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 your Currency trading
skills.
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 market analysis 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.
Market
Analysis
XE Market
Analysis provides breaking currency news and in-depth analysis where the
currency market is, where it's going, and why it's going there. 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.
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.
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.
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.
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.
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.
Source: www.xe.com
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