One of the biggest myths of forex or foreign currency trading is the idea that in order to make a lot of money, you have to make a lot of trades. Traders are spending more and more time online, afraid of missing trading opportunities, and bemoaning their luck in the forums if they do not find many. Also, one of the biggest complaints about certain forex robots is that they do not make enough trades. But does it really matter?

Of course to some extent this depends on the system that you are using. Some systems do rely on many small trades. Day trading and scalping systems usually work this way.

However, these systems are stressful. There is nothing good about putting yourself in for a lot of stress. Apart from the health risks, which are well known, stress leads to impatience, bad decisions and more mistakes in trading, so it can lose you money.

What is more, even if the system goes according to plan and you apply it perfectly, it is much more time consuming and often, less profitable than a longer term trend following system.

Day traders might have an aim of making 10 pips per day, for example. Not all trades will win, so they may have to make several trades in one day to achieve this aim. Assuming they are successful, then in a four week period trading five days a week they will make 200 pips.

In longer term foreign currency trading you might be aiming to make 100 pips per trade. All you need now is two successful trading opportunities in the month to make the same 200 pips.

If they were asked which system they would prefer to operate, almost all traders would say the second one. However, 95% of beginners start out trying to make several trades per day. Why is this? Perhaps because they do not have confidence in their ability to identify a trend that will last several days and make 100 pips or more. But in that case, perhaps they were not ready to start real money trading.

Often, it is simply a case of not having the patience to watch the market for several days on end without jumping in. Of course, you do not have to watch it 24 hours. You can check in every hour or even less than that. Some people just access the market once per day at a set time. That should be enough for this longer term but potentially lucrative style of foreign currency trading.

Demo currency trading is recommended as the way to start by just about everybody, including us here on this site. Trading in a demo account allows you to get to know your broker’s platform and services, discover the strengths and weaknesses of your system and figure out your own strengths and weaknesses as a trader at the same time.

Nevertheless, forex demo accounts do have some disadvantages. Let’s see what to watch out for and how to avoid the traps.

1. Differences between demo and real money trading

We tend to assume that a demo account and a real money account from the same broker are going to look the same, offer the same services and work in the same way. Usually this is true. Unfortunately however, in a small minority of cases, there are significant differences between the two.

Occasionally you might even find that the demo accounts are managed on a completely different platform. The broker could have many reasons for doing this. Legitimate reasons would include freeing up the real platform and its server space for live traders. Sneaky reasons would involve tricks like drawing you in with something that is easy to use and maybe even stacked in your favor (if it does not access the real market) so that they can grab your money and then watch you lose it in the real world.

Whatever the reason, this is something to avoid. Clearly in this situation the demo is useless for preparing you to trade with that broker. So check before you sign up.

2. Different mindset

Naturally, it is tempting to use a demo account in a very different way than we would if we were dealing with real money. People often jump into demo currency trading as if it were a game. Forex trading is not a game. The way to learn to do it well is to study and to create a demo situation that is as close as possible to the situation you would be in if you were trading for real right now.

So it is important not to max out the leverage, open trades at random and play with ten different currency pairs in demo. Anyone who does that is wasting the opportunity and is likely to crash and burn when they start trading for real.

3. The stress factor

However careful you are to make your demo currency trading seem as real as possible, there is still a major difference which you cannot artificially recreate, and that is the impact of stress. Stress is a physical reaction to a situation where we believe ourselves to be in danger. It kicks in for psychological, emotional and financial dangers as well as physical dangers. It prompts us to take fast and extreme action to avoid the perceived danger. This can often lead to bad decisions made in the heat of the moment.

It is hard to avoid stress in real trading and it is not a great idea to try to create it artificially in demo, so all you can do to prevent this becoming a problem is to start small when you do go live. Then increase your position or your risk gradually. If you act in this way, demo currency trading can be a very useful preparation for the real thing.

There are so many forex day trading systems that it can be very hard for a trader to find the best one. In fact when you think about all of the variations that you could have on all of the possible technical analysis tools, there must be an infinite number of possible systems.

Of course, if there was one best system that topped them all and worked for everybody with guaranteed profits, we would all be using it. But this is actually impossible. Every time somebody makes money in the forex market, somebody else has to lose. Sure, some of the slack is taken by people who are exchanging currency because they actually need it for import and export, travel or investments. However, the huge majority of the currency exchanged every day belongs to traders. So if everybody in forex trading used the same system, it wouldn’t work any more.

