The foreign exchange trade market is an exciting place to invest and speculate. Large sums can be made in a short time, although for most traders, even the successful ones, the reality is a little different because of the need to take account of the high risk. So how should a trader act to put themselves on the right side of the equation? Here are our top tips for success in foreign exchange trading.
1. Be realistic
Anybody who gets into forex trading hoping to get rich quick is going to be disappointed. If you go out for maximum leverage on the smallest possible account, you are heading for big losses sooner or later. Forex traders do not get rich quick: they either make money slowly or they lose. We know which option we would pick!
2. Have faith in your system
It is essential to have confidence in your foreign exchange trading system, enough to see it through any bad patches. However, good systems take some finding and testing. Even if a system works for somebody else, you cannot expect to have faith in it until you have thoroughly tested it for yourself. So do not skip this step.
Once you are sure of the long term success of your system, stick with it and do not abandon it just because the market does not act the way you expect all of the time. Sometimes of course there are major shifts in the market and prices may behave differently for a while. If you think that is happening, switch to demo for a while. Don't start on a new system, it would be the worst possible time.
3. If in doubt, stay out
This is one of the catchphrases of the forex market - and probably other financial markets too. It is easy to become impatient when waiting for the trading signals to be just right, especially if we have not seen a trading opportunity in a while. However, this is not a reason for opening a trade too soon. Forex trading is exciting at times and boring at others - the only way to profit is to wait it out.
4. But do not wait too long
Hesitating when the signals are right is almost as bad as jumping in too early. You will be losing some of your profit on each trade if you constantly hover wondering whether or not to act. Your plan should be clear in terms of which charts and indicators you use to check your signal. Having done that, do not start consulting a lot of technical tools. It is time to act.
5. No regrets
Some trades lose and some trades win. Some make profits but not as much as they could have made if only ... (you had closed sooner/closed later/got in earlier etc). Unless you are in the testing process where different variables could make a difference to your final trading system, this kind of 'what if' thinking is a waste of time. No, it's worse than that. It is positively dangerous because it will distract you from the next opportunity and possibly lead you to start tweaking your system for no reason.
When a trade is closed, it is closed. There is nothing to do but record the results on your spreadsheet and move on to the next foreign exchange trade.
Showing posts with label foreign exchange basics. Show all posts
Showing posts with label foreign exchange basics. Show all posts
Tuesday, March 2, 2010
Sunday, February 21, 2010
Forex Spread : What Is It?
To make money with forex trading it is necessary for a trader to understand forex spread. This is the main cost that most traders will have, so it is important to understand how it is calculated and how much difference it can make to your profits.
Spread is the difference between the bid and ask prices of a currency pair, or the difference between the price given by a market maker if a trader wants to sell the currency pair (the bid price) and the price the trader must pay if he wants to buy the pair (the ask price).
This is how most brokers make their money. To see how it works, let us take a simple example.
Imagine that a trader is working with the currency pair EUR/USD. The ask price might be 1.4323 and the bid price 1.4320. If the trader wants to buy the pair, he will pay 1.4323. If he buys at that price and then sells with no change in the market, he will get 1.4320, 3 pips less. So the broker will have made 3 pips on the transaction.
Obviously this is a very important consideration for a trader because in order to begin making money on any trade, he has to first cover the cost of the spread. Spreads can be anything up to about 5 pips depending on the broker and the currency pair. This is a factor that needs to be taken into consideration when deciding on a trading system. The spread must always be allowed for when working out any system, especially if you are backtesting a system. It is easy then to forget it, but the spread can make a huge difference to the accumulated profits over time.
Not surprisingly, brokers will try to compete on spread and therefore the rates for the more popular currency pairs can be relatively advantageous. However, spread is not the only factor to consider when choosing a broker or analyzing your costs. Some brokers that have very low spreads have other ways of making money that must be taken into consideration.
In some cases there may be a fee per trade. This can be fine if you tend to make a low number of very profitable trades, but it is not so good if you make many small trades. In that case you would probably be better off with a broker who charged a slightly higher forex spread but no fee per trade.
Spread is the difference between the bid and ask prices of a currency pair, or the difference between the price given by a market maker if a trader wants to sell the currency pair (the bid price) and the price the trader must pay if he wants to buy the pair (the ask price).
This is how most brokers make their money. To see how it works, let us take a simple example.
Imagine that a trader is working with the currency pair EUR/USD. The ask price might be 1.4323 and the bid price 1.4320. If the trader wants to buy the pair, he will pay 1.4323. If he buys at that price and then sells with no change in the market, he will get 1.4320, 3 pips less. So the broker will have made 3 pips on the transaction.
