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While the concept of Forex trading is actually quite easy, there’re some principles and basics early investors should be aware of if they want to achieve success. Want to start trading Forex? Check this guide first.
Forex trading is short for trading on the foreign exchange market. It’s a market where anyone can buy one currency in exchange for another. It is considered the market with the highest liquidity in the world with a trading volume of $7 trillion each day. This is super-massive when compared to the daily trading volume of the New York Stock Exchange, the biggest stock exchange in the world, which is around $25 billion.
Trading Forex is actually quite easy. If you think a particular currency would increase in value, you can buy it against another, preferably a weak currency. If you suppose a currency would decrease, you can sell it against another and still make a profit whether you’re short or long.
In order to become a retail Forex trader, you need to choose a broker to execute your trades for you. There are several Forex brokers out there offering practically the same services. However, some brokers are better than others and could be well-suited to you and your trading.
Before choosing a broker you first need to consider the issue of security. You certainly don’t want to make tens of thousands of dollars on trades and have to lose it all to a shady broker. The great thing about making certain your potential broker has a high trust level is that it’s easy to do. Several regulatory agencies govern brokers.
The United States has the National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC) as their regulatory bodies. Australia has the Australian Securities and Investment Commission (ASIC), Canada has the Investment Information Regulatory Organization of Canada (IIROC), and the United Kingdom has the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA).
If your broker is situated in any of these countries and is registered with any of these regulatory bodies, you can consider your broker secure. There are, however, other regulatory bodies for other countries and we advise to review them in advance.
Also, it’s wise to check the transaction cost level for your potential broker. Brokers require traders to pay through a commission or spread. Depending on your trading strategy, you’ll want to choose brokers with a certain transaction cost level. Scalpers generally prefer brokers that offer very low spreads or commission. This is because they trade multiple times during the course of the day. Swing traders hold several trades over days and weeks and may not bother so much about transaction costs.
You also have to check the conditions for deposits and withdrawals by your broker. Good brokers don’t give users much trouble pertaining to the inflow and outflow of cash. You can also examine how quickly orders are filled and how good the customer service is.
Many traders who trade Forex have a particular trading plan to consistently make money. Anyway, discipline is a core part of trading and one every trader should imbibe in their daily trading activities. A
Once the strategy is back-tested and well-seasoned, with proper stop-losses and take-profits, one can be sure that a successful trading strategy has been developed. A good trading strategy helps traders develop confidence in themselves.
Creating a Forex strategy in the real sense of it is the development of a specific trading method that is just a facet of an entire trading plan. A consistent strategy focuses on providing a perfect entry point but should also consider:
Developing a clear cut Forex trading strategy comes with many questions with no single answer. Most of the trusted strategies are developed to suit the trader and how the trader sees the market. This means that any strategy depends on the trader’s personality and what the trader looks to get out of the market (remember, what works for one person might not work for another).
Trading styles are usually developed on the timeframe – either short or long and over the years, experienced traders have had to pick one of these timeframes for their trading strategies which have proven to be very efficient and successful based on any market condition they find themselves. Examples of these are:
Scalping: These are short-term trades, usually executed and held for a couple of minutes, or even seconds. The trader here aims to quickly make a few points of profit by beating the bid/offer spread before closing the trade. This strategy works best with tick charts such as the ones found in MetaTrader 4 Supreme Edition. Scalpers aim to best the bid/ask spread of a broker, which is why one of their main priorities is finding a broker with low spreads.
Scalpers that use ECN brokers (brokers that use electronic communication networks that help clients directly access currency markets) look for brokers with low commissions. They typically use high amounts of lots in risky trades to help cushion the small amounts of pips gained on trades. Quite often scalpers are considered gamblers.
Day Trading: As the name suggests, day trading involves trades that are usually exited before the end of each trading day. This removes the possibility of the trades being affected by large pip moves overnight. Day trading strategies are usually considered best for beginners as it is said to eliminate ‘noise’ while reading the charts.
Day traders typically aim for a certain pip level to be reached before closing trades. Several traders make use of taking profit levels to get out of trades with a set profit. They mostly do not pay transaction fees for swap, which is the payment made for holding a trade overnight.
Swing Trading: This strategy involves holding positions for several days while the trader aims to profit from short-term patterns.
Swing traders hold their trades for days and possibly weeks depending on their preset risk-reward level or the use of the trailing stop loss to lock in profits in trending markets. Most swing traders use indicators and price action patterns to guide them before executing trades. They typically view charts at the end of a trading day before taking a decision.
Positional Trading: This strategy follows long term trends, seeking to make a profit from major price shifts. Positional traders hold trades for very long periods of time running into months or years. They are considered the most educated and seasoned traders because they use several amounts of fundamental and economic data to make their decisions.
Before a big move in a market direction is started, positional traders are ready to lock in a trade. They usually use big amounts of money to sufficiently get compensated on the very few trades they make.
This piece cannot be complete without certain crucial points to remember.
1. Demo Trade and Paper Trade until Your Profit is Consistent
A lot of people jump into the live Forex trading market quickly before perfecting their strategy and most importantly, testing it on a demo account. Apart from that, using too much leverage on a live account is common among newbies looking to cash out big from the “goldmine” Forex market. It is pertinent for every trader to take time out to learn the workings of the market before committing capital to it.
2. Trade without Emotion
The mental capacity to see setups and execute them isn’t enough to have a successful Forex trading journey. Emotional strength and maturity are also needed to ensure that a big win or a big loss doesn’t drive the trader into greed. Setting mental stop-losses are also not advisable if they can’t be executed as at when due.
3. The Trend Could be a Friend or Foe
Many times, traders tend to go with the trend of the market – either uptrend or downtrend because more profits come in when trades are executed at the perfect entry point to move on with a trend. If for any reason a trader has to go against a trend, the reason must be solid: at times trends can be just what they are and sometimes could be a preparation for a move in the opposite direction.