So we should celebrate the diversity of forex day trading systems in the same way that we celebrate biological diversity, and just go look for one that will work for us. How do we know that? We can ask ourselves these three questions:

1. Is It Simple To Understand?

The best day trading systems are usually simple. Forex day traders need to act fast to maximize their profits so you do not want to be having to look at a million different indicators before you can open a trade. Checking 2-3 indicators in two time frames is plenty.

2. Does It Have A Lot Of Winning Trades?

Most people work best with systems that have a relatively high number of winning trades. The reason for this is purely psychological.

Imagine that System A has 70% winning trades, making 30 pips profit on the wins and losing 40 pips on the losses. System B has 40% winning trades, 70 pips up on the wins and 30 pips down on the losses.

System B will make slightly more profit in the long term, but it will often have runs of many losses in a row. This can be very hard to handle psychologically and could result in the trader losing faith in the system and quitting when he was down. Therefore, most new traders would do better with system A.

On the other hand it can also be hard to cope with systems that have large single losses. Another system that has 85% winning trades, making 20 pips profit on the wins and losing 60 pips on the bad trades, would also make a profit in the long term but just a couple of those 60 pip losses in a row could lead to high stress and bad decision making.

3. Does It Fit My Trading Style?

Forex traders looking for day trading systems have different requirements than longer term traders. You will need to consider what times you are able to be online and trading. If you only have a small window of time when you can trade, you may need a system that works well for a particular currency pair that is active at that time. There could be many factors like this to take into account when considering forex day trading systems, depending on your situation.

In this currency trading tutorial we will look at how to manage your money in order to have the best chance of making profits, rather than losses. We all know that forex or currency trading is risky, but there are many things that we can do to reduce the risks.

Most new traders spend too much time looking for the perfect system and not enough on other aspects of their trading. Having a system that ‘works’ is not a guarantee of a smooth ride to millionaire status, just as having a car that works is not a guarantee of a smooth ride to the next town. You also have to know how to drive it and which road to take. Two different people will not drive that car in the exact same way and they may not have the same results.

In fact we can take the analogy a step further and it will illustrate the point even better. An experienced driver takes that car and drives it carefully and safely to the next town. No problem. Then we have two beginners. Let’s forget about the driver’s licence for a moment.

One beginner takes a course in driving before he ever gets inside the car. He probably makes it to the next town too, maybe after a few wrong turns, maybe with a couple scratches on the paintwork, maybe a little late, but he arrives in the end. But the other beginner jumps straight in the car with no tuition, heads for the first road that he sees and ends up either in the wrong town or more likely, in the ditch.

And remember, that was the same car. In the same way we can take the same forex system, give it to three different traders, and see three completely different results.

So what do we need from a currency trading tutorial and other forex courses? Just like with the drivers, knowing how to operate the system is only a small part of our training. Risk management is what is most likely to prevent us from finishing up in the ditch.

Let’s take an example. Say you have a system that makes an average of 50 pips profit on winning trades and 30 pips loss on losing trades, including the spread. Around 50% of its trades are winners. It’s clear that this is a good system. It should make profits in the long term.

However, if you start out thinking you have a 50% chance of success so you can risk 50% of your funds on each trade, you would be making a big mistake. 50% winners does not mean that every loss will be followed by a win and vice versa. There could be 2, 3, 4, maybe occasionally even 10 losses in a row. Or you could have 5 losses followed by a win followed by another 5 losses.

Later, of course, it would even up and you would have a run where there were more wins; but if you were placing 50% or even 20% of your account balance on each trade, you would be wiped out long before the wins started coming in.

A better risk in this situation would be 5% or even 2%. At 10% the trader would probably still be wiped out sooner or later. You can check this out against back tests, but always double the worst situation that you see because it is almost certainly not the worst that could happen.

Money management is something that has to be learned by any beginner trader. You can see from this article why it is important to take a currency trading tutorial of some kind before you start trading.

Currency Trading For Dummies is a book by Mark Galant and Brian Dolan that aims to provide a comprehensive introduction to currency trading (also known as forex or foreign exchange trading) for beginners.