Obviously this is a very important consideration for a trader because in order to begin making money on any trade, he has to first cover the cost of the spread. Spreads can be anything up to about 5 pips depending on the broker and the currency pair. This is a factor that needs to be taken into consideration when deciding on a trading system. The spread must always be allowed for when working out any system, especially if you are backtesting a system. It is easy then to forget it, but the spread can make a huge difference to the accumulated profits over time.
Not surprisingly, brokers will try to compete on spread and therefore the rates for the more popular currency pairs can be relatively advantageous. However, spread is not the only factor to consider when choosing a broker or analyzing your costs. Some brokers that have very low spreads have other ways of making money that must be taken into consideration.
In some cases there may be a fee per trade. This can be fine if you tend to make a low number of very profitable trades, but it is not so good if you make many small trades. In that case you would probably be better off with a broker who charged a slightly higher forex spread but no fee per trade.
Friday, July 17, 2009
Foreign Exchange Basics - The 6 Main Influences
To be successful in the forex market is is necessary to understand foreign exchange basics. Technical analysis with charts and trends is one thing but it's equally important to understand the fundamental reasons why the various currencies around the world are constantly moving relative to each other. Being able to understand what influences a currency movement and correctly predict a movement in one direction or another is what makes a successful forex trader. Let's look at the 6 main influences
1. Current Affairs and the News.
Be aware of what is happening around the world especially within the major world economies. Monitor national and international news channels for such events as political unrest, social disorder and in particular financial news.
2. Unpredictable Events
A major natural disaster or significant terrorist activity can influence a sudden currency movement. You should always protect your trades from unpredictable events by using stop losses to minimize the affect of a sudden adverse currency movement.
3. Predictable Events
A political event such as a general election is predictable. A major international sporting event such the Olympic Games is predictable. The important thing here is to be able to understand which currencies are likely to be affected and in which direction they will move. It's not just the events themselves which may influence a currency movement but also the announcement of such an event. So be aware of the timing of such announcements.
4. Financial Reports
Be familiar with the timing of financial reporting from countries of influence. Announcements concerning GDP, interest rates, inflation etc., will often influence currency movements. Monitor the financial results for the major international companies, particularly the banks and other major international financial institutions.
5. Rumors
It's difficult to avoid rumors but you should be very careful if making a trade based on a rumor because very often a rumor is simply no more than just a rumor and often a rumor is spread to fool traders into thinking the market will move one way when in fact the opposite happens.
6. Currency Pairs
You should pay particular attention to applying foreign exchange basics in the two countries concerned with your currency pairs. It is fact that the US dollar has the strongest influence on other currencies particularly if one of the pair is a minor currency.
The problem for the beginner in forex trading is how to apply all this fundamental analysis to successful trading. The best advice I can give is to gain experience with fundamental analysis and how each type of influence effects currency movement before you use it to make real trades. After a while you will develop a feel which will give you more confidence as you become familiar with the foreign exchange basics.
Read more about foreign exchange basics in my new eBook - Quick And Easy Forex Trading is aimed at understanding the fundamentals of forex trading...it's on a special launch offer now Forex Trading eBook
1. Current Affairs and the News.
Be aware of what is happening around the world especially within the major world economies. Monitor national and international news channels for such events as political unrest, social disorder and in particular financial news.
2. Unpredictable Events
A major natural disaster or significant terrorist activity can influence a sudden currency movement. You should always protect your trades from unpredictable events by using stop losses to minimize the affect of a sudden adverse currency movement.
3. Predictable Events
A political event such as a general election is predictable. A major international sporting event such the Olympic Games is predictable. The important thing here is to be able to understand which currencies are likely to be affected and in which direction they will move. It's not just the events themselves which may influence a currency movement but also the announcement of such an event. So be aware of the timing of such announcements.
4. Financial Reports
Be familiar with the timing of financial reporting from countries of influence. Announcements concerning GDP, interest rates, inflation etc., will often influence currency movements. Monitor the financial results for the major international companies, particularly the banks and other major international financial institutions.
5. Rumors
It's difficult to avoid rumors but you should be very careful if making a trade based on a rumor because very often a rumor is simply no more than just a rumor and often a rumor is spread to fool traders into thinking the market will move one way when in fact the opposite happens.
6. Currency Pairs
You should pay particular attention to applying foreign exchange basics in the two countries concerned with your currency pairs. It is fact that the US dollar has the strongest influence on other currencies particularly if one of the pair is a minor currency.
The problem for the beginner in forex trading is how to apply all this fundamental analysis to successful trading. The best advice I can give is to gain experience with fundamental analysis and how each type of influence effects currency movement before you use it to make real trades. After a while you will develop a feel which will give you more confidence as you become familiar with the foreign exchange basics.
Read more about foreign exchange basics in my new eBook - Quick And Easy Forex Trading is aimed at understanding the fundamentals of forex trading...it's on a special launch offer now Forex Trading eBook
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