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What is Forex Trading?
Foreign exchange trading involves trading one currency pair against another, predicting that one currency will rise or fall against another. Currencies are traded in pairs, like the Euro versus the US Dollar (EUR/USD).
Forex
Facts
- Over 61 currency pairs
- Tight spreads from 0.0 pips
- Up to 1:1000 leverage
- Deep liquidity
- Trade 24 hours a day,
five days a week
Online Forex
Trading:
All you Need to Know to Start
Trading FX
So, you’re looking to learn the basics, perhaps even get a detailed
understanding of Forex Trading. Well, you’ve come to the right place!
In
this guide we’ll be addressing all of the important things that you need to know
before you start forex trading in order to understand how to enter the markets
safely, with an effective strategy in place.
Firstly, we’re going to
explain what Forex Trading actually is and how it works. We’ll then be examining
basic terminology so that you can become accustomed to the words and phrases
used while trading foreign exchange. Following the basic terminology, we’re also
going to examine the calculations that you’ll be using in your day-to-day life
as a forex trader.
Our guide aims to fully equip you with the tools to
further your knowledge and understand the details of fx trading before you enter
the global markets. If you’ve had some experience with trading Forex before then
feel free to skip ahead to the sections that you’d be interested in. Simply
click on the menu titles below to be redirected to the relevant information for
you.
- What Forex Trading is and How it Works
- Currency Markets and Currency Pairs
- What is a Pip?
- What is a Pipette?
- What is a Spread
- What is Leverage and Margin?
- Trade Currencies: Is Currency Trading the Same as Forex Trading?
- How to Trade Currencies in Forex
- What You Need to Start Forex Trading
- Forex Brokers: What They Are and How They Work
- Forex Trading Apps, Platforms and Websites: What You Need to Know
- The Forex Market: Opening Times
- Forex as a form of investment
- How to Learn Forex Trading
- Examples of Forex Strategies
- FAQs: Can you really make money trading Forex?
What Forex Trading is and How it Works
Foreign exchange, or Forex for short, is a market where you’re able to
exchange one currency for another. With a daily trade volume of $6.6 trillion
dollars, the forex market itself is huge! It eclipses the likes of the New York
Stock Exchange (NYSE) which, by comparison, has a trading volume of only $22.4
billion per day.
The Forex Market’s sheer size attracts a wide range of
different participants, including Central Banks, Investment Managers, Hedge Funds,
Corporations, Brokers and Retail Traders – with 90% of those market participants
being currency speculators!
So, what exactly happens in the forex market, to
make it so attractive to investors across the globe? Well, imagine that you’d like
to exchange one currency for another. You’re effectively selling one currency while
buying another, or 'exchanging' it.
Now, the exchange rate between those two
currencies is what’s important when trading forex. The exchange rate is constantly
fluctuating, and it’s these fluctuations that allow market speculators to earn from
trading or potentially lose their investment. These fluctuations are driven by the
supply and demand of each currency!
It’s also important to note at this point
that, while you are trading, millions of other traders are also entering the forex
market.
So, when you 'sell' a currency, there is a buyer for that currency
somewhere else. The more people that are trading, the more money there is in the
market, which is what we call the 'liquidity'. As we’ve mentioned, the forex market
is huge with millions of traders across the globe Because of this the liquidity in
the forex market is really high!
What is Forex?
There are around 13.9 million traders across the globe that are
simultaneously buying and selling currencies. As we mentioned before, this means
that the liquidity of the forex market is really high.
These high levels of
liquidity mean that traders can enter and exit a trade, as there will normally be a
buyer for the currency that you’re selling, or a seller for the currency that you’re
buying!
High liquidity levels have other implications too. If the levels of
liquidity are high, then there are a lot of market participants, so trading costs,
like the spreads could potentially be lower. It also means that the market is way
less susceptible to market manipulation! If someone opens a huge trade in a market
with low liquidity, it’ll have a huge impact on price. This doesn’t happen in forex
because there is such a large volume being traded!
Now, the forex market, as
it encompasses all of the currencies in the world, is actually open 24 hours a day,
from Monday until Friday. The trading that is done on these currencies is what we
call over the counter or OTC for short. This means that there isn’t a physical
exchange like there is for stocks. It’s actually a global network where there’s a
network of financial institutions and banks that oversee the market rather than a
central exchange like the New York Stock Exchange.
As an individual, you’re
likely to be categorized as a 'retail trader'. However, the largest portion of forex
trades are actually conducted by ‘institutional traders’ like banks, funds and large
corporations. They’re not necessarily going to actually buy or sell the currencies
but are speculating about price movement or hedging against upcoming changes in the
exchange rate.
