This tutorial will help beginner to get a basic knowledge about forex trading. There are many things to consider but every journey starts with a first small step. Learn and enjoy!
What is forex trading?
Forex is the largest financial market in the world where trillions and trillions of dollars are changing hands on a daily basis. Forex trading represents selling or buying of different currencies with the purpose of making a profit from their swings.
If a trader thinks that a currency is going to appreciate in time, then he/she can buy that currency. On the other hand, if a currency is believed to lose value in time, then the trader can sell the currency. The foreign exchange market is opened 24/5 and because of that, it requires a great deal of attention as virtually trading can take place around the clock.
How is the forex market organized?
The forex trading environment is very well organized starting with the products that can actually be traded (currency pairs) and continuing with the brokers (intermediaries between traders and the actual market) and Online Forex Trading Chartregulating bodies (financial authorities that regulate trading). Currencies are being paired together in currency pairs and they float freely against another. A currency pair will always reflect the difference between the two economies it represents.
These currency pairs are grouped in many categories, but the most important classification comes from the very nature of the US dollar. The US dollar is the world’s reserve currency and this makes that all currency pairs that have the US dollar in their componence are being called major pairs. Keeping the same logic, the other currency pairs that do not have the US dollar are being called crosses. Therefore, the whole forex market comes down to trading either a major or a cross pair.
How to actually take a forex trade?
The first thing to do is to find a forex broker and to open and fund a trading account. The trading account can be accessed via a trading platform, that can be either a web-based platform or one that can be downloaded. The most popular trading platform is the Metatrader, and there is virtually no broker that is not offering it.
However, some brokers developed their own trading platforms as well, but the idea behind a trading platform is the same: to access the forex market.
Currency pairs are moving on a constant basis and the broker offers two prices, or quotations: the bid and ask price. As a rule of thumb, the price on the left side is always the bid price and the price on the right side is the ask price. When you buy a currency pair, this can be done only at the ask price, or the one on the right side, while selling a currency pair can only be done at the bid price.
What is a pip?
A pip is the difference between the opening and the closing price in a transaction or the distance that price travels. For example, assuming one is buying the EURUSD pair at 1.11491 and closes the trade later at 1.12101.
The difference between the two prices is 50 pips and it is being said that the trader just made a 50 pips profit. As you can see, this is not that complicated.
Are bid and ask prices the same?
No. There is a difference between the bid and ask prices and it is being called a spread. This is one of the things that differentiate forex brokers as, naturally, the lower the spread, the more attractive the broker is for forex traders. Spreads are not fixed all the time, as they vary based on multiple factors.
When important economic news is released, for example, spreads are being increased due to the volatility generated around the event. Also, the end of the trading day usually comes with bigger spreads as liquidity is low at that moment of the trading day and good liquidity providers tend to be scarce.
Why do I need a forex broker?
Without a forex broker, the forex market cannot be accessed. The broker makes sure your trade is executed at the best possible conditions stated in the terms and conditions you agreed when opened a trading account and earns a living through commissions and spreads.
A commission is always being deducted from a trade right at the start of the trade when the position is opened. Therefore, the broker is the part that is being paid no matter if the trade will be a winning or a losing one.
What does leverage represent?
Because the foreign exchange market is so big, retail traders cannot access it due to lack of funds. Therefore, trading accounts can be opened on leverage.
This means that the actual amount to be traded on the forex market is not the amount one funds the traded account, but the amount times the leverage. A typical leverage can go anywhere from 0 to 200, while levels above 1:400 are considered to be risky ones.
What is the value of a pip?
The value of a pip is closely correlated with the volume that is traded. On the forex, market volume is organized in lots, and as an example, one pip has a value of $10 if one lot is traded on the EURUSD pair. Continuing with this example, if you trade 20 lots and make a profit of 20 pips, you just made a profit of $400. However, this is not the amount that you’ll see on the account’s balance.
