My top tip for anyone starting out in forex

I’ve had a lot of correspondence following on from last week’s newsletter about the forex markets.

It would seem that there are plenty of Bulletin readers who are keen to get into forex but don’t know where to start, or who’ve dabbled a little in the currency, had their fingers burned – and are understandably cautious.

If you’re considering jumping into the forex markets, I’ve two pieces of advice that I’d like to pass on …

1. My top tip for anyone starting out in forex

My number one piece of advice to any forex newbie would be this: stick to one currency pair.

Restricting yourself to just one currency pair is the best way to keep your trading simple while you’re finding your feet in the market.

It’s a common mistake to flit from one currency to another, in the hunt for the magic signals we’re looking for – don’t do it!

There are three key reasons for placing this limit on your trading:

a) Every currency pair has unique characteristics – they react to news differently; they move at different rates and within different ranges; and they make those moves at different times of day. By sticking with one pair, you can learn its nuances, before you expand your trading repertoire.

b) Currency pairs are correlated. Some currency pairs have a positive correlation – i.e. they both move in the same direction. Some have a negative correlation – i.e. they move in opposite directions. And these correlations don’t stay the same.

If you’re new to forex, it’s easy to make a slip-up with correlations and find that you’ve piled too much risk in one direction. The Swiss Franc, for example, is usually closely correlated with the Euro. So, if you’ve gone long EUR/USD and short USD/CHF – you’ve essentially doubled up your position, and have therefore doubled your risk.

Of course, the experienced forex trader can use these correlations to hedge their positions, bringing greater security – and profits – to their trading.

But if you’re starting out, it’s best not to run before you can walk. By sticking to one pair, you don’t run the risk of getting your correlations in a tangle.

c) In all trading, there’s a danger of adding too many layers of complexity – of piling too many technical indicators onto your charts, of spending too many late nights pouring over trading manuals.

If successful trading were simply about grasping all the facts, then they’d have taught a computer to do it by now! It’s about learning skills, practicing those skills, and applying them with discipline. The best way to do that is to keep it simple.

2. A great starting place

I’m currently using a trading strategy that’s completely new to me. It’s been around for a few months, and I’d heard some good things about it – so thought I’d better give it a try.

It sticks to just one currency pair – GBP/USD – which I like for a start. And, so far, I’ve been pleased with its performance.

I want to test it out for a bit longer though – and will bring you my full thoughts on it next week – so keep an eye on your inbox for this review.

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