The largest trading market, forex attracts more and more would-be traders each day. Keen on making a quick profit, they rely on their instincts or clever strategies in order to profit from the ups and downs of various currencies.
However, as it deals with the relative prices of coupled currencies, certainty is never to be found on foreign exchange market. The risk is therefore inherent to the practice of forex trading. In order to achieve and maintain success for a longer period of time, professional traders make use of a few methods to simplify the process and remove some (never all) of the risk.
How to trade on Forex correctly
Moved on an electronic platform in the 1990s, the foreign exchange market has since grown, allowing players from the largest banks to the smallest individual to take part in the game.
Before starting to commit money, however, every trader should develop a few good habits. Among them, keeping good records, understanding tax implications, proper money management techniques, using clean charts and a reputable broker are paramount. Having checked these off, one can move to trading methods.
SMA
Increasingly professionalized, traders turned to methods such as the simple moving average (SMA), which adds up the closing prices in the last x hours for specific currencies and divides them by the number of hours. The result is a closing average, and thus a moving average. Carefully done, this strategy works for any period, and it represents the simplest way of trading with a strategy.
Backtesting
Using history to determine the future, methods employing software such as the mt4 backtesting use past trade patterns and models in order to establish a winning strategy in real market conditions. In this way, the experience and gut feeling of a seasoned trader can be rivaled easily with the help of a computer program.
Stochastic Indicator
Used as part of the more advanced trend-following strategy, a Stochastic indicator tells the trader when the market is overbought, at which point he should sell, or oversold, the moment in which he should buy. By following this indicator, understanding the market trends will be made easier even for the most inexperienced trader.
K.I.S.S.
However, the truth is that more complex and supposedly reliable indicators always pop up on the foreign exchange market, claiming to be accurate. The Keep It Simple Stupid method ignores such indicators and relies solely on one’s ability to read price action off of a raw price chart.
Naturally, a beginner on forex trading will never understand trends by simply looking at price charts. That kind of grasp is only brought about by time and patience. Returns can become greater and greater, evolving into the kind of market awareness that made George Soros, Jesse Livermore and Warren Buffet rich and famous.
The simplicity of this method can even be seen on the charts used. Compared to the cluttered ones required by complex modern indicators, K.IS.S. charts simply follow trends in pricing.
Daily High Low
Day trading is the most popular way of engaging in the foreign exchange market. With relatively low risks, it means holding a position for an entire day and closing it at the end, thus cutting any losses you might incur by default.
By using only low spread currency pairs like GBP/USD and no indicators, the daily high low forex trading strategy uses the closing positions of the last day as a start and the average of the last three days as a range for the profit targets. Easy to understand and requiring only a one-time checkup each day, this strategy stops overtrading in the making. However, it also allows for risks due to the large stop loss distances.
However simple it is made in theory, practice does not always follow suit. An entire array of mistakes is usually made by beginners to Forex. Either they don’t understand the signals sent within the market, don’t recognize the trends or hold onto their position for far too long, novices to the Foreign Exchange market learn on the job.
Technology versus Experience
Looking at the 15 most traded currency pairs in 2014 and 2015, it was established that traders lose more money on their losing trades than they make on their winning trades. This is because people tend to hold onto their positions for far too long. For this problem, cutting costs is the only fix and gaining experience the only long-term treatment.
Foolproofing your forex game might get you to an advantageous position, but letting go remains entirely up to you. Use Stop-Loss and Limit Orders right from the beginning in order to become a better Forex trader and consistently have more profitable trades.
Complex strategies and indicators, cluttered charts and precisely calculated time frames, limits and directional factors are all products of the increased professionalization on the foreign exchange market. Each claim to offer reliable information, even to the point of predicting the future. However, mixing both technology and experience might prove to be the best approach to trading.
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