You have to deduct the broker’s commission as well as the spread (the difference between the bid and the ask price) and the difference is the actual profit.
What does margin mean?
When opening a position, depending on the volume that is traded, a margin is blocked and cannot be used anymore technical analysis for forex tradingfor trading purposes until the trade is being closed and the margin is release. It is being said that the trader gets a margin call when there are no more sufficient funds in the trading account to support the opening trades. If no new funds are being added, the broker will automatically close the open trades with the respective loss.
What is a pending forex trading order?
A
pending order is a type of order to be used when entering a trade at levels that are not yet reached. If the trader wants to buy a currency pair at a higher level than the actual price, then a pending buy stop order can be placed. On the other hand, to sell a currency pair at lower levels than the actual price, a pending sell stop order can be placed.
Selling can be made from higher levels as well, and in this case, the order is called a sell limit order, and if buying is intended to be done at lower levels than the current ones, a pending buy limit order can be made. If the trade is opened at current prices, it is being said that the trade was “at market”.
What another type of orders are there?
A stop loss and take profit orders can be placed as well. In fact, it is recommended that a stop loss order should always be in place as forex markets can move unexpectedly and one cannot watch them 24/7. The stop loss level is the level the trader wants to close the position if it goes against the desired direction and normally this level invalidates the whole idea behind the trade.
A take profit is a level where the target is being reached. Both stop loss and take profit orders can be set immediately after the trade is being taken, or even before opening a trade, and the trading platform will automatically close the trade if one of them is being reached. Some trading platforms also offer the possibility to place an OCO pending order (One-Cancels-Other). The idea behind this type of pending order is to catch the swings the market makes and to trade the breaks no matter the direction.
Why do currencies move?
Currencies and currency pairs are moving based on two factors: supply and demand on one hand, and monetary policy on another hand. Supply and demand represents the oldest rule in economic history that states that prices are moving up if there is more demand than supply. In plain English, if there are more people that are buying then sellers or the volume on the buying side is bigger than the one on the selling side, the price will always move to the forex trader display at wall streetupside.
The opposite is true as well if sellers dominate buyers. Supply and demand levels can be spotted using technical analysis as there are many trading theories that allow strong support and resistance areas to be identified. Monetary policy is being set by the central bank that governs a respective currency and when it comes to a currency pair, there are always two central banks involved.
Let’s take the USDJPY pair for example. This pair will move based on the differences between the monetary policy set by the central bank in the United States, the Federal Reserve, and Japanese central bank, Bank of Japan. As a rule of thumb, tightening monetary policy is always currency positive, while easing the policy is being viewed as negative for a currency.
Are there specific terms to know?
Yes, trading the forex market implies knowing your way through the terminology. Here are some basic examples, but the list can be much longer. Anyway, this should give you a first impression of terms, that forex trader use on a daily basis.
- Going LONG = buying a currency pair;
- Going SHORT = selling a currency pair;
- Being BULLISH = expecting price of a currency pair to move to the upside;
- Being BEARISH = expecting price of a currency pair to move to the downside;
- FED = Federal Reserve of the United States = U.S. central bank
- ECB = European Central Bank
- BOE = Bank of England
- BOJ = Bank of Japan
- RBA = Reserve Bank of Australia
- RBNZ = Reserve Bank of New Zealand
- SNB = Swiss National Bank
- QE = Quantitative Easing
- Hiking rates = tightening = a central bank is raising the main interest rate = bullish for the currency
- Cutting rates = easing = a central bank is cutting the main interest rate = bearish for the currency
What is fundamental analysis?
Fundamental analysis refers to the interpretation of economic releases relatives to the potential move it can cause to a currency pair. Also, it means comparing the two economies in a currency pair and taking a trade based on the difference between the two.
Economic releases are scheduled and known in advance via the economic calendar, a public calendar that can be consulted any time and is offered by brokers for free. This economic calendar splits the economic releases into three different categories: very important ones (volatility is the greatest here and currency pairs will move aggressively), news that is of medium importance and less important economic news.
