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#Post#: 355--------------------------------------------------
Six steps to improve your currency trading
DIR By: fxvictory
Date: April 18, 2015, 9:47 am
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Whether you're new to Currency Trading or a seasoned trader, you
can always improve your trading skills. Education is fundamental
to successful trading. Here are six steps that will help hone
your Currency trading skills.
step 1: Next Step ►
Strategize, Analyze and Diarize
Successful professional traders do three things that amateurs
often forget. They plan a trading strategy, they follow the
markets, and they diarize, track, and analyze each of their
trades.
Plan How You Will Trade
You may have heard the adage, "if you fail to plan, you plan to
fail." This is particularly true in Forex speculation.
Successful traders start with a sound strategy and they stick to
it at all times.
Choose the currency pairs that are right for you.
Some currency pairs are volatile and move a lot intra-day. Some
currency pairs are steady and make slow moves over longer time
periods. Based on your risk parameters, decide which currency
pairs are best suited to your trading strategy.
Decide how long you plan to stay in a position.
Based on your currency pair selection, plan how long you want to
hold your positions: minutes, hours, or days. Remember that
depending on your account type, having open positions at 5:00pm
Eastern Time may incur rollover charges.
Set your targets for the position.
Before you take a position you should establish your exit
strategy. If the position is a winner, at what rate will you
cash out? If the position is a loser, at what rate will you cut
your losses? Then, place your stops and limits accordingly.
Follow the Forex Market
Use Forex charts and Forex news to monitor market information
and technical levels that affect your positions.
Use Forex Charts
Charts are an indispensable tool to improve trading returns. You
can easily recoup the money spent on a charting package from a
single well-placed trade based on the analysis from professional
charts. Check out XE Charts. Please keep in mind that forex
trading involves a high risk of loss, and no guarantee is made
that the investment on the charting applications will be
recouped.
Follow Forex News
XE Forex News provides breaking Forex news on economic reports
and political events that influence the currency market. You can
access detailed market commentary and trading strategies from
experienced Forex traders.
Keep a Forex Diary
Most traders fail because they make the same mistakes over and
over. A diary can help by keeping track of what works for you
and what doesn't. Used consistently, a well-kept diary is your
best friend. When keeping your diary, make sure that it contains
at least the following:
The date and time you took the position.
The rate at which you took the position.
The reason you took the position.
Your strategy for the position.
The date and time you exited the position.
The rate at which you exited the position.
Your profit/loss on the position.
Why you exited the position. Did you follow you strategy?
Once you learn to recognize successful trading patterns, you
will be able to spot them when they return.
Be aware that trading foreign exchange on margin carries a high
level of risk, and may not be suitable for all investors. The
high degree of leverage can work against you as well as for you.
Before deciding to invest in foreign exchange you should
carefully consider your investment objectives, level of
experience, and risk appetite. The possibility exists that you
could sustain a loss of some or all of your initial investment
and therefore you should not invest money that you cannot afford
to lose. You should be aware of all the risks associated with
foreign exchange trading, and seek advice from an independent
financial advisor if you have any doubts
step 2: Next Step ►
Learn to Manage Your Risk
In our experience, the most successful traders are not simply
the ones who take the best positions. They are the ones that are
smartest about risk management and disciplined in their
strategy. They are never emotional about gains or losses. They
set their profit target and loss limits for their positions, and
use Limit Orders and Stop/Loss Orders to lock them in.
Limit Orders
A limit order instructs the system to automatically exit a
position when your target profit has been achieved. This enables
you to "lock in" your desired profit on a winning position.
Stop/Loss Orders
A stop/loss order instructs the system to automatically exit a
position when your maximum loss limit has been hit. This enables
you to cap your losses on a losing position.
Trading Discipline
Professional Traders use Limit Orders and Stop/Loss Orders as
the cornerstone of a disciplined trading strategy. By setting
both on all their positions, they have removed emotion from the
equation and are letting the market work for them.
Amateurs, on the other hand, dont use Limit Orders and Stop/Loss
Orders. They stay glued to their screens, trying to juggle all
their positions in real time. They miss critical action points,
and they let emotion rule their decisions.
Setting Limit and Stop/Loss Orders
As a general rule of thumb, you your Stop/Loss Orders should be
set closer to the opening position price than your Limit Orders.
If you do this, then you can be successful while being right
less than 50% of the time.
For example, if you use a 100 pip Limit Order with a 30 pip
Stop/Loss Order on all your positions, then you only to be right
1/3 of the time to make a profit.
Where you place your Limit and Stop/Loss Orders will depend on
your risk tolerance. However, you need to be smart when setting
them. If a Stop/Loss Order is too close to the opening position
price, it can be triggered by normal market volatility. This
means that a temporary dip can knock out a position before it
has a chance to retrace. Similarly, if a Limit Order is set too
far from the opening price, potential profit may never be
realized.
