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How To Trade Currencies

Currency trading is currently one of the most prevalent growth areas in the world. Many see it as an opportunity for an alternative source of income when times are difficult. Others use it as an investment opportunity to save money or earn an additional income.

However, before you start trading, it’s important to be clear that although Forex trading can be a successful way to make profits, not all traders are winners. There is a significant risk factor and like any commerce in the world, there will be both profit and losses in currency trading. In these global markets, conditions can be volatile, and even professional traders have lost money. However, if you research well and use all the tools and strategies at your disposal, you should eventually be confident in making the right trading decisions.

For those who are thinking about trading for the very first time, here are the basics that you need to familiarise yourself with before moving on to more in-depth articles.

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How Exactly Do You Trade Currencies?

Trading on the foreign exchange market, or Forex trading, is the process of selling, buying or exchanging currencies. To some extent, it is quite similar to the transactions we make when dealing with foreign exchange companies. However, there are different speculative ways to trade Forex, and the transactions are conducted via an online brokerage firm.

To keep it simple, when traders expect the value of a currency to rise, they will buy. The profit yielded is the difference between the number of points at the time the deal was opened and its closing time. If they expect the value of a currency to decline, they will sell the currency at the highest price possible, with the potential to purchase it again when the price drops further and its value decreases.

  • Traders need to have an account with one of the reputable online brokerage firms, which must be carefully selected to ensure reliability and safety.
  • The company should be reputable and accredited and licensed by recognised international financial institutions.
  • It should also display a transparent set of strict safety standards to ensure the protection of your money and data.
  • The technology used for the trading platforms should be high-quality software, without any technical errors or problems in executing the transactions.
  • The deposit and withdrawal methods and processes should be easy, safe and quickly executed.
  • You will always have some transaction costs. Always review your options to find the right balance between these and your overall security.
  • It is critical that the broker fills your orders at the best possible price. With normal liquidity, there should be no reason for the broker to not fulfil it at the market price that you see when you make your transaction.
  • Any top broker will offer a demo account so that you can try out their services and software before you start trading for real money.
  • Many brokerage firms also offer additional services and benefits, so traders be sure to research, compare, and select the best broker to suit your needs.

What Is The Next Step In Currency Trading?

Price fluctuations can rapidly effect forex currency trading

Trading Currencies - Look at the pips fluctuationFor instance, according to accurate scientific data, the EUR/USD can fluctuate by 150 pips during a quiet day, and on the most volatile days, the movements can reach up to 300 pips. Therefore, before you start trading, you will need to research the various strategies and different analytical methods to help formulate your trading strategy. This can then be tested by using a demo account and virtual money, to make sure that they are effective before you start to invest or speculate with real money.

Trading strategies are techniques used by Forex traders to try to determine whether to buy or sell a currency pair at any given time. Forex trading strategies are usually based on either a technical or fundamental analysis. Depending on the time frames, and whether it is a short-term or long-term trade, there are many other trading strategies which can be used in combination.

Trading Strategies For The Forex Markets

Trading strategies are techniques used by Forex traders to try to determine whether to buy or sell a currency pair at any given time. Forex trading strategies are usually based on either a technical or fundamental analysis. Depending on the time frames, and whether it is a short-term or long-term trade, there are many other trading strategies which can be used in combination.

Scalping: This is geared towards making profits on very minor price changes. They are short-term transactions, with signals based on a set of real-time analysis, often from 1 minute to 15-minutes timeframe. Scalpers will have a strict exit policy to make the most profit possible.

Day trading: These are transactions that are held for just one day and closed before the end of that day. Signals are taken from 30 minutes to 1-hour and trading can take place within minutes.

Swing trading: Here, short-term transactions can be held for several days, typically between two to six days. Traders look at signals from 4 hours to 1-day timeframe, and may even wait up to two weeks to trade.

Forex trading strategies are usually manual, where transactions are executed by a trader after looking for trading signals and deciding to buy or sell. However, there are automated software systems where the transactions are executed by a Forex robot. Although there are some benefits to these automated systems, as there is no human emotion involved, you should be extremely careful before deciding on this option.

Building A Trading Strategy

  • Selecting your market: You should select a specific market for your strategy and become an expert in the subject and at reading the signals.
  • Position sizing: Traders must carefully determine how large each position is, to control the amount of risk taken in each transaction.
  • Timeframe: Choose a trading timeframe depending on the amount of time that you have.
  • Market context: Decide on a tool to help you to read signals and judge the developing trends.
  • Entry and exit points: You will need to develop rules governing when to enter a long or short transaction and when to exit. This will make your trading actions decisive.
  • Defining the risk: Work on minimising the risk by position sizing and keep carefully observing it.

After selecting a brokerage firm, building your trading strategy and testing its efficiency, you should now be ready to move to a real account and take advantage of market movements.

What Are Bullish And Bearish Markets?

Depending on the nature of the trend, the market has two distinct types, bullish and bearish. Along with long and short, these are common terms used in all Forex markets and timeframes. This is regardless of what you are trading in and the length of your investment. There are many ways to determine if the market is bullish or bearish, and traders often use many technical indicators for this purpose. One of the most popular indicators is the “moving average” which can determine if the overall trend is up or down.

  • Bullish market: This is when the price of an asset is rising over a sustained period of time, months or years. A trader using this terminology indicates their belief that prices will rise.
  • Bearish market: This is when the asset’s price is trending in a downward manner and falling, again over several months or years. A trader using these terms means that they believe the price will decline further in value.
  • Long & short: To go short on any currency means that a trader sells it, in the hope of a market price decline. A long trade is when they are buying with the anticipation that they can sell for a higher price at some point in the future.

One of the key advantages of Forex trading in currency pairs is the chance it offers traders to profit from both bullish and bearish markets.

What Is The Best Way To Trade?

There is no “ideal way to trade” since currency trading is governed by many variables, methods of analysis and indicators. In the end, each trader is trying to achieve their own goal by using a certain strategy and depending upon their own preferences and budget restrictions. There is no guaranteed profit rate in Forex trading, although you may read about it. Success will depend entirely on each traders diligence, together with their ability to accurately analyse the market and execute successful trades. When you are just starting out, you will considerably improve your performance by making a detailed plan, sticking to it, and avoiding these common mistakes.

  1. Starting to trade without adequate research, practise and using a recognised method of analysis.
  2. Failure to adequately research and test brokerage services.
  3. Using a trading strategy without testing it and its ability to achieve good results.
  4. Entering a market in times of fluctuation or political and economic unrest.
  5. Using large leverage that does not fit the available capital.
  6. Not committing to predetermined profit and loss stop orders.
  7. Trying to pursue a current trend and entering into a large number of transactions.
  8. Not utilising risk management for every trade.
  9. Trying to make back losses after several losing trades.
  10. Trading when in a bad mood or under personal stress.