Forex beginner strategy: getting started
Forex trading is a simple concept; you aim to make money by buying a currency and selling it when the price has risen or by selling a currency and buying it back when the price has declined.
Wouldn't it be great if there was a way to tell which way the price is going to go before you buy or sell a currency?
Even though there is no crystal ball that will tell you the future for certain, you have the potential to make money by determining the overall market direction of a currency and then trading in the same direction.
So if you determine that the market direction is up, you can buy and if you determine the market direction is down, you sell.
The beginner strategy gives you an easy step-by-step method to determine the market direction and the moment to buy or sell. The beginner strategy was developed with a focus on the EUR/USD currency pair but can be applied to other currency pairs for training purposes.
Note that due to its simplicity, the beginner strategy is not optimised for generating maximum profits. It is designed as a learning tool that helps you learn trading in hands-on, practial manner. Therefore, we highly recommend to use the beginner strategy on a demo account with play money until you are experienced enough to use real money or more advanced strategies.
Navigating our beginner strategy
Our forex trading beginner strategy is composed of five easy lessons. You can always switch between the different lessons in the side navigation to the left.
Each lesson has a video in the top right corner. We recommend you watch the video and read the lesson – but if you are short on time, watching the videos alone is already a great start.
As a quick overview and as a reminder, we have also compiled the beginner strategy into an overview chart for you. You can download it as a PDF file now or later.
Before we start, a quick question:
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To understand the strategy, you need to know some of the terms that are specific to online trading. We will explain these terms to you below.
Alternatively, you can skip the term explanations and jump into the strategy right away in the next lesson.
Terms you should know
A currency pair is the exchange rate between two currencies
A currency pair shows the price at which one currency is exchanged into another. So if the price of the EUR/USD is 1.30, then this means that 1 euro is exchanged for 1.30 US dollars.
The price chart shows you the price of a currency over time.
The price is on the right hand side and the time is along the bottom.
A price chart shows how the exchange rate between two currencies develop over time
If you look at the chart in the video at 2:35, you can see that the exchange rate is displayed on the right hand side and the time is displayed on the bottom.
Japanese candlesticks show you the price in a specific time frame
The chart type we use is called a “Japanese candlestick chart”. It is made up of shapes that look like candlesticks.
Each candlestick shows how the price developed over a period of time — we refer to this as a time frame. A 5 minute time frame therefore means that each candlestick shows the price development over 5 minutes. In the beginner strategy, we use the 5 minute and 30 minute time frames — later we will tell you how to change between time frames in the MT4 software.
During the period that the candle forms, you will observe that it changes shape. After the period, the candle is closed and a new candle starts to form, or opens.
Interpreting a candlestick is easy:
- The thick part represents the prices at the beginning and at the end of the period.
- The thin parts show you the maximum and minimum price during the period.
- If the candle is blue, the price moved up during the period.
- If the candle is orange, the price moved down during the period.
A pip is used to measure how far the price has moved
You will find that we refer to pips throughout the lessons. It is used to measure how far the price has moved.
If you think of the exchange rate between the euro and the dollar (EUR/USD), you might think of it as say, 1.31, where only two digits follow the decimal point.
However, in the forex markets, this is broken down even further and we observe the price as 1.3100. The last digit – the last 0 — is the pip. If the value of that currency pair moves from 1.3100 to 1.3101, it has moved by a single ‘pip’.
Pips are how traders generally measure their profit. If a trader buys a currency pair, again the EUR/USD at 1.3100, and the price moves up to 1.3130, it is said to have moved up by 30 pips or the trade has gained a 30 pip profit.
Some trading software makes use of 5 decimal places, in which case the fifth digit is called a fractional pip or pippet.
Making a trade
Making a trade is the act of exchanging one thing for another. In the context of forex, it means that we exchange a certain amount of one currency into a certain amount of another currency, based on the current price of the currency pair. For example, if the price of the EUR/USD currency pair is at 1.30, for that we can get 1 euro for every 1.30 US dollars.
Entering a pending order
Instead of waiting for a specific price level to be reached to place your trade, you can tell the trading platform to automatically open your trade if that price level is hit. This is called entering the pending order. You tell the software where your entry, stop loss and profit target will be and the position size or volume you want to trade with, and the software does the rest. When using MT4 to enter a pending order, it is important to know that when you wish buy, you select the type buy stop and when you want to sell, you select the type sell stop.
The image above shows an example of an order window in MetaTrader 4.
1. Position size/volume is how much you will buy or sell.
When we refer to position size, we mean that this is the amount that you will buy or sell. We show you the correct amount to buy and sell in the following lessons.
2. A stop loss prevents you from losing all your money.
If a trade goes against you, i.e. you buy and the price of the currency pair starts to go down, a stop loss order will automatically close your trade so that you do not lose too much money. When the time comes to enter your pending order, we will show you how and where to place your stop loss before you enter your pending order.
3. A profit target is the amount of money you intend to make.
A profit target is a pre-determined price at which you will close your trade for a profit.
Fractals are indicators that help you trade
A fractal is an indicator that is displayed as small triangles that are either plotted above or below a Japanese candlestick. When a fractal is plotted above a Japanese candlestick it is an up fractal and when it is plotted below a Japanese candlestick it is a down fractal.
Fractals help determine a potential price reversal. However, if price moves beyond a fractal, it indicates that price may be continuing in the same direction.
Note that a freshly formed fractal can disappear again unless two full candles have formed after it. Thus, before using a fractal in the context of the beginner strategy, you should always wait for two candles to close on the right side of the fractal to 'confirm' that the fractal is valid.
Broken fractals guide our trading decisions
A broken up fractal is where the price, to the right of the fractal, has broken the high price of the candle where the fractal has formed. This is shown by the line placed at the high of the candle just below the fractal.
A broken down fractal is where the price, to the right of the fractal, has broken the low price of the candle where the fractal has formed. This is shown by the line placed at the low of the candle just above the fractal.
Note: A fractal can be broken by either the wick or the body of the candle. It does not make a difference.
Broken fractals play a key role in the forex beginner strategy.
Here you can download the Tradimo template with fractals:
Pivot points are used for your profit target
The pivot points indicator is displayed as lines on the chart that are generated automatically by your trading software; they are used to place your profit targets. Pivot points are places where the price is deemed likely to stop.
The pivot points indicator will label these lines as daily pivot, R2, M4, R1, M3, Pivot, M2, S1, M1, S2 etc. You do not need to worry about what these labels mean in the beginner strategy.