What is technical analysis?
Technical analysis stands for analyzing a currency pair’s chart in order to identify patterns that formed on the left side of the chart and to project them on the right side, basically forecasting future price movement the currency pair online trading call to actionmight do.
There are many trading theories based on technical analysis, such as Elliott Waves, Gartley, Point and Figure, Renko, Japanese Candlestick Techniques, VSA (Volume Spread Analysis), etc, and to a certain degree, they fit every trader personality. There are a lot of services which offer forex trading signals.
Are there different forex trading styles?
Yes, and they are differentiating based on the time horizon. Short term traders are being called scalpers, so scalping means opening and closing many trades during the trading day with the purpose of making a quick but small profit. Swing trading means positions are being left open for a medium period of time, from a few days to even weeks, while investing refers to keeping positions open for an even longer period of time. Check our forex trading strategies page for more information.
User Submitted FAQ
Savvy investors realize the impact and importance of having a general understanding of global affairs and how they could potentially impact currency trading. To help potential new investors learn some of the basic concepts of foreign currency trading and the basic features of the Forex trading platform, this additional list of user submitted frequently asked questions has been researched and developed.
What Is A Currency Trading Platform?
Every investment traded publicly or privately must be entered through an appropriate platform. Experienced brokers and novice individuals are both able to place orders to buy, sell, or trade through a software program. In the past, these orders were turned into viable transactions when commissioned brokers and registered representatives physically took the paper orders to an elevated stage, or trading platform, for execution. Today, a trading platform typically represents the avenue in which an investor chooses to place their orders. Forex trade requests can be placed online using a traditional desktop, laptop computer, or other electronic mobile device.
The manner of investing may differ from one investor to another, but the way orders are entered is usually similar across all trading platforms. Individual investors have different needs and expectations, so they will choose the most suitable trading platform to meet their specific criteria. Some of the most commonly compared features of various trading platforms include charts, real time quotes, research options, and professional suggestions. Hands on investors want to have instant access to relevant information and real time trading data from around the world. Busy professionals and experienced investors who prefer to let an advisor handle their trading requests usually prefer not to be inundated with unnecessary information and data that will not impact their immediate trading decisions or their overall investment styles. Regardless of their investment style, there is at least one trading platform that matches the personality of every specific investor.
What Are The Special Features Of A Forex Trading Platform?
The most important aspect of any trading platform is the ease of use for investors. Education can come from many sources, and results are never guaranteed in any publicly traded investment opportunity, but a user friendly platform enables investors to take control of their financial portfolio with a sense of confidence. Key factors that impact an investor include the presence of trading tools and the absence of hidden fees. Investors want enough information available for their personal use and research to make an informed decision before investing. Savvy traders are likely to research specific economical factors for countries before choosing to invest in the nation’s currency. Each transaction will have some cost associated with it, but some platforms and investment firms charge investors an additional service fee or account maintenance fee either per transaction or per month.
Customer service is another determining factor for investors who are seeking an investment platform. Many companies and software programs feature a mixture of personal associates and searchable database tools for investors to reference when they have a problem or simply want more information. The relationship management piece is also important if an investor encounters a technical problem with the website or have a question about a specific investment opportunity. An efficient and reliable trading platform that offers a balance of self-service options, such as education onsite or through external links, and the availability of expert assistance is the perfect blend for most investors. Since there are so many options available for investors who want to experience the world of Forex trading, it makes sense for newcomers to spend time finding the most suitable Forex trading platform according to their specific needs and preferences.
Who Or What Is An Authorized Forex Dealer?
Several regulatory authorities serve to oversee the daily interactions of investment firms and registered representatives who conduct business on behalf of their customers. Federal guidelines typically provide the framework around which a nongovernmental body or organization enforces and upholds the law. These agencies provide multiple support outlets for consumers, clients, investors, and investment firms. They ensure the prompt and accurate transmission of orders and information. In addition, they provide checks and balances to remove any unfair advantages that may result from business practices that deviate from the normal and standard operating procedures. Another role for governing agencies is to ensure that trades are conduced ethically and methodically, in full compliance with all applicable laws and regulations.
