Here in this article we will discuss six steps that will help you to sharpen your Currency trading skills.
- Strategize, Analyze and Diarize
- Learn to Manage Your Risk
- Choose Your Approach
- Chart Your Course with Technical Analysis
- Be In The Know with Fundamental Analysis
- Beware of Psychological Pitfalls
1. Strategize, Analyze and Diarize
Successful traders do three things that amateurs often forget. Firstly
a. Plan How You Will Trade
We know the saying that “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 money pairs are unstable and move a lot intra-day. Some currency pairs are stable 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 trader 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 trader takes 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.
b. 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 device 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.
Follow Forex News
Forex News provides breaking Forex news on economic reports and political events that influence the currency market. Trader can access detailed market commentary and trading strategies from experienced Forex traders.
c. Keep a Forex Diary
Most traders fail because they make the same mistakes again and again. A diary can help by keeping track of what works are there and what doesn't. Use 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.
2. Learn to Manage Your Risk
In our experience the most winning 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 approach. 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.
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.
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.
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 haveremoved emotion from the equation and are letting the market work for them. Amateurs, on the other hand, don’t 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, 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.
3. Choose Your Approach
There are two fundamental approaches to analyzing the Forex market. It is important to understand how they can be used successfully.
Technical Analysis focuses on the study of price movements, using historical currency data to try to forecast the direction of future prices. The basis 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 recognize 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 focuses on the economic, social, and political forces that force supply and demand. The basis 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.
4. Chart Your Course with Technical Analysis
Technical Analysis uses charts to try to predict future currency prices by studying past market actions. 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 response to market activity tends to be similar the validity of this method 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 higher boundary that a currency couple 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
Trader can use these support and confrontation 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 idea is still the same as we stated earlier. We want to buy a currency pair if we expect the market moving up and then sell it at higher price. We can also sell a currency pair if we expect the market moving down and then buy it at a lower price.
5. Be In The Know with Fundamental Analysis
Traders use basic analysis to try to predict 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 position on the market with the purpose of making a profit.
Traders should focus on three main macroeconomic factors when analyzing foreign exchange
Each currency has an overnight lending rate determined by that country's central bank. If inflation is deemed too high, a central bank may increase the interest rate to cool down the financial system. on the other hand, if financial 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 policy in which a trader sells a currency with a low interest rate and buys a currency with a high interest.
The unemployment rate is a key pointer of economic power. 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 price.
These key worldwide political events affect the foreign exchange market, as well as all other markets.
6. Beware of Psychological Pitfalls
Many traders take shopping more badly than trading. Little people would spend Rs. 5000 without carefully researching and examining a product. But many traders take positions that cost them well over Rs. 5000 based on little more than a feeling. This cannot be harassed enough. Most traders fail because they require discipline. Be sure that you have a plan in place before you start to trade. Your analysis should include the possible downside as well as the predictable upside. So for every place you take you should place both a Limit Order and a Stop/Loss Order.
Set Smart Trade Limits
For each trade, decide a profit target that will let you make good money on the situation without being unachievable. Decide 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 thought is one of the most difficult to follow. Many traders dump their prearranged plans on a whim, closing winning positions before their profit targets are reached because they grow worried 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 reverse in their favor once they are out. This can direct to mistaken belief that this will always keep happening, and that loss limits are counterproductive. Nothing could be additional from the fact. No trader makes money on every trade. If you can get 5 trades out of 10 to be profitable next 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 study before taking a position. It is much harder when you've got money invested. Traders holding positions be liable to examine the market in a different way in the hope that it will move in a positive direction, ignoring changing factors that may have turned against their unique study. 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.
Do not over trade
A common mistake made by new traders is over-leveraging an account. Most traders examine the charts correctly and place sensible trades, yet they tend to over leverage themselves. As a result 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.