FOREIGN EXCHANGE TRADING
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Forex for Beginners | What is Forex?
If you’re new to forex trading, we’ll take you through the basics of forex pricing and placing your first forex trades. ‘Forex trading’ is short for foreign exchange, also known as FX or the currency market. It is the world’s largest form of exchange, trading around $11 trillion every day, and it is open to major institutions and individual investors.
The aim of forex signal trading is simple. Just like all forms of speculation, you want to buy a currency at one price and sell it at higher price in order to make a profit. Some confusion can arise as the price of one currency is always, of course, determined in another currency. For instance, the price of one British pound could be measured as 5 US dollars, if the exchange rate between GBP and USD is 5 exactly. In forex trading terms this value for the British pound would be represented as a price of 5.0000 for the forex pair GBP/USD. Currencies are grouped into pairs to show the exchange rate between the two currencies; in other words, the price of the first currency in the second currency. | FOREIGN EXCHANGE TRADING.
Calculating your profit
Take another example. Suppose the spread for EUR/GBP is 0.8414-0.8415. If you think the price of the euro is going to rise against the pound you would buy euros at the offer price of 0.8415 per euro. Say in this case you buy €10,000 at a cost to you of £8415. The spread for EUR/GBP rises to 0.8532-0.8533 and you decide to sell your euros back into pounds at the bid price of 0.8532. The €10,000 you previously bought is now therefore sold for £8532. Your profit on this transaction is £8532 minus the original cost of buying the euros (£8415) which is £117.
Both new and experienced forex traders can be prone to the same FX mistakes. There are many different ways in which your judgement can be impaired and you can lose objectivity, and invariably these will affect the profitability of your trading. Here we look at some of the most common fx trading mistakes.
Not planning properly
Your FX trading plan is the foundation of long-term profitability, and a point of reference in the heat of your decision-making. Without a plan you are simply moving from trade to trade with no strategy to achieve your ultimate profit targets.
Trading too much
When your trades are in profit you may find yourself tempted to strike some extra trades, thus undermining your original trading plan.
Looking for the perfect trading system
A trading system should not replace your own judgement. If there was one infallible system that suited all trading styles, don’t you think everyone would be using it.
Winning Forex Trading Strategies
Establishing a winning forex trading strategy helps you to take a more objective approach to your trading. In the short term, you are trading on the basis of tested methods rather than individual hunches. In the long term, you are placing your individual trades within the wider context of your rules for money management. With a reliable forex trading strategy in place, no single trade should be able to make a disproportionate dent in your bottom line, and you should be able to see each trade as part of your ongoing trading activity.
Forex strategy: money management
Your forex trading strategy should be designed to achieve profits over the long term.
- The investment capital you want to devote to your forex trading
- The profit target you want to achieve by a specific date
You can see that your strategy depends not just on the funds at your disposal but also on your attitude to risk. Are you happy to shoot for a high return on your risk or would you rather target a smaller return per trade and hope that your strike rate leads to long-term profitability?
Forex strategy: choosing your currency pairs
Rather than try to keep track of the full array of available forex pairs, you’ll probably want to restrict your analysis to a limited number of pairs. These may be the pairs you feel most comfortable trading, or pairs featuring a common currency you feel you understand well. Do you want to trade the most popular forex pairs, such as EUR/USD, USD/JPY and GBP/USD, where the high levels of liquidity can give you very low trading spreads?
Forex strategy: trading on news
Will you rely solely on technical analysis or will you try to incorporate news events in your forex trading strategy? Individual currencies represent geopolitical entities and are therefore highly sensitive to political events and economic data releases.
Forex strategy: reading indicators
When you apply technical indicators to your forex chart you are creating the basis to generate signals to buy or sell. Different combinations of indicators give rise to different systems which you can incorporate with your forex trading strategy.
Forex Chart Patterns
As a forex trader, one of your most invaluable tools will be the price chart. This is your basis for analyzing the trading history of a fx pair and defining your own potential entry and exit points.
Why use trading charts?
A chart gives you the price history for a forex pair over a given period of time. By viewing patterns in the price history you can predict future price movements, targeting future trading opportunities based on reversal or continuation of the pattern.
Types of chart
Three common styles of price chart are the line chart, the bar chart and the candlestick chart. The line chart is the most simple, plotting the closing price at each interval over the time period (each week, each day, each hour) connected by a simple line. Reading a line chart gives you a sense of the general price movement.
At a glance the candlestick chart gives you a clear visual indication of the strength of a trend or areas of market indecision.
Try reading: Identifying the Best Times to Trade Forex
Applying technical indicators
You can apply technical indicators to your price chart to add information regarding market sentiment and potentially confirm your reading of the trend.
A technical indicator works by calculating a specific formula on the available price (and sometimes volume) data. The new data generated from the formula is then either plotted on top of the existing price chart or, in the case of oscillators, is plotted in a smaller chart beneath the main price chart, along the same timescale.
When you view price movements over a specific time period you’ll be able to plot support and resistance levels, the levels the price has not managed to break through over this period. The area between the support and resistance levels is a channel.
Reading chart patterns is all a matter of predicting continuation or deviation of the existing channel.
Find out more about forex trading signals.
Forex Trading Signals
HOW IT WORKS Every forex trader can benefit from accurate signals to trade. A trading signal is simply an indication of when and how to trade a particular forex pair, based on specific price analysis. This could be generated from a manual source or from an analytic program using complex technical indicators.
The key to using trading signals is to be methodical. Find a clear and reliable source of trading recommendations based on a methodology that is consistent with your wider trading strategy. best forex pairs to trade by FxPremiere Group. Most signal providers should be able to supply the research underpinning individual recommendations, as well as a ‘strike rate’ of previous signals.
Trading signals: entry point
Your entry point tells you the price level at which to open a trade on the forex pair in question. This could be to buy the pair (a long position) or to sell the pair (a short position).
Trading signals: exit point
A reliable trading signal will typically provide you with three exit points.