Be aware that trading foreign exchange on margin carries a high
level of risk, and may not be suitable for all investors. The
high degree of leverage can work against you as well as for you.
Before deciding to invest in foreign exchange you should
carefully consider your investment objectives, level of
experience, and risk appetite. The possibility exists that you
could sustain a loss of some or all of your initial investment
and therefore you should not invest money that you cannot afford
to lose. You should be aware of all the risks associated with
foreign exchange trading, and seek advice from an independent
financial advisor if you have any doubts.
step 3: Next Step ►
Choose Your Approach
There are two basic approaches to analyzing the Forex market. It
is important to understand how they can be used successfully.
Technical Analysis
Technical Analysis focuses on the study of price movements,
using historical currency data to try to predict the direction
of future prices. The premise is that all available market
information is already reflected in the price of any currency,
and that all you need to do is study price movements to make
informed trading decisions.
The primary tools of Technical Analysis are charts. Charts are
used to identify trends and patterns in an attempt to find
profit opportunities. Those who follow this approach look for
trending tendencies in the Forex markets, and say that the key
to success is identifying such trends in their earliest stage of
development.
Fundamental Analysis
Fundamental Analysis focuses on the economic, social, and
political forces that drive supply and demand. The premise is
that macroeconomic indicators such as economic growth rates,
interest rates, inflation, and unemployment can be used to make
informed trading decisions. Information about economic data can
be found using XE Forex News, which is free to use.
There is no single set of beliefs that guide Fundamental
Analysis. Different traders look to different indicators, and
weigh various indicators in different ways.
What should I use - Technical or Fundamental Analysis?
Traders using Technical Analysis follow charts and trends,
typically following a number currency pairs simultaneously.
Traders using Fundamental Analysis must sort through a great
deal of market data, and so typically focus on only a few
currency pairs. For this reason, many traders prefer Technical
Analysis.
In addition, many traders choose Technical Analysis because they
see strong trending tendencies in the Forex market. They look to
master the fundamentals of Technical Analysis and apply them to
numerous time frames and currency pairs.
Be aware that trading foreign exchange on margin carries a high
level of risk, and may not be suitable for all investors. The
high degree of leverage can work against you as well as for you.
Before deciding to invest in foreign exchange you should
carefully consider your investment objectives, level of
experience, and risk appetite. The possibility exists that you
could sustain a loss of some or all of your initial investment
and therefore you should not invest money that you cannot afford
to lose. You should be aware of all the risks associated with
foreign exchange trading, and seek advice from an independent
financial advisor if you have any doubts.
step 4: Next Step ►
Chart Your Course with Technical Analysis
Technical Analysis uses charts to try to forecast future
currency prices by studying past market movements. Using this
technique, a trader has the ability to simultaneously monitor
multiple currency pairs by evaluating how others are trading a
particular currency. In our experience, because so many traders
use technical analysis, and their reaction to market activity
tends to be similar, the validity of this technique is
strengthened. It becomes a self-fulfilling prophecy that feeds
on itself, increasing the reliability of the signals generated
from this analysis.
Support & Resistance
Perhaps the most effective and therefore the most popular form
of technical analyses is the use of "support" and "resistance".
Support is the "floor" or lower boundary that a currency pair
has trouble breaching. Resistance, on the other hand, is simply
the opposite: it is the upper boundary that a currency pair has
trouble penetrating.
Support and Resistance are important in range bound markets
because they indicate the boundaries where the market tends to
change direction. When and if the market breaks through these
boundaries, it is referred to as a "breakout" and is usually
followed by increased market activity.
Using Support & Resistance
We can use these support and resistance levels in many ways. A
range trader would want to buy above support and sell below
resistance while breakout. Trend traders, on the other hand,
would buy when the price breaks above a level of resistance and
sell when it breaks below support.
The concept is still the same as we stated earlier. We want to
buy a currency pair if we anticipate the market moving up and
then sell it at higher price. We can also sell a currency pair
if we anticipate the market moving down and then buy it at a
lower price.
Be aware that trading foreign exchange on margin carries a high
level of risk, and may not be suitable for all investors. The
high degree of leverage can work against you as well as for you.
Before deciding to invest in foreign exchange you should
carefully consider your investment objectives, level of
experience, and risk appetite. The possibility exists that you
could sustain a loss of some or all of your initial investment
and therefore you should not invest money that you cannot afford
to lose. You should be aware of all the risks associated with
foreign exchange trading, and seek advice from an independent
financial advisor if you have any doubts.
step 5: Next Step ► Be In The Know with Fundamental
Analysis
What influences prices in the currencies market?
Traders use fundamental analysis to try to forecast the effect
that economic, social, and political events will have on
currency prices. Prices in the currency market are affected by
macroeconomic factors such as inflation, unemployment and
industrial production. Based on the analysis of economic data,
traders will take positions on the market with the objective of
making a profit.
Finding information about economic data is relatively easy. XE
Forex News, for example, provides streaming news and market
commentary and is available for free.
