For beginners currency trading can be complex to understand. It carries a high level of risk on the foreign exchange (Forex) market. It is important to understand investment objectives and risks associated before beginning currency trading. Currency trading on Forex market is beneficial because it is the world’s largest market with a volume of almost 3.2 trillion US dollars and operates 24 hours a day.
The unique thing about currency trading in Forex market is that no physical site is required; it runs entirely through a network of banks and brokers. It is important to develop strategies to carry out currency trading in order to become a potential investor in the Forex market. The effects of economic, social and political events are directly implemented on the currency prices.
Whether new to trading or an experienced trader, currency trading skills need to be improved. Some important steps can be adopted before beginning currency trading activities.
Plan Currency trading Strategy
Successful currency trading requires planning a strategy that follows the market and help in analyzing the trade. It is important to choose a currency pair based on the risk associated with it. The duration in which a trader plans to stay in the market depends on the currency pair chosen. Also the exit strategy planning is essential which includes the cash out rate and the losses cut to limit the investment accordingly.
Usage of Forex charts and news to have hands-on information of the market and how it will affect the position is must. A good strategy is to keep record of the implemented strategies to know what works and what does not.
Manage Risk in Currency trading
Its not only necessary to take the best position in currency trading but a smart trader is distinguished based on the risk management strategies adopted as well. Usage of Limit Orders and Stop/Loss Order are used by such traders to target their profits and put limits on their losses.
Limit order allows the trader to exit automatically as the target is achieved while currency trading. A Stop/Loss Order allows exiting automatically when a maximum loss limit is reached. These are some important techniques in risk management of currency trading.
Choosing the Approach when currency trading
In currency trading normally two approaches are used, technical analysis and fundamental analysis. Technical analysis uses the history of currency data to predict future prices. Intelligent investors track the price movement of any currency to make informed currency trading decisions. Charts are used to identify the price movement trends to find profit opportunities.
It is also important to focus on the macroeconomic indicators for currency trading decisions. The social, economic and political forces along with growth rates, interest rates, inflation and unemployment rate drive the supply and demand of currency. Fundamental analysis is based on these factors to make informed decisions. It requires great deal of market research.
Both the approaches are beneficial in their respective aspects for currency trading. Traders normally choose technical analysis because it is easier to apply.
Using Support and Resistance in currency trading
Support and Resistance is the most popular form of technical analysis for currency trading decisions. Support is the lower boundary or the floor of the currency pair that it has trouble in breaching. Whereas resistance is the upper boundary or ceiling of the currency pair that it has trouble in penetrating.
These boundaries indicate the market direction where it tends to change. These levels can be used in many ways. The currency pair is bought if there is anticipation that the market is moving up and the pair is sold at higher price. And if the market is moving down the pair is bought at lower price.
Staying Alert of Pitfalls in currency trading
A general rule of currency trading is that failure occurs when traders lack discipline. It is always advisable for traders to have a plan in place before starting which includes the downside and upside of currency trading. At times situations occurs when traders get nervous and diverge from their strategies fearing that the market is turning against them. Those who hand on to their currency trading strategy find ways to recover their losses.
But it is also not wise to believe the sheer luck always that the market will come back in favor. It is important to follow the Limit Orders and Stop/Loss Order approach in this regard and also track the changing factors that will affect currency trading.