Let’s look at an example
Currency Markets and Currency Pairs
Currencies in the forex market are expressed as pairs. So, lets
take a look at the EURUSD and look at what exactly makes up a currency
pair.
The first thing to know, is that currency pairs are expressed
in terms of the 'Base Currency' and the 'Counter Currency'. The base is
always expressed first and the counter second – so in our example, the EUR
is the base currency and the USD is the counter.
Once you’re ready to
begin (we’ll get to that a little later in the guide) and are familiar with
the platform and want to open your first trade, you’ll see two prices quoted
for the EURUSD; the Sell or 'Bid' price, and the Buy or 'Ask' price, as
shown below. It’s important to always remind yourself that when you click
buy or sell, you’re buying or selling the first currency in the pair.
Question
> 1.8 pips <
Didn’t get it right? Don’t worry! Check out our Spreads and Margin page to
learn more.
Now that we’ve given you a brief explanation of
what Forex Trading and Currency Pairs are, let’s examine some common terms that
you’ll experience as you learn to trade forex
- Pips & Pipettes
- Bid and Ask
- Spread
- Leverage
- Margin
What is a Pip?
You’ll need to become very familiar with the term 'Pip'
if you’re going to indulge in online forex trading.
As an acronym for
'price in point' or 'percentage in point', a pip
is the fourth decimal point used in pricing. It’s equivalent to 1% of one basis
point. As most currency pairs are priced to 4 decimal points, it’s the smallest
price move that an exchange rate can make (0.0001).
Now,
it’s an important term to know for currency trading because the spread (we’ll get to
that later) is actually quoted in pips. We’ll look at the spread a little later!
Let’s look at an example to make it a bit clearer:
You’d like to trade the EURUSD. The price of the EURUSD is 1.1060.
Before you’re about the enter the trade, you see that the price changes to
1.1059. This means that there has been a fall in price by one pip, or
0.0001.
It’s important to remember that although most currencies are
quoted to 4 decimal places, some currency pairs, like the Japanese Yen is
actually quoted to two decimal places.
What is a Pipette?
Now that you’re familiar with a pip, it’s also
important to know that the MT4 trading platform actually shows prices beyond the
standard 4 or 2 decimal places.
A pipette
is a fractional pip and can be up to 5 or
3 decimal places. It’s effectively 1/10th of a
pip. Check out the image below so you can get a better idea of how
pips should be read.
Comfortable with what a pip and pipette is?
STEP 1
STEP 2
Let’s check out an example
EURUSD’s price is currently at 1.5510 and your lot size is a mini lot or,
10,000. The value of the
pip is: (0.0001/1.5510) X 10,000 = 0.6447
In this example, should the
market move by one pip, you’ll earn or lose 0.6447 EUR.
It’s important to note that the pip value is defined by the
quote currency. In our example above that is the EUR. However, when the
quote currency is the USD the value of a pip is always the same! This means
that should the lot size be 100,000, one pip will be equal to
$1.
Your broker will actually be calculating the value of a
pip for you, but it is something that every forex trader should know!
What is the Bid and Ask price?
As we discussed before, when you’re going to be trading forex you’ll
need to understand how currencies are actually priced. We know that currencies are
actually traded in pairs; with the value of one currency appreciating or
depreciating in value against the other.
Now, when we buy and sell a currency
pair, you’re actually simultaneously buying one currency while selling the other.
So, the ‘Bid’ price is actually the price where you sell a currency pair. So, it’s
the price of buying the base currency against the counter currency!
What is the Spread?
Another common term in the forex trading world is the spread. It’s a
crucial concept that you’ll need to understand when working out the costs involved
while online forex trading!
So, the spread effectively means the difference
between two prices. It is the gap between the bid and ask price of your chosen
currency price.
- The instrument you’re trading.
- The volatility of the market.
- The market volatility.
- The broker you’re trading with.
It’ important to note that a good broker will have a lower spread to
ensure that you aren’t priced out of trading. Although these spreads tend to widen
in times of high market volatility, a broker like Tickmill will always offer you the
lowest spreads available so you can trade effectively.
When the spread is
widened it means that there is a larger difference between the two prices, which is
a good indication of market volatility. This means that theoretically, there will be
a smaller spread when the market is more liquid.
What is Leverage and Margin?
When you begin to become familiar with terms like pips and spreads,
you’ll also hear the terms leverage and margin more frequently. They’re two terms
that go hand in hand.
Leverage basically involves borrowing funds from your
broker to enable you to control more funds when you’re trading. This is done through
the use of a margin account and is partly responsible for the increase in forex
trading popularity. It effectively allows retail traders to control a lot more money
than they actually invest.
Lets’ look at an example in more detail
You’ve decided to trade with a leverage of 1:100.
