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: 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.
- Choose the currency pairs that are right for you.
- 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 outXE 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.
- Use Forex Charts
- 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?
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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.
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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.
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.
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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.
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step 5: Next Step ►Be In The Know with Fundamental Analysis
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.
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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.
