The foreign exchange market, or forex (FX), is a decentralized, electronic currency trading venue. Featuring more than U.S. $5 trillion in average daily turnover, the forex is the world’s largest market, far surpassing the premier U.S. equities and futures exchanges. Given its enormous size, depth, and offerings, the forex is a primary destination for active traders around the globe.
You can find thousands of forex trading tips online designed to help boost profitability. In this article, we’ll cover three points of emphasis that can help you secure market share in this fast-paced, exciting trading atmosphere.
1. Understand the Basics
Before you focus on complex forex trading tips, it’s important to grasp the basics first. Forex trading is different from trading conventional futures, options, and equities in several ways. To make a profit, understanding the key differences is essential.
On the forex, currencies are traded in relation to one another—or as pairs. Each currency pair represents the exchange rate of a base currency to a counter currency. For instance, in the EUR/USD, the base currency is the euro (EUR) and the counter currency is the U.S. dollar (USD). When trading FX pairs, the following mechanics apply:
- Buy: When you buy a currency pair, you are assuming a long position in the base currency. If rates rise, a profit is made; if rates fall, a loss is taken.
- Sell: When you sell a currency pair, you are taking a short position in the base currency. If rates rise, a loss is taken; if rates fall, a profit is made.
The functionality of forex trading is unique from futures and equities in that currencies are valued relative to one another. Accordingly, many factors influence currency valuations, including central banking policies and economic performance. This differs from the trade of stocks or commodities because a currency’s intrinsic value is viewed on a much broader scale.
2. Define Your Goals
As in other markets, forex trading requires participants to place capital into harm’s way. Because of this fact, successful traders clearly define their goals before ever entering the marketplace. They accomplish this by taking the following steps:
- Identifying financial objectives: You need to decide how much profit is acceptable on a daily, weekly, and monthly basis.
- Quantifying resources: Complete an honest inventory regarding the amount of time and capital you have available for FX trading is essential.
- Adopting a suitable strategy: Once you’ve set your financial goals and quantified your resources, you can develop strategies that maximize the probability of success. Viable strategies will incorporate ideal risk versus reward ratios to beneficial intraday, day, or swing trading methodologies.
Perhaps the most valuable among all forex trading tips is this: Be sure to align your resources to your goals. By doing this, you’ll be able to optimize your capital efficiency and focus your operations in a strategic way.
3. Build a Plan
It’s important to have a comprehensive plan in place before you start active trading. A good plan provides a structured approach to trade selection, position management, and risk management. Without a plan, your odds of success drop exponentially.
When building your currency trading plan, be aware of these three forex-specific factors:
- No expiration: In contrast to futures and options, forex currency pairs do not have an expiration date. Positions may be held in perpetuity as long as margin requirements are satisfied and you pay the carrying costs.
- Variable bid-ask spreads: Forex pairs are priced with respect to a bid-ask spread that includes the cost of brokerage execution. Additionally, spreads fluctuate during periods of heavy volatility and sparse participation.
- Leverage: Forex pairs are traded on margin, with varying degrees of applied leverage. In the U.S., leverage is limited to 50/1 or a 2 percent margin requirement.
A rock-solid forex trading plan needs to address trade horizons, spreads, and applied leverage. If not, even the best forex trading tips are likely to produce inconsistent results.
Interested in More Forex Trading Tips?
For anyone interested in trading FX pairs, learning the basics, defining goals, and building a plan are great places to begin. However, there’s much more to the global currency trade, and the services of a true professional are invaluable.
To learn more about what trading futures, options, and the forex can do for you, schedule your free consultation with a member of the Daniels Trading team today.