Three things are very important in your forex trading journey, first – your strategy, secondly – your Psychology and thirdly – your Risk management skills. In this article, I am going to share the best forex trading strategy for beginners, but before we begin, let me give you a brief overview of the three fundamental pillar of forex trading.
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Table of Contents
The three fundamental pillar of forex trading.
To be a successful forex trader, you need to master your psychology, understand your risk appetite and follow your strategy 100%. By following your strategy 100%, you have to wait for all the rules in your trading strategy to play out before placing or closing a trade. (Don’t worry, we are going to discuss this soon)
Psychology
Psychology involves emotions like fear, greed, and patience. Fear can be inform of FOMO (fear of missing out) or fear of entering the market again after consistent loses.
Patience can involve ability to wait for your trading set up to be 100% before placing a trade, or ability to wait for your trade to reach your take profit or stop loss level before closing it.
Mastering these two emotions (including greed) is very important to your success in the forex market.
Risk Management
Forex Trading is risky; you can lose all your equity in few minutes and you can also double your equity in few minutes. It is important to define your risk to reward ratio and stick with it. This implies that you need to know how many percentage of your equity you are risking per trade and your expected profit.
Let’s be practical. If you have a trading capital of $100; you can decide to risk $5 per trade to get $10 or $20 depending on your trading strategy and Market structure. This means that for every $5 investment in the market, you either lose the $5 you invested or make an additional $5 or $15 depending on your reward per trade.
Treat trading as investment and you will reap the dividends
This implies that your stop loss will be $5 while your TP will target $10 or $20. Let say in a week you have 6 trading set-up based on your strategy, and out of the 6 trading set-up, 3 of them hit stop loss while 3 of them hit your TP. If your profit target is $10 per trade, your reward for that week will be $15 (3 trades hits stop loss = $15; then 3 trades hit tp = $30. So $30 – $15 = $15).
You can have consistent result as highlighted above, if you master your emotions and allow your trades to playout, but if you don’t master your emotions, you may be force to close your trade with small profits and big loses, as you may keep shifting your TP with the hope of market reversal.
Strategy
Strategies are a set of rule that guide your entry and exit in the market. I call it the forex investment guidebook. If you can develop good entry and exit rules and stick with it, your success in the market is 100% guaranteed. Let’s look at the best forex trading strategy for beginners.
Best Forex Trading Strategy for Beginners
One of my mentee asked me to share the best forex trading strategy for beginners during a Webinar last month. Her question was simple “Warren, if you are starting forex trading today, what strategy will you use?”
So here are my thoughts:
Strategy depends on individual goals, experience and expectations from the market. As a beginner you have to start with a demo to test your strategy for weeks before going over to your real money account. Don’t be in a haste. Having said that, this is what I will do.
Task 1: Identify Daily High and Low
The first thing is to identify the previous daily high and daily low. Some brokers has made this easy by including them in the quotes (as shown below)
Draw Horizontal lines on both the previous daily low and high
Task 2: Look for Key area of support and Resistance on H4
Head over to H4 and draw key areas of support and Resistance
Task 3: Head Over to H1 to draw trendline
Drawing trendline on H1 will help you to understand the market direction.
Task 4: Head over to M5 and look for Entry
Here are what to look at for when you are looking for entry.
- If the price is close to the daily low and is at a key area of support, look for buy opportunities and put your $5 stop loss slightly below the previous daily low ( your stop loss is depending on your Risk to Reward Ratio)
- If the price is close to the daily high and is at a key level of resistance, look for sell opportunities and put your $5 stop loss slightly above the previous daily high.
- If the price is not close to either, wait for it to fulfill condition 1 or 2.
- Remember, price can sometimes break previous daily high or low, so monitor price structure at key level of support or resistance on MI before making your decision to enter at M5. By monitoring price structure, I mean look for a series of higher high to confirm your buy or a series of lower lower to confirm your sell
Final thoughts on The Best Forex Trading Strategy for Beginners
If you want to be a successful trader, please ignore all those Lamborghini forex traders, focus on the process: learn, practice on your demo, review your trading history and build your confidence before opening a real account.
Risk Disclaimer
Deriv offers complex derivatives, such as options and contracts for difference (“CFDs”). These products may not be suitable for all clients, and trading them puts you at risk. Please make sure that you understand the following risks before trading Deriv products: a) you may lose some or all of the money you invest in the trade, b) if your trade involves currency conversion, exchange rates will affect your profit and loss. You should never trade with borrowed money or with money that you cannot afford to lose.