An Intern Learns - Remembering The Most Important Lessons
It's sad to say that unfortunately this will be the last blog from the An Intern Learns series, I really hope you’ve enjoyed reading about my little adventures as I learned about foreign exchange and tried my hand at various trades. Some worked out quite well and others not as much. In this blog I want to go through some of what I feel are the most important lessons I learnt. These are the areas that I have found the most helpful in my trades and that from my research seem to generally be deemed the most important. Hopefully this little refresher blog will help all those new to Forex like me to get going with some great trades. In this blog I will touch briefly on each of these important topics, and include as many links as I can to my other blogs so you can read more on these topics. Don’t worry if you’re still not quite there, MahiFX have other great blogs by our excellent writers and we’ll always be here to help whenever you need.
The first topic I want to discuss is how important it is to hone your skills on a demo account before you open a live account. For those of you who have traded before and have that experience, of course feel free to open a live account straight away. But for those of us who are still really new to Forex, a demo account is a great way to learn the art of trading. The MahiFX demo account is exactly the same as the live account and the prices are all the same live prices. In fact all the other areas that I’ll be discussing again here such as creating a trading system, Stop Loss and Take Profits, technical and fundamental analyses can (and should) be practiced on a demo account. Use your demo account in exactly the same way you would a live account, take it seriously and make the best trading decisions you can. In time you will develop the confidence and skills to tackle a proper live and funded account.
One of the basic concepts that I feel can help you keep your trades in control is to make use of Stop Loss (SL) and Take profits (TP). Now this may be an elementary concept to experienced traders but I still think this is quite a fundamental part of trading worth mentioning. In all different trades, whether you’re going long or short, scalping or swing trading, making use of a SL and TP really helps focus your trade in terms of your entry and exit strategy and your profit goals. Importantly for beginners, the SL can prevent a loss caused by the market going against you from getting too bad. There are different ways to calculate your SL and it depends on which trading approach you’ve taken; but the basic concept remains – put it in a place that reflects an acceptable loss for you. If you are able to sustain a maximum loss of 30 pips then that’s where your stop loss should go.
Other broader topics that I’ve covered in some detail are technical and fundamental analyses. These are two opposing approaches used by traders trying to discern which way the market is going to go. Although some traders advocate a strict approach of either one or the other, I think having a knowledge about both can help you make more informed decisions and in time you can choose to use more of one or the other, depending which works best for you. Here I’d like to recall some of the more important aspects from these two topics.
A technical analysis is based solely on the information already present on the charts. The idea is that by looking at the historical movement of price, we can ‘predict’ where it’s going to go next. By historical movement I don’t mean five years ago, but rather the relatively recent history of anything from the last couple months to the last day (depending on which time frame you have selected). For example, if the trend is going up, and has been for the last three days, we could possibly assume that it will continue going up and we should go long. However it’s unfortunately not quite as simple as that… Price movement can be much more unpredictable and so numerous chart analysing tools have been developed. One of my favourites is the Simple Moving Average’s – these are great for beginners as they are relatively easy to use and understand.
The SMA is a line that smooths out price movement so it’s easier to see a trend.
There are many many others and it’s best to learn how to use a variation so you can see which works best for you. Bollinger Bands are great as they help show market volatility; when the bands widen this indicates a volatile market. Another tool of the technical analysis set that I quite like is the Average Directional Index (ADX). This tool is a non-directional, trend-strength indicator. Simply put, the ADX shows how strong the trend is. On the MahiFX platform, if you use the ADX indicator you will notice that there are three lines, however the bright turquoise line is the most important one – if it goes above a reading of 25 this means that a trend has developed and anything above 50 indicates a very strong trend.
A fundamental analysis is different to a technical analysis in the fact that this approach is concerned with the broader social, political and economic news that affects the supply and demand of a currency. The basics of supply and demand applies to currencies as it would for any other commodity – if there is a lower supply and/or a higher demand, then price for that commodity will go up. Conversely, if there is excess supply and/or little demand, cost for that commodity comes down. For a country, the broader social, political and economic environment affects this supply and demand for their currency. For example, if a country has a strong export sector, other countries will have to buy their goods in the local currency, this purchasing of the currency drives it’s value up. Or perhaps the country has had a period of strikes, crime or civil unrest; this will cause investors to see the country as an unsuitable environment to invest and withdraw their funds. This will cause a drop in demand for the currency and therefore its value will also decrease. There are many other factors that influence this such as government agendas and monetary policies, or major banks such as the European Central Bank (ECB) who have a great influence on Europe’s financial activities. One way to stay on top of this is to use the economic calendar on the MahiFX trading platform. This shows you all the economic events that could have an impact on your trades.
The last area I will touch on from previous blogs is your own personal influence on the outcomes of your trades. The technical and fundamental aspects will have little importance if your own trading technique and drive is not in check. You need to have a solid trading plan, and keep your emotions under control.
Your emotions in trading can have a very strong influence on your decision-making. You will make the best decisions for your trading when you are in a calm and rational thinking mindset. New traders often get quite emotional in their trades. I know I certainly have, even in my demo account, when things go wrong you can’t help but feel disheartened and unmotivated! One way to combat emotional turmoil is to have a trading diary. The actual diary itself won’t help you, but by using it consistently over time, you will be able to see which situations have been working for you and which haven’t. A trading journal is like a personal coach, however you need to be consistent and detailed with what you record. If you are able to do this, over time you will create your own guide that will show you which trades were successful and how to learn from the ones that went wrong.
Finally, your own trading system is very important and is something you need to develop. You need to start by evaluating your situation and choosing a trading style that suits you best. Scalping is quick and continuous throughout the day, garnering small profits over a large amount of time. A day trader will start and conclude a trade in one day, and may not have time to check the chart throughout the day. Swing traders hold a trade over a couple days to a few weeks and a position trader will make a trade and hold for a long time, normally a couple of months. You also need to determine your entry and exit points, as well as which indictors will get you into a trade. For example, will you use a combination of technical analyses to identify a trend or will you base your trade on a fundamental approach. Either way you need to identify what signals will kick-start your trading session.
Well that’s it. Thank you so much for reading and enjoying these blogs with me, it’s been a real pleasure learning about Forex and sharing it with you. I hope you’ve learnt some great lessons along the way as well as tools to improve your trading. This blog series will stay on the MahiFX website for your reference, and if you ever need any help with the MahiFX platform you can always give us a call.
Thanks, warm regards and happy trading!