Understanding the market and world economy
The goal of trading forex is to exchange a currency for another one, anticipating that the price will change and that the currency you have 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 trading charts to monitor a currency’s movement, which can indicate political climates and other economic indicators. These factors affect supply and demand for currencies, creating daily volatility in the forex market. With practise (and by making sure you are up to date with the latest news from around the world), you may be able to learn how to predict the movement of the global economy, which could help you with your trading strategy. Trading platforms can help you formulate advanced technical analysis, trading strategies and trade indicators.
Choose a forex trading strategy
When you start trading, you need 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 first to understand what your risk profile is. So start by gaining a solid understanding of the market aspects and assessing your capital. Also, set realistic expectations for the profits you’re anticipating and do your extensive research on currency pairs that you’re interested in.
Your strategy will help you define your approach and reach your trading goals. Diversifying your investment profile can also help you minimise loss and enhance your strategy in the long term. Through extensive testing and practise, you will be able to refine your strategy in harmony with your risk profile.
Start trading! 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 choose from minors or exotics if you want. Through fundamental analysis (what’s happening in the world economy) and technical analysis (chart-based analysis that trading platforms provide), 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
Unlike most other trading markets, 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 speculations and your research, you will be able to decide which position you want to choose.
Stop losses, limit and other forex orders
Since the forex market can be very volatile, you may choose to use stop losses and limit orders to protect you – they allow you to automatically exit or stop trades at predefined levels. All trading strategies should include a stop-loss 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. In some instances, the stop-loss order may not be executed at the exact set level, but it will work the next time the price reaches this level. This is known as slippage.
Types of stop orders include normal stops, guaranteed stops and trailing stops:
- Normal stop orders are when you close the position when the market moves against you, and these don’t protect against slippage.
- Guaranteed stops will always be executed at exactly the price you specify.
- A trailing stop is when you open a trading position to follow price movements and close it 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 forex trading now with ADSS!
Now that you have most of the theoretical knowledge you need, it’s time to get hands-on experience with ADSS. Trade with our MT4 platform and benefit from personalised customer service, a wide range of educational tools and expert analysis.