Understanding the market and world economy
The goal of trading forex is to exchange one currency for another, anticipating that the price will change and that the currency you’ve bought will increase in value. Market movements are mostly the outcome of the news, political events and central bank announcements. To make informed trading decisions, it is imperative to do your research and analyse the market thoroughly. Even if you believe in luck or your gut feeling, you still need to conduct proper research and analysis. Research a particular currency pair, for example, and find the resources that work for you.
Also, don’t forget to do regular checks of current and historical charts to monitor the currency movement, political climates and other economic indicators. These factors affect for the value of currencies, creating daily volatility in the forex market. With practise and regular knowledge of what’s happening in the world, you may be more informed to predict the movement of the global economy. Trading platforms will help you with advanced technical analysis and strategies.
Choose a forex trading strategy
When you start trading, aim to develop a general strategy that can help you in different situations. You can choose different strategies for different currency pairs or market conditions. To be able to devise a strategy that works for you, you need to understand what a risk profile is. Start by assessing your capital and determine what you are prepared to lose and gaining a solid understanding of the market aspects. Also, set realistic expectations for the profits and losses you’re anticipating and undertake extensive research on currency pairs that you’re interested in, bearing in mind the risks involved.
Your strategy will help you define your investment approach and reach your trading goals. Diversifying your investment profile may help you minimise loss and enhance your strategy in the long term. Through extensive testing and practise, you will be able to find a secure strategy in harmony with your risk profile.
Start Trading Forex! Select a currency pair
Trading forex always starts with currency pairs. You’re exchanging the value of a currency for another by buying one currency and selling another simultaneously. Many beginners like to start with major currency pairs; however, you can also choose from minors or exotics. Through fundamental analysis of what’s happening in the world economy and technical analysis of advanced charting)), you can choose the currency pair you’ll start with. To begin, you need to know how to read a forex quote.
In a forex quote, the first listed currency is known as the base, and the second is known as the quote currency. In the example below, the base currency is EUR, and the quote currency is USD. The difference between both rates is the spread. When you buy EUR/USD, this means you’re buying the base and selling the quote. So, you’re buying EUR and selling USD because you believe that EUR will increase in value in relation to the USD. In the opposite scenario, you’re selling because you’re anticipating the base currency (EUR) to decrease in value.
Choosing your position
The forex market allows you to speculate on up and down movements in the market. When buying a currency, you’re selling another one at the same time. Choosing your position in the trade means either going long or going short. When you take a long position, it means you’re buying the base, and when you take a short position, you’re selling the base currency. Based on your research, you will be able to decide which position you want to choose.
Stop losses, limits and other forex orders
Since the forex market is very volatile, you should consider to use stop losses and limit orders to protect you by automatically exiting or stopping trades at predefined levels. All trading strategies should consider to include a stop-losses order, which is setting a closing price for the trade. This order will ensure that you don’t lose more than the limit that you preset. Types of stop orders include normal stops and trailing stops:
- Normal stop orders are when you close the position when the market moves against you.
- A trailing stop order is a type of stop-loss, when you open a trading position to follow price movements when they move in a favourable direction and close that position when the market moves against you.
Setting a limit order to achieve your profit goal means the position will be closed when the price reaches your specified level. There are also two types of limit orders:
- The first is a limit order to buy at a price below the current market price, and this order will be executed when the price hits an equal or less value than the price you set.
- The second type is a limit order to sell at a certain price higher than the current market price, and it will be executed when the price hits a level equal to or more than the price you predefined.
Another frequently used forex order is the take profit order, which allows you to close the trade position automatically when the price reaches a certain level.
Start trading now with ADSS!
Now that you have learned some of the theory, gain hands on experience by opening a risk-free demo account or open a live account (whilst considering the risks) to start your trading journey.