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Forex Trading Strategy – An introduction to Forex Trading

What Is The Forex Market?

The foreign exchange market, or Forex as it is better known, is the largest market in the world with a daily trading volume in currencies of around 5 trillion dollars. This globally decentralised market is where all aspects of buying, selling and exchanging currencies occurs, at current or determined prices. Traders can take advantage of the Forex market being open 24 hours, 5 days a week for opening and closing positions at any time.

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How Does Forex Trading Work?

Trading is conducted over a network of computers operating globally, and to do this electronic trading platforms like MetaTrader 4 are used. Popular due to its ease of use, MetaTrader 4 is not the only trading platform available, and as technology develops so do your trading platform options. On these platforms, you buy and sell in currency pairs, where the pairs are grouped to show the difference in the exchange rate. In other words, the price of the first currency converted to the second currency.

For example; an offer to purchase EUR/USD at 1.300 means the cost of 1€ is $1.30

There are numerous currency pairs to be found in the Forex market but there are six that are considered the main currency pairs:

GBP/USD British Pound / US Dollar
EUR/USD European Euro / US Dollar     
USD/JPY US Dollar / Japanese Yen
USD/CAD US Dollar / Canadian Dollar
USD/CHF US Dollar / Swiss Franc
AUD/USD Australian Dollar/ US Dollar          

When To Sell And When To Buy

Fundamentally, trading involves:

  • Buying when prices are lower
  • Selling when prices rise

For example with currency pairs, traders buy when they are at a low price and sell when the prices rise. The converse is also true, as if the currency is expected to fall then traders sell at the higher price and buy back when it falls.

Sounds simple? Don’t be fooled, as this process includes a lot of analysis to know when the market is in the right position for transactions.

There Is Also CFD Trading

Contract for difference trading involves speculating on the margin. That is, selling (going short) when you think prices will go down, or buying (going long) when it looks as if prices will rise.

It is about the difference between the current currency price, when you open the transaction, and the price at the end of the contract when you close the transaction. This style of trading is about traders speculating on the price movement, and they do not own the assets being bought and sold.

How To Predict The Rise And Fall Of Prices

Basically, there are two methods usually employed – fundamental analysis and technical analysis.

Fundamental Analysis

This involves prediction through a thorough analysis of the economic situation of a country. Traders are basically looking for indicators that a country’s economy is good and therefore offers an expectation of the currency to maintain or rise in value. To aid in assessing the economic situation in any country, brokers offer an ‘economic calendar’. This shows all the indicators of that country’s economy that could possibly create an effect on the exchange rate of its currency. This can be a time consuming, but informative method of analysis.

Technical Analysis

This ‘new boy’ on the block is used to predict currency prices by studying the history of the currency over a period of time. It’s an analysis based on the premise that ‘history repeats itself’, so by studying the past the future movement can be anticipated. A popular method for traders, there are numerous tools available to support this method of analysis.

What Is The Best Trading Strategy?

There is no easy answer to this I am afraid, or shortcuts! There are numerous trading strategies available, both effective and ‘get rich quick’ ones. A beginner to Forex trading needs to explore all the options to find the one most suited to their temperament and expectations. Keeping up to date with studying the diverse approaches is vital to keep your strategy on point.

The Profit And Loss Rates In Forex Markets

No one can promise you a guaranteed profit percentage, and certainly not a 100% one. Successful traders are those that have profits exceeding their losses and have received a good return on their investment. There is an equal probability of loss and profit in Forex trading, with even the best traders losing sometimes! While always aiming for a gain, an awareness of the high risk of Forex trading will help to keep the business real and expectations achievable.

Five CTA’s To Get Started On Making Money With Forex

  • Personal commitment make an investment in yourself to ensure you take practical steps in studying. Gain experience in the field, and be aware this is a continuously developing field regarding tools and analysis, so keep up to date and knowledgeable.
  • Brokerage companies there are numerous brokerage firms available and more entering the field every day. Choose and compare the ones that interest you, bearing in mind some important points:
  1. Does it have a  license from a reputable Financial Services Board?
  2. Has it received any awards like the Quality Performance Award?
  3. Research how other traders have found the company performance.
  4. Look at ease of deposit and withdrawal.
  5. How simple is it to execute orders, and can you open and close orders at peak times?
  6. Is the spread large or small? This is the difference between the selling and buying price or the commision the company takes.
  7. Do not be swayed by a ‘bonus’ sign-up cash offer or other perks.
  8. Check there is a demo account so you can try out all the services.
  • To really understand what you are doing you must start with a demo account, where you can explore trading without using real money, but in a real account environment.This introduces you to the reality of trading, tests out your knowledge and experience, and highlights areas you need to work on!
  • Once you have developed your personal trading strategy, do not rest on your laurels. Test it out on a demo account and continuously look for improvements until you are happy with the results.      
  • Before you start to work on your real account, seriously consider your budget. Do not exceed your means, as profit is not a given, and you do not want a loss to devastate your finances or affect your life. You are in a much better position psychologically during trading if you are not  ‘chancing all’.

Tips To Becoming Successful In Forex Trading

  • As the psychological element plays an important part, good mental health is essential in Forex trading.
  • Do not be upset by a loss, as every day there are new opportunities.
  • In case of loss, study the process, learn from it and return to trading when you have absorbed this information.
  • Capital management needs proper attention as it is the most essential component for success. Using large leverage can be a leading cause of loss.
  • This adage is a good indicator for applying patience. Warren Buffett, a leading economist advised that ”Trading is the transfer of money from the impatient trader to the patient trader”
  • Keep to your trading plan! Don’t diverge, and always examine the results then make any adjustments. Warren Buffett also advised “If you are working on a certain strategy and it achieves satisfying results, keep it and do not change it”. If it works why play with it?
  • Any investor needs to be aware of blinkered focus, so be careful to invest in more than one currency pair. Failing in one does not mean the other will not make a profit.