Because of the precise and sensitive nature of international trading and foreign currency trading, investment firms and financial representatives must be educated and experienced before being authorized to perform transactions on behalf of investors. Part of the training includes administering a standardized test to evaluate knowledge in specific areas of the investment and finance genre. Continuing education requirements must be met annually in order for a registered representative to remain actively licensed to practice in their specified territory. Due to the potential risk involved in currency trading, only authorized Forex dealers are permitted to provide information, post daily results, update tracking charts, and perform other research on behalf of currency traders. The authorized Forex representatives are able to conduct business for an individual or an investment company. Consumers can invest with confidence, knowing that their transactions are being process according to all applicable laws and international regulations.
How Can I Get Started With A Forex Practice Account?
Investors who are new to foreign currency investments or trading in general, find the free practice account to be enlightening and informational. Investors can choose a Forex trading mock account that is funded with a basic minimum investment that can be traded according to real time information about the international trading market. Clients make trades based on the data available and are able to see how their decisions would have translated in the real world if they were using real money instead of the fictitious account. The trial account serves to give investors a chance to become familiar with trading currency and also to learn how to review information and understand the streaming data.
Real time information, including prices and recent transactions, are a vital part of trading on any stock or commodities exchange. Timing is everything when it comes to these ever changing markets, and in a volatile market even a few seconds can make a big difference between a profitable investment and a substantial loss. The lessons learned with a free practice account can help investors avoid common mistakes that newcomers often make. The real time streaming quotes can also help new investors get used to recognize the various symbols and country flags so they are able to view their screen at a glance and make educated choices about buying or selling foreign currency. Trading with real money is much easier after an investor has a chance to play the market and developing trading strategies with pretend money before investing their hard earned money in an unknown market.
What Information Should I Research To Prepare For Currency Trading?
Although it is virtually impossible to accurately time the market one hundred percent of the time, there are basic steps that every investor can take to avoid making costly mistakes in their various investments. Reviewing market research provided on a Forex trading platform helps investors understand the foreign currency markets and how slight variations can significantly impact a trading decision. When new investors enter unfamiliar territory, they sometimes attempt to learn everything there is to know about the industry or commodity before placing a transaction. They believe that the only way to successfully trade is to fully understand all the ins and outs of a specific market or genre.
If I Do Want More Information, What Education Options Are Available?
As they become more familiar with currency trading, investors may wish to expand their knowledge in specific areas. They can easily become a subject matter expert by investing some time online or in person at investment seminars. There is more to trading on stock exchanges or in commodities and foreign currency than just getting the highest returns. When investors express a genuine interest in the trading industries, they can turn to many different sources of information to learn more from reputable experts. There are several different methods that proactive and motivated investors can employ before deciding how and when to make new trades. Before embarking on an impromptu educational adventure, investors should consider how their unique learning styles will impact their choice of informational materials.
Traders can customize their learning options regardless of how frequently or infrequently they perform transactions. Live webinars create a comfortable atmosphere to interact with other investors and a knowledgeable meeting facilitator who can answer questions and provide additional resources or a follow up conference call when necessary. Investors who prefer reading and studying reports over live interaction and verbal stimuli will have no problem finding comprehensive research reports to peruse. Various graphs and charts combine functionality with extensive statistical data in that they can be adjusted to focus on specific time periods, prices, or countries. These online trading guides can be stored for future use and highlighted material can easily transfer into extraordinary profits when implemented carefully and executed in a timely manner.
In What Ways Can I Manage The Funds In My Account?
