Pin the Tail on the Donkey: Your First Forex Trade

Forex trade
About the author
Seasoned macro trader, managed billions from the Credit Crunch to COVID-19 and everything in between. Traded most assets you’ve heard of and a few you haven’t, and still alive to tell the tale. A student of history, markets, and psychology and a lover of risk and weirdness.

Table of Contents

So, you’ve finally decided to start trading forex? Great! Breaking into the trading industry can be a bit challenging—not because it has to be, but because of the overwhelming amount of information out there. After all, all you actually need to start trading is a mobile phone (or a computer), an internet connection, and a trading account.

The real challenge is knowing when and indeed where to place your first trade. With so many educational resources available, it’s easy to feel like you’re not ready because you haven’t mastered “this strategy or that concept.”

However, we believe Pareto’s Principle applies to trading—you only need a small fraction of all the available information to get started on the right path. This article is our attempt to get you into the trading ring as soon as possible, in the best possible way.

We will cover the basics of idea generation, trade execution and risk management, what we won’t touch on here is where to trade, for that you need to select the best forex broker for you, it just so happens we did some of the hard work for you already. Head on over to our broker review section for a selection of trustworthy and fully features brokers. Personally being Irish it would be remiss of me not to plug AvaTrade but it’s more than just home country bias I really love their platform for ease of use and also range of market and instruments.

But enough preamble, lets crack on with this!

Introduction to Simple Technical Analysis

Unless you plan on being a full-time fundamental analyst, technical analysis will be the foundation of your trading journey.

At this point, it’s important to acknowledge a hard truth: no trading strategy wins all the time. Your goal with technical analysis should be to develop a clear, repeatable trading model that provides an edge over the market in the long run.

A simple technical analysis trading system consists of:

  • Identifying the trend
  • Deciding on an entry point
  • Knowing where to exit

But before diving into these steps, let’s talk about leverage—one of the most crucial aspects of forex trading.

Understanding Leverage: A Double-Edged Sword

Leverage is one of the reasons forex trading is so appealing—yet it’s also what can trip you up if you’re not careful.

With 100:1 leverage, you can use $100 to control $10,000 in the market. Sounds great, right? However, if leverage can amplify your potential profits, it also increases your exposure to losses.

Now, imagine being on the wrong side of a trade. If the market moves against you, high leverage means even a small unfavorable movement can wipe out your account faster than you can react.

With that in mind, let’s move on to the core of your trading strategy: identifying the trend.

1. Identifying the Trend

One of the most reliable ways to spot trends is by using multiple moving averages (MAs) with different periods—such as the 20, 50, 100, and 200-day MAs.

Here’s how it works:

  • When a “fast” moving average, like the 20-day MA, crosses above slower ones (50-day, 100-day, or 200-day MA), it’s a signal that an uptrend might be forming.
  • If these MAs start spreading out and aligning in order (20-50-100-200), it strengthens the case for a solid trend.
  • However, if the price moves too far ahead of the fast MA, the market may be overbought. This signals that a retracement or correction could be imminent.

2. Deciding on an Entry Point

There’s a golden rule in trading: The trend is your friend.

Once you’ve identified the trend, the next step is to find the right entry point. But timing is everything. Jumping in too soon can lead to unnecessary losses.

A simple way to enter a trade:

  1. Wait for the 20-day MA to cross above the 50-day MA—this signals a potential uptrend.
  2. Instead of buying immediately, wait for the price to pull back towards the 20-day MA.
  3. If the price respects this level and starts moving back up, it’s a good entry signal.
  4. However, if the price drops below the 20-day MA with strong momentum, it could mean the trend is weakening. In that case, it’s best to wait for another clear setup.

3. Knowing Where to Get Out

Entering a trade is easy; knowing when to exit is where the real skill lies. Risk management should be your top priority.

Once you’ve entered a trade, set your stop-loss and take-profit levels. A good rule of thumb:

  • If you entered based on the 20-day MA, place your stop-loss just below the 50-day MA. This gives your trade breathing room while protecting you from major reversals.
  • As the trade progresses, watch how the price interacts with the 20-day MA. If it starts closing below this level, it may be a sign the trend is reversing—consider taking profits or tightening your stop-loss.

Why Fundamentals Matter

A common mistake new traders make is relying solely on technical analysis. They believe they’ve cracked the code by mastering charts—only to get blindsided by major news events.

While technical analysis is essential, it’s only part of the puzzle. The forex market moves based on economic data and key events. Ignoring these factors is like driving without checking the road conditions—you’re bound to hit an obstacle.

The Importance of Fundamental Analysis

Fundamental analysis involves understanding economic indicators and central bank policies. For example:

  • A Consumer Price Index (CPI) report can signal inflation trends, influencing central bank decisions on interest rates.
  • A Federal Reserve rate hike can cause the USD to strengthen, affecting currency pairs like USD/JPY.

Failing to consider these factors can lead to unexpected losses, even if your technical analysis setup looks perfect.

Case Study: USD/JPY at 30-Year Highs

Let’s illustrate this with a real-world example. Recently, USD/JPY hit a 30-year high, attracting massive attention from traders.

Initially, the rally was fueled by strong U.S. economic data, particularly CPI reports, which suggested that the Federal Reserve might tighten monetary policy. This drove up the USD against the yen, creating a textbook carry trade opportunity—where traders borrow in a low-yield currency (JPY) to invest in a higher-yield one (USD).

However, the market quickly reversed:

  • In July, weaker-than-expected U.S. inflation data stalled the dollar’s rally.
  • The Bank of Japan (BOJ) then surprised traders with an unexpected rate hike, triggering a rapid unwinding of positions.

Despite all technical signs pointing to a strong uptrend, fundamental shifts changed the game overnight. This underscores why staying informed about economic events is just as critical as reading charts.

Final Thoughts

As you step into forex trading, start small. There’s no rush to trade real money—use a demo account to practice, make mistakes, and gain experience without financial risk.

Trading is a journey, not just a destination. Each trade either brings a profit or teaches a valuable lesson. Give yourself time to learn, refine your strategy, and find what works best for you.

Stay patient, stay disciplined, and soon enough, you’ll carve out your own success in the forex market.