You’ve deposited
$1,000 with your
broker.
However, you’re actually able to control $100,000 for trading!
This means that when you’re trading, the profit that you made on
a trade is actually amplified because you’re using more money to trade that you
have effectively borrowed from you broker. At this point you should be hugely
aware that trading with leverage is a double-edge sword. Although your profits
may be amplified, your losses are also amplified.
Now, to be
able to access this type of leverage, your broker will need some for of insurance to
enable you to do so. This is where the margin comes in! Think of your margin as a
deposit that you give your broker to open and maintain a trade. The broker will
effectively keep a portion of your balance to cover the potential loss of your
trade.
The 'margin requirement' that you broker needs is
normally expressed as a percentage of your overall trade and each trade that you
open will have one. Remember that your margin requirement will vary depending on the
asset that you trade and the broker that you work with.
Trade Currencies:
Is Currency Trading the Same as
Forex Trading?
As you’ve been learning about trading forex, you’ve probably also come
across the term currency trading. But, is currency trading the same as forex
trading?
In short, it’s exactly the same thing!
The
term simply doesn’t use the 'foreign exchange' abbreviation 'Forex' but defines it
by the currency trade itself.
In order to trade currencies, what you’re actually
doing is trading individual currencies in pairs, which it’s the essence of forex
trading. Trading currency actually infers that you’re trading the value of one
currency against another. For example, if you’re trading the EURUSD, you’re actually
speculating about the change in value of the EURO against the USD.
How to Trade Currencies in Forex
It’s all about working out the value.
The value
of each currency depends on the supply and demand for it, thus determining the
'exchange rate' between the two currencies. The exchange rate itself is basically
the difference between the value of one currency against another. And, it’s this
exchange rate that determines how much of one currency you get in exchange for
another, e.g. how many Pounds you get for your Euros.
At this point, it’s
important to remember that the exchange rate is continually fluctuating.
Now,
investors involved in currency trading look at many different factors that could
potentially affect the value of each currency, and they speculate how these factors
will affect the value of those currencies. If a trader thinks that the currency’s
value will increase, they’ll buy that currency. Conversely, if they think the value
of a currency will decrease, they’ll sell it instead.
Now, when you’re
trading forex, you’ll be trading currency pairs. So, two different currencies will
be involved, and you’ll be speculating about their value in relation to each
other.
For example, an investor may believe that the value of the Euro
will depreciate against the value of the British Pound, because of an imminent
data release. So, the investor would sell the Euro, believing its value will
fall, and buy the British Pound simultaneously, believing its value will rise.
If the investor is correct, then he or she will make a profit!
It
sounds pretty straightforward right? Well, bear in mind that to speculate
effectively you’ll need a good understanding of the market, and knowledge about how
to analyse the market movement.
What You Need to Start Forex Trading
An Internet Connection
One of the first things
you’ll need is a stable internet connection, as forex trading is done online. The
most important factor is that your connection is stable and readily available. This
is especially important for monitoring your trades and accessing your account should
you need to make changes or catch an opportunity.
A Forex
Broker
Next, you’ll need a Broker. This is one of the most important
decisions you will make when you start forex trading. So, here’s some important
factors to consider
1. Regulation
When choosing the broker that you’re going to start forex trading
with, regulation should be something that you consider first. The regulatory
body of a broker determines how protected you are as an investor!
Now,
when you’re choosing a broker, it may appear to be really attractive to trade
with one who can offer you 1:1000 leverage so you can trade with minimal
investment. However, with great leverage comes great risk. Although the reward
for a profitable trade may be vast, the market could also move in the opposite
direction, meaning that you could lose a significant portion, or all your
initial investment.
A regulated broker however is not able to offer such
high leverage to their clients and will offer you a leverage that’s far more
realistic in terms of appropriate risk to reward ratio.
Moreover, a
regulated broker should be offering clients Negative Balance Protection. This
means that should you be trading, and the market moves against you (or gaps),
then you’re protected from generating a negative balance. This ensures that
you’ll never lose more than your original investment.
By working with a
regulated broker, you’re also protected should the broker become insolvent. Regulated brokers are required by law
to be a member of a Financial Service Compensation Scheme. These compensation
schemes are contributed to by the broker and, should the broker go bankrupt,
will cover your deposit up to a certain amount!
Finally, regulated
brokers also protect their clients by always having 'segregated client
accounts'. These special accounts hold Client funds separately from those of the
broker, ensuring that your broker can’t use your funds for other purposes.
2. Trading Conditions & Account Types
In the process of choosing a broker so you can start forex trading,
you’ll need to consider the trading conditions and account types that are on
offer.