There are multiple ways to fund and manage Forex trading accounts. Generally speaking, most trading platforms allow users to create accounts online and link their trading accounts to a major credit card, internet banking option, or checking account. There may be more stringent requirements for commercial accounts as opposed to personal checking or savings accounts. Automatic drafts make monthly contributions and regular trading activities convenient for frequent traders. Online trading platforms place a high priority on security measures for account maintenance and automated transactions so users can invest with confidence their their personal information is delivered through state of the art encryption methods. Brokerage houses and investment firms that offer Forex trading may accept payments in person at local banks or branches.
Once an account has been established and the identification of the account owner has been verified, trading activity can commence according to the account balance in the Forex trading account. Settlement times will vary based on the method of payment used. In most cases, the same methods of payment can be implemented for withdrawals and deposits. When traders want to withdraw some of their earnings, they may be able to request a bank to bank wire transfer or an automatic transfer into their checking or savings account. Alternatively, when a withdrawal request is not time sensitive, investors may request that a check in the amount of the sale proceeds be mailed to their address of record.
How Is Currency Trading Different From Other Investments?
There are many different types of investment vehicles, but no single avenue is suitable for every investor. Day trading volatile stocks and saving for retirement through an employer sponsored plan are both examples of investment vehicles that represent opposite ends of the spectrum. Independent investment options appeal to specific traders based on their overall risk tolerance. While some traders are willing to risk large deposits in hopes of the potentially higher rewards, other investors view this uncertain strategy as a form of gambling. They are not comfortable taking risks regardless of the possible payout. Even within an actively managed account, these investors probably prefer mutual fund investments over commodities or currency trading.
The main difference between stocks, bonds, commodities, and currency investments are the underlying product or service being offered. None of these investment options are instantly visible or tangible to the investor. Stock certificates represent ownership in a company relative to the total number of shares of stock owned by a shareholder. Corporations and government agencies may also issue bonds as a way to raise capital for a specific project or event. Bonds represent payment due from the issuer to the bondholder and includes a specific expiration date and interest rate, which are listed on the face of the bond certificate. The underlying commodity would technically be available upon the demand of the owner, but traders typically prefer to buy and sell rather than collect the actual commodity. Currency trading in effect transfers ownership of position rather than the actual currency being traded. Investors are essentially placing transactions based on their understanding and expectation of how the value of one nation’s currency will compare to the currency of another specific country within the specified time period. The end result of these transactions do not necessary mean that an investor is going to be paid with the currency of a foreign country.
What Does It Mean To Trade On Margin?
Many online brokerage accounts and Forex trading platforms allow customers the option to trade on margin. This process may also be referred to as trading on leverage or leveraging accounts. There is more risk associated with trading on margin, so this method of trading should be approached with caution and limited to experienced investors. When a person leverages their position and decides to make a transaction request on margin, they are not required to have the full balance for the worst possible outcome of the transaction in their trading account at the time the request is made. Although this is very convenient for frequent traders who want to place time sensitive orders, it can also result in a negative account balance if the trade settles in a manner that the investor did not expect.
Most trading platforms allow investors to trade on margin, but warn against the risk of this investment style. Software programs and brokerage houses may require that any debit balance is cleared and a trading account is brought to a positive balance before the investor is able to commence trading. In addition, the margin amount may increase for an investor who repeatedly trades on margin and fails to restore the account balance in a timely manner. The amount of the margin, or percentage of reserves that must be met before a margin transaction can be placed, may also increase for investors who frequently place leveraged account transactions. Trading platforms reserve the right to limit or prohibit margin and leverage transactions without notice.
What Is A Rollover Transaction?
There are a few investment terms that have the propensity to create confusion because they have different definitions based on the specific genre in which they are being discussed. For example, a rollover IRA is created when an individual transfers funds from an existing individual retirement account or from an employer sponsored account into a new account. This process essentially serves to shift the location of assets but does not incur any tax penalties or the realization of gains or losses when the same underlying investments are transferred to the new account.