What You Get

The book is 360 pages. It is published by John Wiley & Sons in the ‘For Dummies’ series of reference books whose stated aim is to put complex subjects into plain English for beginners. It is clearly written and should help people who want to get started with forex trading but do not have any background knowledge.

As this is a physical book, there are no video tutorials. You are on your own here. This is reflected in the low price.

Level And Coverage

Currency Trading For Dummies is clearly aimed at beginners. With some notable exceptions (see below) this gives a well structured introduction to forex trading. Special terms and concepts are well introduced and the language is appropriate for people new to currency trading, although some understanding of the financial markets generally is assumed. Some terms are not explained.

The explanations of the workings of the market and the section on currency pairs are excellent. Fundamental analysis is well covered too. The book is weaker on technical analysis and actually setting up trades. Its strong point is bringing you to an understanding of how the forex market actually works, which many of the more practical, system-based trading books hardly cover at all.

The established forex trader will not find much that is new on the practical level here, although the sections on mindset and attitude are covered well and could be helpful for anybody.

Critical Review

There is quite a lot in this book that is open to criticism. For example, they suggest that you should develop your own trading system and trading plan, which is a worthy goal. However, they do not tell you how to backtest a system, which is a very important step. Testing is vital before you go live with a system. While you can and should do real time testing on paper or in a demo account, backtesting is much quicker and can rule some possible systems out of court very fast. You cannot realistically test 10 or 20 possible variations of a system live; but you can easily backtest them.

Also, there is not much coverage of certain steps which are essential to the beginner, such as choosing a broker. We have seen it suggested that this is a deliberate omission because the authors are allegedly associated with a market maker which prevents them being objective. Certainly, if true, it would be a reason for not pointing up any of the possible disadvantages of going with a market maker, which in our view, beginners should be warned about.

They do not give an example of a profitable system that you can use yourself. This is explained on the basis that you should develop your own. While this is undoubtedly the ideal, most beginners will be looking to buy into something that could work for them as a starting point.

Cynics will wonder if the authors really know any profitable trading systems. The book is so much stronger on market information than on practical trading, that it is no surprise to hear that it was authored by people who are on the brokering rather than the trading side of the business.

Summary

This is a useful introduction for beginners interested in forex trading who like to read rather than following video tutorials. It does not set out a trading system to follow, so you will have to look elsewhere for that. It leaves certain things to be desired but on the other hand, it’s not expensive. Let’s face it, you wouldn’t expect to get the perfect trading system for a few dollars. Overall, good value for the price, but it does not contain all that you need to know.

Currency Trading For Dummies is available from Amazon and other online and high street stores.

Commodity forex trading is a surprising concept for many beginners. Commodities are not traded on the forex market, only currency is traded there. So why introduce them into a forex trading system?

The reason is that commodity prices can affect currency prices. Although we are not trading in the price of raw materials directly, in some cases the price of a currency pair may be more or less directly linked to the price of a specfic commodity.

This is because the economies of many countries are based around a particular import or export. Where a country is exporting manufactured goods, this is not relevant. But where they are exporting or importing raw materials, also known as commodities, changes in the price of these items will have a big effect on the country’s economic situation.

These raw materials include oil, metals, precious stones, unprocessed agricultural products, etc. Clearly many of the countries that are dependent on one of these commodities, are small or developing countries whose currency would not form part of a major pair. These currencies are not likely to be of interest to most forex traders.

However, there are three countries of importance in the forex market whose economy is closely tied up with commodities. These are Canada, the world’s second largest exporter of oil; Australia, a major gold producer; and New Zealand, with a bigger basket of commodity exports.

Any of these currencies would be suitable for commodity forex trading systems. The USD/CAD pair is perhaps the most common. With Canada being an exporter of oil and the USA being a big importer, a rise or fall in the price of oil is likely to affect this pair directly. It would be crazy to be trading USD/CAD without taking any notice of oil prices.

In the same way, traders involved with the Australian dollar need to be aware of the possible impact of changes in the value of gold. NZD pairs, however, are more complex because of the varied range of goods that New Zealand exports. The general commodity price index is the one to watch here.

Of course, even where there is a strong economic link to a particular commodity, the effect on currency prices is not necessarily direct. Other factors also affect the forex market. Small changes in commodity prices are often ignored by the market. The effect is more noticeable when there is a large rise or fall or, indeed, a prediction of a major shift in the price of the commodity.