Traders should focus on three main macroeconomic factors when
analyzing foreign exchange rates:
Interest Rates
Each currency has an overnight lending rate determined by that
country's central bank. If inflation is deemed too high, a
central bank may raise the interest rate to cool down the
economy. Conversely, if economic activity is sluggish, a central
bank may reduce interest rates to stimulate growth. Lower
interest rates usually depreciate the value of a currency – in
part, because it attracts carry-trades. A carry-trade is a
strategy in which a trader sells a currency with a low interest
rate and buys a currency with a high interest.
Employment
The unemployment rate is a key indicator of economic strength.
If a country has a high unemployment rate, it means that the
economy is not strong enough to provide people with jobs. This
leads to a decline in the currency value.
Geopolitical Events
These key international political events affect the foreign
exchange market, as well as all other markets.
Example
In May of 2005, there was growing anticipation that France would
vote against accepting the European Union Constitution. Since
France was vital to Europe's economic health (and the value of
the Euro), traders sold the Euro and bought the dollar; this
pushed the Euro down so far that many traders thought it
couldn't go any lower.
But, they were wrong. When France actually voted against the
constitution, the EUR/USD currency pair fell by more than 400
pips in three days. Traders who bought the Euro lost thousands.
On the other hand, traders selling the Euro made thousands.
Be aware that trading foreign exchange on margin carries a high
level of risk, and may not be suitable for all investors. The
high degree of leverage can work against you as well as for you.
Before deciding to invest in foreign exchange you should
carefully consider your investment objectives, level of
experience, and risk appetite. The possibility exists that you
could sustain a loss of some or all of your initial investment
and therefore you should not invest money that you cannot afford
to lose. You should be aware of all the risks associated with
foreign exchange trading, and seek advice from an independent
financial advisor if you have any doubts.
step 6:Beware of Psychological Pitfalls
Many traders take shopping more seriously than trading. Few
people would spend $500 without carefully researching and
examining a product. But many traders take positions that cost
them well over $500 based on little more than a hunch.
This cannot be stressed enough. Most traders fail because they
lack discipline. Be sure that you have a plan in place before
you start to trade. Your analysis should include the potential
downside as well as the expected upside. So for every position
you take, you should place both a Limit Order and a Stop/Loss
Order.
Set Smart Trade Limits
For each trade, choose a profit target that will let you make
good money on the position without being unachievable. Choose a
loss limit that is large enough to accommodate normal market
fluctuations, but smaller than your profit target. Lock these in
using Limit Orders and Stop/Loss Orders.
This simple concept is one of the most difficult to follow. Many
traders abandon their predetermined plans on a whim, closing
winning positions before their profit targets are reached
because they grow nervous that the market will turn against
them. But those same traders will hang on to losing positions
well past their loss limits, hoping to somehow recover their
losses.
Sometimes traders see their loss limits hit a few times, only to
see the market go back in their favor once they are out. This
can lead to mistaken belief that this will always keep
happening, and that loss limits are counterproductive. Nothing
could be further from the truth! Stop/Loss Orders are there to
limit your losses.
No trader makes money on every trade. If you can get 5 trades
out of 10 to be profitable, then you are doing well. How then do
you make money with only half of your positions being winners?
By setting smart trade limits. When you lose less on your losers
than you make on your winners, you are profitable.
Don't Marry Your Trades
People are emotional. It is easy to do objective analysis before
taking a position. It is much harder when you've got money
invested. Traders holding positions tend to analyze the market
differently in the hope that it will move in a favorable
direction, ignoring changing factors that may have turned
against their original analysis. This is especially true when
losses are being taken on a position. Traders tend to 'marry' a
losing position, disregarding signs that point towards continued
losses.
Don't Bet the Farm
Do not over trade. A common mistake made by new traders is
over-leveraging an account. Just because one lot (100,000 units)
of currency only requires $1000 as a minimum margin deposit, it
does not mean that a trader with $5000 in his account should be
able to trade 5 lots. One lot is $100,000 and should be treated
as a $100,000 investment and not the $1000 put up as margin.
Most traders analyze the charts correctly and place sensible
trades, yet they tend to over leverage themselves. As a
consequence of this, they are often forced to exit a position at
the wrong time. A good rule of thumb is to trade with 1-10
leverage or never use more than 10% of your account at any given
time. Trading currencies is not easy (if it were, everyone would
be a millionaire!).
Be aware that trading foreign exchange on margin carries a high
level of risk, and may not be suitable for all investors. The
high degree of leverage can work against you as well as for you.
Before deciding to invest in foreign exchange you should
carefully consider your investment objectives, level of
experience, and risk appetite. The possibility exists that you
could sustain a loss of some or all of your initial investment
and therefore you should not invest money that you cannot afford
to lose. You should be aware of all the risks associated with
foreign exchange trading, and seek advice from an independent
financial advisor if you have any doubts.
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