In a Forex trading account, a rollover has a much different definition. Under the circumstances of trading foreign currency, the term rollover refers to the position an investor holds in their investment portfolio. Most trades and transaction request in foreign currency take two business days to settle. The settlement period includes a portion of time where the funds are not present in the investment portfolio or in the currency market. When an investor conducts a transaction with another trader, he or she has two days to rollover their position and deliver the amount of currency specified in the transaction to the buyer. The new owner must be able to take ownership of the currency at the end of the rollover period. Some trading platforms and software programs offer assistance to investors by automatically rolling over funds to meet the settlement period requirements for trades made during the course of the day.
What Are Spot Metals? Can I Trade Them In A Forex Account?
Gold, silver, precious, and industrial metals are frequently traded because they offer a universal value that is not necessarily dependent upon a specific country, business, or industry. While there is no such thing as a spot metal, these precious metals are sold at what is typically referred to as a spot price. The denomination of precious metals usually consists of a coin, bar, or bullion and will be specified somewhere in the transaction details. Investors who wish to dabble in the precious metals industry should take the necessary precautions to ensure they are confirming the purchase price and the amount of metal to be delivered or traded.
Every metal has a melt value that holds standard across the material and helps originating countries maintain a consistent placeholder for the value of the specified metal. The melt value is always calculated the same way in every country and equals the amount of the metal in the transaction by the spot price of the metal at the time the transaction was conducted. A metal sold at a premium represents the cost of the bar, coin, or bouillon that exceeds the melt value. Investors who deal in precious metals know that the spot price is based upon immediate delivery. This is an important factor to consider with precious metals because their prices vary greatly within a single business day. Traders can conduct transactions within a variety of precious metals within their Forex trading platforms if the carrier of the platform allows the transactions. Profits are made in precious metals when the value of the metal increases between the time of original purchase and the subsequent sale, or when an investor is able to hold the metals until they can be sold at a premium.
How Do Businesses Use Forex Trading As A Hedge?
When businesses within any specific industry choose to expand their reach into global territories, they must consider several different aspects of doing business on an international level. There are many benefits and challenges of growing a corporation to include global eCommerce and foreign entities. The biggest benefits for the company are the potential growth and branding from successful expansion. Some of the main challenges include local regulation and currency risk. Operating a business within another country or shipping product through international waters can pose a risk to corporations who may inadvertently breach local laws or customs. Hiring employees and interacting with native business leaders also presents a risk for foreign entrepreneurs.
When business contracts and agreements are written to include payment for goods or services on foreign soil, they typically reflect the local currency. Savvy business owners attempt to hedge against inflation or deflation when making deals in foreign currency. One way to protect their investment is to utilize a foreign exchange trading account. Investors can purchase currency from the countries where they will be conducting business and either hold the foreign currency until after their transactions are complete, or they can schedule a preset date, time, or price that the currency should be instantly traded or sold. These advantageous proactive measures help businesses safely interact with other countries and conduct transactions with a reduced risk of a poor currency exchange. In addition, the presence of foreign currency in a trading account could lead to lucrative investment returns whether or not they are needed for a particular business transaction.
What Do I Need To Know About Forex Charting?
Charts are one of the main ways that information is transmitted in the financial world. Most notably, line charts, bar charts, and candlestick charts are used to represent market trends and activity. They offer a picture of market activity based on specific criteria such as time period, price fluctuation, and trading frequency. Although Forex investing does not necessarily require an exhaustive understanding of charting, some traders prefer to be somewhat well versed in the core concepts of charting. Whether investors choose to review published charts or create their own handiwork charting their personal progress, they will likely choose one of the three main types of charts previously mentioned. Regardless of the style preference a user has, they can utilize any of these charts to review information and make informed trading decisions.