Often, the currency price will not react immediately. This creates an ideal situation for a forex trader with an interest in the commodity market. By identifying a trend in the price of oil, for example, traders can often enter the USD/CAD market ahead of a reactive trend forming in the price of the currency pair. This is where commodity forex trading can give traders a very valuable edge.

Beginner currency trading is a minefield where a lot of money can easily be lost. New traders usually come into the market with dreams of making it big, but any attempt to make a lot of money in a short time is likely to result in losses in forex trading just as in any other field. Starting small is the only way to become successful in the long term, at least for most beginners. So starting out with a micro forex account can be the best way to go.

It sounds counterintuitive to suggest that a new trader will make more money with a tiny account balance of $100 or even less, but when you consider how much it is possible to lose by trading the bigger mini or standard lots, you will see that this makes sense. The important point is not to think that just because the account is small, you can take big risks with it.

Opening a micro forex account for your first foray into beginner currency trading is a valuable way to start even if you have a lot more money available. In fact, any forex trader should be prepared to risk at least $500 to start, even with a micro account and even if you do not intend to put it all into the account right away. It is best, in fact, to keep some back.

Starting with a micro account does not mean that you can skip the demo stage. It is important to get to know both your system and your broker’s platform in demo mode before you go live. This cuts down on the chances of making technical mistakes or mistakes in the implementation of your system in your real money account, provided of course that the platform remains the same in demo as for the real market.

To get the most from a micro forex account it is important to have a system that does not involve big risks. In most cases you will be using high leverage on the account or trading more than one lot, so that you maximize the amount that you can make from winning trades. This means that any loss is likely to have a big impact.

Therefore you need a system that only makes small losses. Do not choose a system with a very high win rate because it is likely that the losses, when they do occur, will be heavy. This could wipe out a trader using maximum leverage in a micro account. Instead, look for a system with more stable results. Of course, no forex system is completely predictable, but statistically a small account balance will have a better chance of surviving that way.

Once you are making steady profits with a micro account you can gradually add more funds to your balance and increase the number of lots that you commit in each trade, until eventually you are ready to move to a mini forex lot size which is ten times bigger. Used in this way, a micro forex account can be the best way to get started with beginner currency trading.

Automated forex system trading is becoming more and more popular with investors. If operated successfully, it offers a hands free way to make money on the lucrative currency trading market. Naturally, making money on autopilot is an attractive market.

Forex is a huge worldwide market with a daily turnover of more than the total trading volume of all of the world’s stock markets added together. It spans all of the global time zones so it never sleeps during the business week. Trading is possible 24 hours a day Monday through Friday.

Clearly, no human trader can watch this market night and day for all of the possible trading opportunities. Nor can we cover all of the currency pairs.

In theory you can exchange any two currencies and therefore there are  a huge number of potential currency pairs. In practice, of course, traders who are in the market to make money will concentrate on the most important pairs: that is the majors (combinations of the major world currencies with the US dollar) and perhaps a few cross pairs (pairs that do not include USD). Still, we cannot watch six or more currency pairs at the same time. It is difficult for a human trader to monitor more than one without messing up now and then. So automated forex system trading offers a lot of potential for increasing the number of trades that we can make.

Automated forex system trading involves software commonly called a forex robot. This is a program which interacts with your broker account through an API to trade on your behalf. Of course, it uses the internet and requires a broadband connection. Usually you have to leave the computer switched on and connected to the internet all the time that you want the robot to watch the market, although some can run on web servers if you have a website and hosting with the right capabilities.

Automated currency trading systems still involve risk. The robot cannot guarantee that you will make profits. It depends on the system that has been automated and also on the market. Even with a system that has been extremely successful in the past there is no guarantee that market conditions will continue to make it successful in the future.

Because of this, it is important to understand the market. Even if you plan to use a robot developed by somebody else, it is a good idea to have some practice at manual trading so that you see how the market works. This practice can be gained in a demo account where you do not have to risk any real money.

Manual trading, even in demo mode, will teach you to manage your money. Assessing risk and deciding on the best position size is vital when you are using automated forex software. If you have too much money at stake on each trade, it is possible that your balance will be wiped out during a losing run, even if the system that you are using is profitable in the long term. It is very important to take this into account when setting up automated forex system trading in a profitable way.