Whether you're new to Currency Trading or a seasoned trader, you can always improve your trading skills. Education is fundamental to successful trading. Here are six steps that will help hone your Currency trading skills.
Successful professional traders do three things that amateurs often forget. They plan a trading strategy, they follow the markets, and they diarize, track, and analyze each of their trades. In our experience, the most successful traders are not simply the ones who take the best positions. They are the ones that are smartest about risk management and disciplined in their strategy.
They are never emotional about gains or losses. A limit order instructs the system to automatically exit a position when your target profit has been achieved. This enables you to "lock in" your desired profit on a winning position. This enables you to cap your losses on a losing position.
By setting both on all their positions, they have removed emotion from the equation and are letting the market work for them. They stay glued to their screens, trying to juggle all their positions in real time. They miss critical action points, and they let emotion rule their decisions. However, you need to be smart when setting them. This means that a temporary dip can knock out a position before it has a chance to retrace.
Similarly, if a Limit Order is set too far from the opening price, potential profit may never be realized. There are two basic approaches to analyzing the Forex market. It is important to understand how they can be used successfully. Technical Analysis focuses on the study of price movements, using historical currency data to try to predict the direction of future prices. The premise is that all available market information is already reflected in the price of any currency, and that all you need to do is study price movements to make informed trading decisions.
The primary tools of Technical Analysis are charts. Charts are used to identify trends and patterns in an attempt to find profit opportunities. Those who follow this approach look for trending tendencies in the Forex markets, and say that the key to success is identifying such trends in their earliest stage of development. Traders using Technical Analysis follow charts and trends, typically following a number currency pairs simultaneously.
Traders using Fundamental Analysis must sort through a great deal of market data, and so typically focus on only a few currency pairs. For this reason, many traders prefer Technical Analysis. In addition, many traders choose Technical Analysis because they see strong trending tendencies in the Forex market.
They look to master the fundamentals of Technical Analysis and apply them to numerous time frames and currency pairs. Technical Analysis uses charts to try to forecast future currency prices by studying past market movements. Using this technique, a trader has the ability to simultaneously monitor multiple currency pairs by evaluating how others are trading a particular currency.
In our experience, because so many traders use technical analysis, and their reaction to market activity tends to be similar, the validity of this technique is strengthened. It becomes a self-fulfilling prophecy that feeds on itself, increasing the reliability of the signals generated from this analysis.
Perhaps the most effective and therefore the most popular form of technical analyses is the use of "support" and "resistance".
Support is the "floor" or lower boundary that a currency pair has trouble breaching. Resistance, on the other hand, is simply the opposite: Support and Resistance are important in range bound markets because they indicate the boundaries where the market tends to change direction. When and if the market breaks through these boundaries, it is referred to as a "breakout" and is usually followed by increased market activity.
We can use these support and resistance levels in many ways. A range trader would want to buy above support and sell below resistance while breakout. Trend traders, on the other hand, would buy when the price breaks above a level of resistance and sell when it breaks below support. The concept is still the same as we stated earlier.
We want to buy a currency pair if we anticipate the market moving up and then sell it at higher price. We can also sell a currency pair if we anticipate the market moving down and then buy it at a lower price. Each currency has an overnight lending rate determined by that country's central bank.
If inflation is deemed too high, a central bank may raise the interest rate to cool down the economy. Conversely, if economic activity is sluggish, a central bank may reduce interest rates to stimulate growth. Lower interest rates usually depreciate the value of a currency — in part, because it attracts carry-trades. A carry-trade is a strategy in which a trader sells a currency with a low interest rate and buys a currency with a high interest. The unemployment rate is a key indicator of economic strength.
If a country has a high unemployment rate, it means that the economy is not strong enough to provide people with jobs. This leads to a decline in the currency value. These key international political events affect the foreign exchange market, as well as all other markets. In May of , there was growing anticipation that France would vote against accepting the European Union Constitution.
Since France was vital to Europe's economic health and the value of the Euro , traders sold the Euro and bought the dollar; this pushed the Euro down so far that many traders thought it couldn't go any lower.
But, they were wrong. Traders who bought the Euro lost thousands. On the other hand, traders selling the Euro made thousands. Many traders take shopping more seriously than trading. This cannot be stressed enough. Most traders fail because they lack discipline. Be sure that you have a plan in place before you start to trade.
Your analysis should include the potential downside as well as the expected upside. For each trade, choose a profit target that will let you make good money on the position without being unachievable. Choose a loss limit that is large enough to accommodate normal market fluctuations, but smaller than your profit target. This simple concept is one of the most difficult to follow. Many traders abandon their predetermined plans on a whim, closing winning positions before their profit targets are reached because they grow nervous that the market will turn against them.
But those same traders will hang on to losing positions well past their loss limits, hoping to somehow recover their losses. Sometimes traders see their loss limits hit a few times, only to see the market go back in their favor once they are out.
This can lead to mistaken belief that this will always keep happening, and that loss limits are counterproductive. Nothing could be further from the truth! No trader makes money on every trade. If you can get 5 trades out of 10 to be profitable, then you are doing well. How then do you make money with only half of your positions being winners?
By setting smart trade limits. When you lose less on your losers than you make on your winners, you are profitable. It is easy to do objective analysis before taking a position. It is much harder when you've got money invested. Traders holding positions tend to analyze the market differently in the hope that it will move in a favorable direction, ignoring changing factors that may have turned against their original analysis.
This is especially true when losses are being taken on a position. Traders tend to 'marry' a losing position, disregarding signs that point towards continued losses. Do not over trade. A common mistake made by new traders is over-leveraging an account. Most traders analyze the charts correctly and place sensible trades, yet they tend to over leverage themselves.
As a consequence of this, they are often forced to exit a position at the wrong time. Trading currencies is not easy if it were, everyone would be a millionaire! Be aware that trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite.
The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
Strategize, Analyze and Diarize 2. Learn to Manage Your Risk 3. Choose Your Approach 4. Chart Your Course with Technical Analysis 5. Beware of Psychological Pitfalls. Does your Forex Broker cut the mustard? What is Currency Trading?More...