Line charts are the most widely used charting styles, because they are clear and easy to understand. Different points are plotted along the chart and can be connected with a single line to express a relationship or change in data. Most daily reporting tools use line charts to represent a change in closing prices from one day to the next. Bar charts are somewhat similar to line charts in that they express data along a constant line. They are useful for looking at multiple data reports over a specific time period in a condensed and specific manner. Bar charts can be used to exhibit information for a wide span of time, from one hour to a full month or longer. Candlestick charts are named for the unusual shape that consists of a large body of information that is tethered on either end by a solid line that represents a wick from a candle. These charts are predominately used to compare opening and closing prices for a particular currency and are not typically used to compare prices over a long time period.
Should I Develop A Forex Trading Strategy?
Trading in foreign currency is not a new industry and there are several tried and true methods of successfully timing trades to earn profits. Although no method is completely foolproof, considering a trading strategy is important for a first time investor. Forex trading platforms that offer trial or mock accounts give investors a chance to play around with a few different strategies and even set up guess games where they randomly choose countries and execute trades. These transactions are entertaining and risk free because the investor does not have any real funds at stake. When it comes time to invest real money, most investors prefer to have a better strategy than blindly selecting random countries.
Experienced traders in foreign currency often look for specific data when considering how and when to execute a new trade. Support and resistance levels are an important factor in almost every trading strategy because they are good indicators of how the market will perform next. Support levels are created when a downward trend spikes back up to a specific point. The flat line is considered a support level, meaning the market will support the most trades when the price teeters near this point. Resistance levels work much the same way, except in the opposite direction. When a specific currency that is trending upwards suddenly reverts back to a lower point on the price line, it is said to have met resistance. Both of these concepts mirror general economic principles that are well founded and thoroughly researched.
What Is Trend Trading?
Financial advisors in most other investment vehicles recommend against market timing. Novice investors who attempt to time the market often fail for two basic reasons. First, when the market for a specific industry or company stock is very volatile, the market can change drastically within a few minutes. Even when investors are monitoring the market throughout the day, most real time synopses are reported in twenty minute intervals. Making trades based solely on the most recent activity could be a gamble, and many investors learn this lesson after facing a significant loss. The second way that day traders and inexperienced investors can lose money when trying to time the market is through transaction fees. Depending on the type of account they have established, the number of transaction fees assessed through frequent trading may outweigh the potential profits from the actual trades.
Forex trading platforms are different from many other investment options because they actually work in real time and traders must find creative strategies based mostly on market timing. While other factors do come into play, the most reliable information in foreign investment trading comes from recent executions. Trend trading focuses on the general direction a market is moving and is marked with higher than average closing prices. Beginners and intermediate traders usually find that trend trading is successful for their purposes. Those with a higher risk tolerance and more experience with foreign currency investing may dabble in counter-trend trading. This is more complex and attempts to enter the market at the precise moment when an existing trend is expected to reverse or slow down. More research is required for this technique, but the rewards are higher relative to the increased risk.
What Are Some Common Mistakes That New Traders Make?
Investing can be a rather intimidating experience, especially for new traders. Since foreign currency trading is even more complex than regular stock trading, many Forex trading platforms offer new users a chance to experience the currency exchange on a mock account before they actually invest money into their accounts. One of the most common mistakes that investors make is trying to analyze every detail of every foreign currency transaction. This overindulgence creates confusion and often becomes so overwhelming that traders become afraid to take any action. Another common problem occurs when investors do not take the time to learn anything about the foreign currency market and make rapid, unplanned trade executions. These two paradigms represent flip sides of the same coin and both scenarios can spell trouble for new investors. Traders use or fail to use information at their disposal and either never make a trade or make a series of irresponsible trades.
Since there is a fairly equal possibility to gain or lose money on any investment, new and experienced traders must weigh the risk and reward before conducting any transaction. Failure to recognize that a loss is plausible at any time causes investors to act more like gamblers than responsible financial stewards. Margin and leverage options make the concept of losing money even less realistic to investors who have radical tendencies and view these account features as a viable form of credit. Moderation is the key to any investment, and traders should not wager more than they are willing to lose on any single transaction.
How Often Should I Review My Trading Practices?
