Forex trader, the volatility stop is very difficult to comprehend and best left to your broker.  It deals with high versus low volatility of currency pairs and the application of greater or lesser risk accordingly.

Drawback: Not for the faint of heart or the inexperienced.

4. The Margin Stop

Basically the Margin Stop is where you draw – in advance – a line in your trades at a certain point.  Say if your account is $2,000, you might set your margin to $500.  You trade with the $1,500 but if your losses reach that figure, then you would close your position to avoid losing any more.

Drawback: There is very little about a Margin Stop that’s a drawback.  It enables you to keep control of your account, even if you are using a broker to operate it for you.

Forex money management is a vital element to trading in the currency markets.  Vigilance and patience are needed to ensure your losses are minimized and your gains are steady.

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Here are some essential factors you should be looking for before parting with your money to buy Forex trading software:

• Consider your skill level.  You can buy software for beginners, for experienced traders and for professional traders.  Buy what will help you to understand, given the level at which you are.

• Buy from a reputable company.  Aside from losing money, you will also be obtaining information that could be wrong, misguided or out of date.

• Be sure that the Forex trading software you buy works with all trading platforms.  Only independent programs will accommodate this important feature.

• Buy software that allows you to use any broker in any country.

• Forex trading software for beginners should always include a demo account so you can familiarize yourself with the realities before investing any actual money.

• Choose from web-based or desktop-based.  If you want to be able to use your Forex trading software in your work breaks or even when you’re on vacation in another country, on a computer that is not your own, then you will need web-based software.  If you plan on taking your laptop with you on your travels, then desktop-based is fine.

• Choose software that offers free or low cost updates for life.  Outdated software becomes useless eventually, and unless you can afford the upgrades, then you will need to buy it all over again.

• If you lack confidence and/or experience in Forex trading, then you might be best finding software that comes with a telephone hotline for support.  Some even have a live chat service that you can use via your computer.

• If the company you buy from does offer a helpline service, find out if it’s available 24/7.  Forex trading is open 24 hours a day, five and a half days per week.

• Check what kind of security comes with the software.  It should include 128-bit SSL encryption which prevents access by hackers.  It goes without saying that you need to protect your personal details and information such as account balances and trading history.

• Password protection is also vital in Forex trading software.

• Software that enables you to back up your day’s activities is also recommended.

• Your Forex trading software must be able to offer real-time quotes and allow you to enter and exit markets without delay to avoid losses.

• Ask the company from which you intend to purchase your software if they have a backup server in the event that there is a power failure or crash with their main server.

Above all, don’t purchase Forex trading software from companies that offer you unrealistic value for free.  As the old saying goes, “if it seems too good to be true, then it probably is”.  Start with a list of reputable companies and don’t waver from those.  Your local regulating authority can steer you in the right direction.

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Choosing the right Forex broker is the first, most important step in getting involved in Forex trading, especially if you are new to it.  The three things you need from a broker are: experience, reputation and successful track record.  Of course those are not the only qualities you want them to have but they are an excellent starting point.

How to find a Forex broker

The smartest way to find a Forex broker is to contact your local licensing authority which licenses brokers to be in business.  You definitely don’t want to be dealing with someone who approaches you with amazing promises of success and fortune.  Start cautiously; don’t allow yourself to be taken advantage of because you are inexperienced.

Reputation

Make up a short list of three companies or brokers you are considering doing business with.  Then research them: online, via word of mouth and by contacting the governing authorities to find out if there are any complaints against them.  Ask other traders about the brokers you’re interested in.  Ask friends and associates who have dealt in Forex trading if they can recommend someone reputable.  Determine how easy they are to do business with by first communicating with their customer service desk.

Your protection

You need a Forex broker who has enough safeguards in place to protect their customers.  Find out if they are regulated and if so, by whom.  What protection is available to you via the regulatory organization?  Are their clients’ funds covered against fraud and bankruptcy?

Free trial

Many Forex brokers offer the opportunity to trial trading on the currencies market for free.  You use ‘play money’ but it gives you the chance to see how the system works and how you would have profited or lost if you were using your own, actual money.  Some provide training videos or free visits from actual Forex brokers to guide you through.  The service the broker or company provides you during the free trial should indicate how they will treat you once you become a customer and it will also show you the way they operate.

What do they offer?

Supposing they are all reputable and trustworthy, most Forex brokers offer the same in terms of tools.  Some charge more or less in processing fees.  Some provide trading advice for free whilst others offer the simulated trading as described above, with practice money of $50,000.  A good Forex broker will be able to give you some basic lessons in online trading or might provide trading via email or via a DVD.  There should also be a 24-hour facility for customer service.

Online Forex trading

If you are going to practice online Forex trading, your Forex broker must have a fully secure trading environment to protect your personal details as well as the money you invest.

Costs

The Forex broker you choose should be upfront about costs.  There should be no hidden costs and they may also offer special frequent trading terms.  Full transparency of how your broker operates is essential and if you ask questions about costs, returns or require other information, you’ll want to be sure you will be given clear and honest answers.

Compare Forex brokers

A good way to compare Forex brokers before you actually start trading with them is to take advantage of their free trials and see which one you prefer using.  Some websites also have comparison charts between larger broker firms so you can see, at a glance, the services offered and the differences in the way they operate.

International or local?

Ideally, you should select a Forex broker that is local to you.  That way, your broker is regulated by the same authorities that will be able to help you if something goes wrong.  Also, an offshore broker will be dealing with transactions with you in their local currency and this can affect your returns.

Trading platform

Arguably the most important thing to consider when selecting a Forex broker is their trading platform, the pairs of currencies offered, the difference between the bid/ask prices and the spread (difference between bid and asking price).  By opening practice accounts with 3 brokers, you’ll be able to gauge which is the best for you.

Remember, a Forex broker is the person who will stand between you and success or failure.  Don’t set yourself up for failure before you even begin, by choosing someone who appears disreputable or dishonest.  Research your shortlisted brokers and definitely try out the practice accounts to ensure you know how they operate before spending anything.

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