This tremendous liquidity together with the availability of different currency pairs can result in a high level of volatility on a day-to-day basis. Forex markets are also highly affected by financial news releases which are relatively frequent and can bring about huge swings in the value of a currency. These fluctuations in price give traders opportunity to profit. Forex markets offer investors the ability to profit in both rising and falling markets. With a wide range of instruments to trade and highly leveraged trading, it is possible to begin trading Forex with a very small account.

Most of the instruments traded on the Forex market have a minimum trade size, calculated on the base currency, a common minimum trade size is 100,000 units, for this reason the use of leverage is essential for traders. Many Forex brokers offer mini accounts, where traders are able to place trades with a minimum size of 10,000 units.

Currencies are always priced in pairs, with each trade resulting in the purchase of one currency and the sale of another. If the currency you are buying increases in value relative to the currency you are selling, you will make money. The first currency in a pair is the base currency and the second is the counter or quote currency.

Forex quotes include two prices, a bid and an ask price. The bid price is the price at which you can sell the base currency in exchange for the counter currency. The ask price is the price at which you can buy the base currency in exchange for the counter currency. There is always a gap between the two prices, referred to as the spread. You can calculate the spread by looking at the last two numbers in the bid and ask prices, for example if the prices are 1.8967 / 1.8971, the spread is 4 pips, so the trade would need to move in your favor by 4 pips for you to break-even.

Margin in Forex is a deposit taken from the trader’s account to cover any future trading losses. The margin required is calculated automatically by your Forex broker before the trade is placed. Your Forex broker will generally close all positions held if the trade turns against you and your trading losses are close to emptying your account.

If you hold a currency pair overnight, you will be charged or paid the difference between the two interest rates of the currencies you are holding. Your interest will be calculated each day as part of the rollover process. If you don’t hold a position overnight you will not pay or receive any interest.

Trading in Forex can be quite similar to trading other instruments but does require a slightly different way of thinking. The best way to learn how it all works is to open a currency trading demo account and start experimenting with placing trades. The high level of leverage available to Forex traders can bring great opportunities but also has the potential to bring significant risk. Before trading with any real money traders need to have a money management plan to ensure the decisions they make are appropriate for their account balance.

There are three types of moving averages: Simple, Weighted and Exponential.

In a simple moving average each price point over the specified period is given equal weight. The user must define whether the high, low or close is used, these price points are then added together and averaged. As each price point is added to the equation a line is formed and the oldest price point in the sample is dropped.

A weighted moving average gives more emphasis to recent data. Each price point is multiplied by a weighting factor which will change every day. These figures are then added and divided by the total of the weighting factors. The weighted moving average provides smoothing to a curve of prices while being more responsive to recent price movements.

An exponential moving average is another way of giving more emphasis to recent data. A percentage of the most recent price is multiplied by the previous period’s average price.

Fortunately, most charting packages do all the calculations for you.

Traders look to find the optimum moving average for a particular currency pair. This process involves testing the different types of moving averages and varying the time periods used to find a fit for the price data.

Many traders use a few different moving averages on each price chart. For example a trader might use a 5 period, 13 period and 60 period moving average on the same price chart. The trader will look for how the moving averages can be used together to provide confirmation for a trade.

Larger moving averages (eg. the 60 period) can help the trader to confirm the long term trend, but lag behind the price and are slow to respond to a changing trend. Smaller moving averages (eg. the 5 period) can help to spot short term trends and reversals, they follow the price trend pretty closely but are more influenced by normal price fluctuations.

Traders often look for a moving average that has been a line of support or resistance in the past. This line is then used to place stops, profit targets and look for trend reversal opportunities. Many traders also look for the moving averages to cross over to identify a trade opportunity.

Like any other technical indicator, moving averages work with a delay. The moving average line is only a forecast of what could happen in the future, not a guarantee of what will happen.

There are a few other more complicated moving averages you might come across.
- Double Exponential Moving Average (DEMA)
- Triple Exponential Moving Average (TEMA)
- Forecast Moving Average
- Least Squares Moving Average
- Modified Moving Average
- Time Series Moving Average
- Triangular Moving Average
- Zero Lag Exponential Moving Average

The best way to find out how these different moving averages respond to price data is to open up a currency (or stock) trading demo account and try them out on a chart.

- Misplacing Stops
Stops are necessary to avoid bad losses, however poorly placed stops can be just as bad. Before placing a trade the trader should consider the risk to reward ratio for the trade. The stop needs to be set with the traders money management in mind and should not be too close or too far away from the price. Traders should also consider moving their stop as the trade goes in their favor to lock in profits and reduce potential losses.

- Abusing Leverage
With Forex brokers offering up to 400:1 leverage, it’s easy for inexperienced traders to get carried away with the hope of making quick profits. When traders use a high level of leverage the returns can be astounding, but when the trade doesn’t work out the result can be catastrophic. Traders should always calculate the dollar value of the risk they are taking for each trade and ensure that this is appropriate for their account balance. Experienced traders rarely risk more than 2-3% of their account balance on any one trade.

- Placing Technicals On A Pedestal
Technical indicators are great tools that assist traders to make decisions. However making decisions for trades based solely on what the technical indicators are telling us can result in large losses. By considering fundamental information together with technical information you will have a much better chance at being successful.

- Day Trading
There are successful day traders out there. However, for new traders, trading with the longer term trend will be easier and have a better chance of making profits. Longer duration trades give the position more time to move in your favor, particularly if the market is volatile.

- Blindly Following A System
There are a lot of Forex systems out there that promise miraculous results. But if you start trading one of these systems without proof that it actually works you could find your account balance quickly reduced to 0. If you want to use a Forex trading system, a sensible approach is to backtest and forward test it using software or on paper before putting any real money at risk.

- Underestimating Emotions
Emotions can have a huge impact on your Forex trading. Keeping a trade diary will help you to understand how your emotions are affecting your trading, you can then learn to use them to your advantage.

- I Backtested It So It Must Work
A mistake traders make is to assume a backtested system will continue to work. Forex markets are constantly changing and are effected by global and political events. Before you begin to use a backtested system you should consider if it reasonable to assume that the market conditions the system has been tested on are likely to be similar to market conditions in the future.

Hopefully this article has given you some tips on how to avoid common Forex trading mistakes.