Foreign currency tading: A beginner's guide to the trade

Written by guest contributor Jennifer Gorton from Forex Traders

For financial advisors to perform their fiduciary duty for their clients, they must understand both the details and the nuances of a plethora of financial products in the global marketplace. One of the most popular investing avenues, that did not even exist ten years ago for the average investor, is the fascinating world of foreign currency trading. Internet access and a creative community of Forex brokers, coupled with enormous advances in telecommunications and data management technology, have opened the world’s largest market to anyone with the desire to actively trade.

Many of the skills necessary to trade in stocks and commodities transfer easily to currency markets. A financial advisor need only follow similar educational courses on how to trade Forex as he would advise his clients to take in order to equip themselves for a more intense trading environment. The learning regimen encompasses four areas, preparation, knowledge, experience, and strategy. Let’s focus our discussion now on each factor:

· Preparation: Read as much on the topic as you can assimilate. There are numerous websites devoted to foreign currencies,and there are plenty of books at your local library or bookstore on the topic. When the subject matter is familiar to you, move to the next step and enroll in a formal Forex training class. As with any other discipline where performance matters, the best advice for a beginner is to study the experts and learn why they are. Accept your “apprentice” role, and learn from your mentor. They will teach you the ropes, advise you on how to select a bank and broker, avoid fraud and scam artists, and how to wisely use leverage to enhance your potential trading gains.

· Knowledge: Collecting and processing massive amounts of information that can influence currency prices is one key to success. You must understand the “why” behind price movements in the form of “fundamentals”, including economical, financial, political, and crisis related data. Understanding the “how” comes from technical analysis, a trader’s friend for finding patterns and market trends. Indicators will instruct you on “overbought” and “oversold” conditions, when to enter and exit the market, and how to predict future pricing behavior with enough consistency to construct profitable trading strategies. Learn where to obtain useful information and how to anticipate the release of vital data by public agencies.

· Experience: Surveys have continually shown that beginners in Forex trading fail due to impatience and inexperience. For some reason, our psyche believes that we can succeed at investing naturally, with no training at all. “Just do it” seems to be the siren’s call. Brokers understand this problem and have built extremely informational tutorials and “free” demo trading accounts to prepare you for the market. You must invest the time in these virtual trading programs. Your practice runs are with real trading data, but your real money is not put at risk. During your practice sessions, you must develop a disciplined approach to how you trade, set entry and exit points, cut losers, and run with your winners. Your primary objective is to develop confidence in your judgment capabilities such that you achieve consistency in your “net” trading efforts. You will win some and lose some trades. No one is perfect. However, the “net” value must grow in the positive direction over time.

· Strategy: There are many different trading time horizons to choose from with Forex. Strategies can be daily, weekly, monthly, or even quarterly or longer. The skill of the trader is his ability to observe and interpret Forex indicators and support/resistance levels for a specific time period, and then develop a logical approach to profit from the predicted price movements. Execution must be in a disciplined manner, without the intervention of emotional feelings along the way. As Warren Buffett has said about investments, all you need to be a successful investor is an intellectual framework for making decisions and a way to prevent your emotions from corroding that framework. This quote is even more appropriate for currencies since the trading environment is more stressful and frenetic. Once again, practice on your demo account to hone your capability. If your individual nature seems unsuited for trading, you might investigate “mirror trading”. In this modality, you choose a trader based on his performance metrics, and then with the click of a switch, his trades will be applied to your portfolio on your behalf. You observe his performance and decide when to stay or change, thereby outsourcing the psychology driven components of trading.

As with any other form of investing, foreign currency trading can appear to be very complex to a beginner, but with an investment of time, there is a payoff down the road. However, no shortcuts are allowed. You must earn the title of “Forex trader.”