Adjusting strategies and assessing trading patterns is basically a matter of personal preference. Some basic guidelines can be used to determine when a stale portfolio needs to be revived and when a failing system should be revised. Depending on the overall size of a portfolio and the amount of trading executed, some traders prefer to review their entire account at the beginning or end of each day. When an account becomes too large to review on a daily basis, traders can establish a software tracking system that records daily activity which can be compiled for review at the end of each month. New investors typically want to review their Forex trading account at least once per day because they are still developing a suitable strategy and determining how to perform data analysis that will assist them with executing future trades.
The purpose of review a foreign currency trading account extends beyond simply calculating gains and losses over a specific time period. The review and analysis also serves to make adjustments to correct losses or increase potential opportunities for gains. During the evaluation period, traders learn a lot about their own habits and investment styles. They may realize that they need to adjust the time of day they make the majority of their trades. Alternatively, investors may decide that setting up automatic trades at specific prices or times helps them conduct business more effectively because they prefer not to be bogged down with frequent account reviews.
What Are On-Stop Trading Orders? Can I Leverage Them In My Forex Account?
As investors become more comfortable with trading in the foreign currency markets, they can combine some of their investment knowledge with convenient trading tools to produce a well-oiled trading machine. There are several delayed order requests that an investor can utilize to execute trades at specific times or prices. Most of these concepts exist in other investment genres and have simply been adopted into the foreign currency market as well. Buy limit orders, stop orders, sell limit orders, and on-stop trading orders are just a few of the commonly used market orders that investors use to remotely monitor their investment portfolios.
The benefit to understanding how on-stop trading orders and other planning tools can affect a trading account can literally save investors hours of analysis each week. After reviewing the current trends, an investor can determine to put in an order to buy or sell currency based on the direction of the market. If they want to execute an order to buy or sell at a certain price point, they simply enter an on-stop order so that their request will be automatically executed when the current market price passes through the predetermined trade price. There is no guarantee that the trade will be executed instantly, or at all, but conducting transactions automatically helps investors stay actively involved with their accounts without having to physically sit and watch the account throughout the day.
What Is Price Action Trading?
Price action is a style of investing but is not necessarily an investment strategy in itself. Whereas a strategy is focused on one particular market aspect and how an investor or trader will respond to this one focal point, price action is a much broader concept. Thorough analysis over a long enough period will generally uncover some basic data about price points for various investments, commodities, and currencies. This information can then be tracked to determine how the prices are affected by specific events and which direction they trend under certain circumstances.
Past performance is no guarantee of future success, but most investments follow the same patterns from inception to expiration. Barring any unforeseen circumstances, a trader can reasonably expect an investment to perform the same way when faced with the same set of external factors. For example, an investor watching the way a particular stock or currency reacts to significant trading activity during a brief period can use this information to place trades when the same conditions occur again in the future. If the currency of a country is stagnant during periods of high market activity, there may be reason to believe it will begin to trade rapidly when the rest of the market begins to settle.
How Much Money Can I Make Through Forex Trading?
This is actually an impossible question to answer because every investor is going to face unique internal and external factors that will impact their ability to execute profitable trades. Investor behavior is the most important factor in determining the overall potential to earn profits through Forex trading. Impulsive investors that want to trade, trade, trade will often fail to earn substantial profits because they spend more time trading than researching and executing responsible trades. Sedentary traders who spend more time analyzing and researching than actually placing trades will miss out on opportunities to trade for potentially significant earnings. Either of these situations will determine how much money can be made through foreign currency.
Establishing a trading strategy and giving it sufficient time to work is one of the keys to successfully investing in the foreign currency markets. A disciplined investor is one that does not overreact to every market swing and make rash decisions. Most attempts to avoid or limit losses result in more severe losses than if a trader simply allowed their investment to ride in the market until the next available transaction. This learned behavior has much to do with risk tolerance and the solid understanding that risk and reward nearly always have a positive correlation.