You might have heard that keeping to your discipline is important in forex trading. This could be true but how are you supposed to do that when you are in a trade?
One approach to this is to have a trading strategy that you will follow.
There are a lot of unique trading strategies available and it will help to get some books or courses on it but sometimes trading can be a personal thing to handle. Lots of traders spend a lot of money search for unique trading strategy. Building strategies can be fun, easy and amazingly fast.
There is always room for improvement of skills whether you are an amateur or an expert in trading. Education is the basis for success in forex trading. Below are some steps that would help you improve your currency trading skills.
Step 1: check the time-frame of your trading style
Here are a few trading styles, beginning with the short-term frames to the long.
- Scalping: this style is shortly out lived, it could last for just a few minute
- Day trading: these trade does not last till the end of the day, it is probably available for only a few hours and the price bar might be set on to last for about one or two minutes.
- Swing trading: this could last for some days while the trader is in need of profit from a short-term price patterns.
- Positional trading: this is a long-term trend that is out to make maximum profit from the major shift in price.
Step 2: strategize, Analyze and Diarize
There three things that professionals in forex trade do which the beginner always forget. They develop a trading strategy, they move along with the market, they make notes of their observations, track and analyze every single trade.
1. Make a plan of how you will trade: there is a saying, “if you fail to plan, you plan to fail.” This is very true in the forex market. Successful traders have a plan they start out with and they always keep it.
- Select the currency pairs that suit you. Based on your risk findings choose a currency that will meet your trading strategy needs.
- Decide how long you would in a particular position. Note that having an open position at 5:00pm Eastern Time may bring rollover changes though it depends on your account type.
- Set an aim for the position. You should make exit plans before taking any position.
2. Follow the forex market: you can monitor the market information and technical level that has an effect on your position using forex charts and market analysis.
- Use forex charts. Charts are very important for a better trading return. Money spent on a charting package from a single well-placed trade can easily be recovered using the analysis from a professional chart.
- Market Analysis. You can get well-detailed trading strategy from a professional forex trader.
3. Have a forex diary: a lot of traders keep on failing because they do not learn from their past failure. A diary can help you knowing what is most suitable for your trading business. A well detailed diary can be very useful.
Step 3: Manage your risk
In the trading market the most successful ones are not those that hold the best position but those that are very careful when it comes to risk management and those that are disciplined in their trading. They do not get emotional about a loss or a gain. They set their profit target and no specific limit for their position, and they lock them in using limit orders and stop/loss orders.
- Limit orders. A limit order tells the system to exit a position automatically once the target has been obtained. This gives you the opportunity to “lock in” your targeted profit on a winning position.
- Stop/Loss orders. This tells the system to automatically log out when the maximum loss limit has been reached. This helps you to minimize your loss on a losing position.
- Discipline in trade. Most skilled traders use Limit Orders and Stop/Loss Orders as the fundamentals for a disciplined trading strategy. By using both for their position, they have put away emotions and they make the market to work for them.
- Setting Limit and Stop/Loss Orders. As a general rule, it is best you set your Stop/Loss Orders very close to the opening position price rather than your Limit Order. By so doing you have a chance of being successful even though you are not up to 50% right most times.
Step 4: Select a suitable approach
Basically, there are two different approaches to analyze the forex market. Understanding how they work can help you use them effectively.
1. Technical Analysis.
The major use of technical analysis is to study price movement, using previous currency data to try predicting the direction of the prices in the future.
The main tool here is the chart. In an attempt to discover profit opportunity charts could be used to identify the patterns. People that use this approach are in search of trending tendencies in the forex markets, and they believe success is achieved when this trend is discovered at the early stage.
2. What should I use; Fundamental or Technical Analysis?
Those that use the technical analysis follow charts and trends which means they are automatically following some currency pair. While those that use fundamental analysis deals with market data therefore they focus on a lesser number of currency pair. Because of this most traders prefer to use Technical Analysis.
3. Chart your course with Technical Analysis
Technical Analysis studies historical market movements in order to predict the currency price in the future and it does this by using chart. With this technique a trader would be able to monitor different currency pair just by analyzing how others are trading a specific currency pair.
- Support and resistance. Support and resistance is believed to be the most popular and effective kind of technical analysis. Support is the lower boundary a currency struggle with coming out from while the resistance is the upper boundary a currency tries to break into.
- Using Support and Resistance. There different ways the support and resistance technique can be used. A range trader would like to buy higher than support and sell lesser than resistance. Or, would like to buy when the price goes above resistance level and then sell when it is below support level.
4.Be in the Know with Fundamental Analysis
- Interest Rates. Every currency has its own lending rate which is determined by the central bank of the country. The central bank might increase the interest rate if there is high inflation so as to balance the economic situation. If the economy is not doing too well the central bank might reduce the interest rate to improve growth. The value of a currency depreciates if the interest rate is low because it comes along with carry-trades. This is a strategy whereby a trader buys the currency with a high interest and sells with a low interest.
- Employment. The strength of an economy is majorly determined by level of unemployment. A country with a high number of the unemployed has a weak economy. This causes the currency to depreciate.
- Geopolitical Event. This has an effect on foreign exchange market and other markets also.
5. Set smart Trade Limits
Choose a profit target that will enable you earn more money on the position for every trade. Let your loss limit be large enough to handle any normal market fluctuation, but also lesser than your profit target. Lock these in with your Limit Orders and Stop/Loss Order.
Though this appears simple but it is very difficult to follow. Most traders forget about their plan strategy and close their winning position due to fear of the market going against them. And these same traders will hold on to their losing position with the hope of recovering their losses.
Step 5: creating and testing strategies
- It is easier to follow a realistic strategy because it was created by you and you can achieve your goal with it.
- For instance, if on a particular day a trader chooses to go for stocks that only last for 5 minutes. She has a list of stock chosen from the available ones. The trader will search for profit opportunities in these 5 minute stocks.
- Consider the fluctuation of price and know if you can predict the price movement.
- After writing out your strategies that will enable make money in the market search for similar example and find out what the likely risk would be. Determine what your stops will require in order to be on future trade so you can make enough profit.
- Analyze the price movement after your entry and know where to place your stop. Always look out for profitable exit when you analyze the movement. And determine the kind of technique or indicator to use. Use indicators, candlesticks pattern, chart pattern, percentage, retracement, trailing stops, Fibonacci level or any other available tactics when searching for exit point so it would help you capture profits from the opportunities we are seeing.
- Keep a record of all the strategies you have used in your diary and turn them into a trading plan so you can always avoid unfavorable conditions and utilize the favorable ones.