Just like with anything in life, Forex trading is no free lunch. It is not easy and usually it does not make you rich overnight (unless you get very lucky by trading like a total gambler, which is not something I recommend you do).

If you are considering to become a Forex trader, make sure that the money you trade with is money that you can afford to lose.

Trust me when I say that it will take you 2 to 4 years before you have a good understanding of the Forex markets, even if you are really good with studying and a quick learner. Technical analysis, trading strategies and theory will only take you so far. You need real experience with trading the Forex markets in combination with a great technical analysis and theory background to be a successful trader in the long run.

If you think that you are a good trader because you have read one Forex related book, have an MBA or because you demo traded the Forex markets for 2 months and doubled your virtual money (by taking crazy risks) then I will tell you that you are wrong. This kind of thinking will lead to a blown account 95% of the time. There are certain rules that you have to set for yourself (or just use the ones that I will give you later in the article) to prevent you from blowing your account and staying in the Forex game successfully for many years to come.

Everything I write in this article is purely for your benefit and to help you become a successful trader. You may not agree with everything that I have to say, but I advise you to consider everything that you read from me before you write it off as not important (which is hopefully not the case).

Let’s get started with some basic principles and things you need to do if you are serious about starting to trade in the live Forex markets. Before you even consider making a deposit of your hard-earned money into a broker account you need to know your technical analysis and theory first.


Technical Analysis




Technical analysis is the study of price action on charts. Ignore anyone who tells you that technical analysis is nonsense and doesn’t work. It works time and time again, no matter if it was 10 years ago or 5 years from now, it has worked and it will still continue to work.

I cannot tell you exactly why it works, but my theory is that markets are ultimately controlled by human beings who are subject to mood changes. People often make similar decisions under certain conditions, and that results in the formation of patterns on the charts which allows you (as the technical analyst) to take advantage of these patterns. Patterns are not a guarantee that the price action will react the same way every single time, but every pattern has a high probability of causing the price avtion to act in a certain way. This is what we trade on as technical analysts.

I am not going to do my own tutorial about technical analysis and its patterns because there are many books on the subject already. I strongly advise that you get one of the 2 books below or a similar and comprehensive book about technical analysis. Learn every single pattern and its reacting off by heart. Study the patterns every morning when you wake up and every evening when you go to bed.

Technical analysis is the basis and the tools with which you are going to be trading Forex. I personally recommend the folowing two books about technical analysis (click to buy from Amazon.com)

Trading Strategies




Trading strategies are exactly that: systems and ways to trade the Forex market and (hopefully) give you a good profit.

When you are starting out with Forex trading you are going to want to look for winning trading strategies. In your searches on the web and the studying of the books that you are going to buy, you are going to come across tens if not hundreds of trading strategies that all claim to make you good money if you follow them religiously.

There is of course no holy grail. There is no single trading strategy that is going to make you money in every condition, every time that you use it. Otherwise everyone would be rich and nobody would work. The majority of people who try to become Forex traders blow their accounts and their savings. There are only a small percentage of people who start trading Forex and make a successful career out of it. Keep that in mind. It is very possible that you become part of that successful small percentage, but you have to apply what you study and stick to your trading rules.

While many trading strategies work (at least under certain conditions or for certain markets), you have to choose one method and stick to it until you no longer want to use it. One of the traps when starting out trading Forex is that you want to try a different system every day or evey week, or use multiple at once. Do not do this.

Find one strategy, research it, test it out on a demo account and then (once you are happy for yourself that it seems like a good strategy) use it on your live trading account.


Prevent Blown Accounts




The single biggest cause of a blown account is over-leveraging your trades (trading too big for the account).

The reasons for over-leveraging your trades are many (especially when you are a newbie to Forex trading). You may get lucky and get your first few trades correct. This leads to over-confidence and greed and thus to you making trade sizes way bigger than your account can handle if the trade goes against you.

Another reason why traders trade too big for their accounts is that they have no strict rules in place. Their ego may be too big for them to take a loss. They may think that because they have had the last 5 trades correct that their current trade (which is going against them) will turn around and come back in their favor. This causes the trader to double and triple up and keep adding to the losing postition only to see that it doesn’t turn around. A margin-call soon occurs and the trader has just lost all the money in his account. Ouch!

You can prevent your account from blowing up if you take the following 2 rules and you stick to them religiously:

RULE 1 – Never risk more that 3% – 5% of your account on a single trade

RULE 2 – Always use a stop loss

Rule 1 allows plenty of room for mistakes and for unforseen events. Using technical analysis to determine your trades should get you between 6 and 8 good trades out of every 10 you do, which makes you a winning trader and will allow you to trade Forex as a career. However, everyone is human and makes mistakes so you will make a wrong trade every now and then. If you limit your loss to 5% of you account, it means that you can lose more than 20 trades in a row before you go broke. I would say that if you lose more than 5 trades in a row you seriously need to reconsider your trading strategy and go back to studying technical analysis.

Rule 1 allows for unforseen events like I mentioned earlier. Political changes in a country, assasinations, natural disasters, wars. While these events may not occur frequently, they can and do occur and can bring massive changes to markets in matters of minutes and hours. Limiting your loss to a maximum of 5% of your account will ensure that you can never go broke on one single external change in the world.

Rule 2 is simply the step that is needed to ensure that rule 1 is applied. With a stop loss placed at a distance from your entry point to ensure the maximum loss of 5% of your account, you will never have to worry about losing more than that 5%. You will be able to sleep at night or be able to walk away from your positions feeling safe and knowing your maximum loss if your position goes against you.

I recommend 5% of your account as the maximum, but if you are just starting out you may want to limit your maximum loss to 3% of your entire account. Remember that the larger your trade size, the closer your stop needs to be to ensure a maximum loss of 5%. The closer your stop, the larger the risk that your stop gets hunted or your position gets stopped out on a spike before the trade goes in your intended position without you in it. Over time you will learn where to place stops to get stopped out as little as possible. I suggest that you keep your trade sizes small and your stops a safe distance away from your entry point.


Patience Required




If you are going to be a Forex trader then one thing you really need (besides the discipline to follow your rule of using a stop loss and limiting your loss to a maximum of 5% of your account) is patience.

Like I mentioned before there are hundreds of different trading strategies based on different systems and timeframes. There are people who micro-trade, doing tens or hundreds of small trades a day on 1 and 5 minute charts. There are day-traders who only take and hold positions for the day and close their positions at the end of every single trading day. There are also traders who are prepared to hold positions for days, weeks or months.

You can’t force a good trade setup. If there is no setup or your strategy is not giving you the correct conditions to enter into a trade, then you need to wait. Sometimes there are periods of days where you will not get a good trade setup. If you do not have the patience to wait it can cost you a lot of money.

The analysis I do on this site is based on holding positions for a day to even holding it a few weeks. The benefit about this way of trading is that it does not require me to sit in fromt of my computer 12 hours a day watching the markets. I do my analysis for my trades once a week and determine entry, profit and stop-loss levels. Other than that I check the markets for 1-2 hours every day to see if my analysis for the week is still on track.