Generally, the account types that are available depend on the
volume that you’ll be trading. A standard lot is 100,000 base units, a mini lot
is 10,000 base units and a micro lot is 1,000.
So, should you decide to
start forex trading small, you’d be better suited to something like our Classic Account. Larger accounts like
our Pro and VIP are
available, but more appropriate for traders who are trading larger volumes. For
a comparison you can check out our Accounts Overview page here. We’ll look at what you’ll need to open an account later
on.
After selecting your account type, you should also be looking at the
trading conditions that are on offer, like the spreads & swaps which will be directly related to your
costs, and the margin and leverage
which will determine how you trade!
First, let’s look at the different
types of spreads available, which are called fixed and floating.
Fixed
spreads are generally provided by brokers that are defined as 'market makers'.
Rather than transferring your trades directly to the interbank market, they’ll
match them up with other trades internally. This means that they’re ‘making the
market’. Due to this, they offer fixed spreads as it’s not going to the external
market.
In contrast, some brokers offer floating spreads, whereby your
trades are passed on to a liquidity provider. This means that you’re getting
market prices with a 'mark-up' which is generally where a broker will make their
money from. These spreads tend to be lower than those you would incur with a
'fixed spread' broker.
Because of this, brokers with floating spreads
have a general incentive to make sure that their clients trade sustainably, so
that they can keep profiting. It’s not in their best interest for a client to
come, lose their money and then leave. Sustainability is key here! Now, working
work a broker that provides floating spreads also has disadvantages. At times of
high market volatility spreads may widen which is done to account for the
significant market movement that is occurring.
3. Trading Instruments
It’s all about the type of trader you want to be and the flexibility
that you need. So, another important factor when selecting your broker is the
instruments that they offer. Some brokers will only be offering access to trade
major forex pairs. Others may have a plethora of different asset classes
available, from forex to crypto with metals, stocks, indices and bonds thrown
in!
When you’re making this kind of decision it’s important to have your
trading strategy defined and understood so that you can choose a broker which
will give you everything you need
4. Trading Support
When you’re ready to start forex trading, identifying the support
available to you is really important. You need to consider that you may not be
based in the same country as your broker and will therefore need to have access
to a support team able to help you, in your native language.
Looks for a
broker that offers 24/5 support at the minimum so that should there be an issue,
the team will be on hand to help.
5. Trading Platform
As we’ll discuss in more detail later, for you to be able to get
access to trade forex, you’ll need to use a Forex Trading platform!
We
actually offer our clients the world-renowned MT4 and MT5 platform! It has a
wealth of tools available to enhance your trading including the ability to use
custom indicators, charts and a notification system so you don’t miss any
trading opportunities.
6. Trading Account
As we briefly discussed earlier, you’ll need a trading account to
start forex trading. To open an account with your broker you’ll also need to
submit some documentation so that we can verify who you are.
We’ll guide
you through the process when you come to the point of opening a live account, but just
as an overview, we’ll need an identification document and your proof of address
to open your account.
7. Trading Funds
You’ve probably gathered that you’ll need to make an investment in
order to start trading forex! When you’ve opened your account you’ll need to
make a deposit using one of the deposit
methods available to our clients.
It’s important to note that a
good broker will have a variety of options available to you.
Forex Brokers:
What They Are and
How They Work
Every day there’s trillions of dollars traded on the Forex Market,
making it the largest financial market in terms of sheer volume traded. However,
this used to only be available to the likes of big banks, financial institutions,
huge corporations, and hedge funds. As technology has developed though, smaller
investors like individual traders can now access the market and become retail
traders! This has all been made possible by the existence of Forex Brokers.
As we’ve already explored, a forex trade is effectively selling one currency
while simultaneously buying another. What a forex broker does is basically connect a
trader with a buyer for the currency they’re selling and vice-versa. So, what makes
your trade possible is the broker matching your trade with their other traders or
transferring it to the interbank market where a match can be found!
Without
your forex broker being there, you’d never be able to get access to the interbank
market as you need a really big capital requirement to do so. Your forex broker
actually has this capital requirement and so can place the trade on your behalf.
Thanks to leverage, where you control more funds that you have actually
invested, it allows you to make bigger trades. It’s the forex broker that offers you
this leverage so, they use their own capital to open the trade, meaning you can
participate in the forex market!
Forex Trading Apps, Platforms and Websites: What You Need to Know
Forex Trading Apps
When you begin to start forex trading you’ll need to have access
to market news, data, quotes, charts and even have your account readily
available at the times you’ll trade. Thanks to this need, a huge range of
apps have been created to be used on your mobile device.
Due to the
fact that the forex market is exceptionally volatile and event driven,
economic calendar apps with push notifications have become standard tools
for forex traders across the world. Most brokers at this time offer their
clients access to mobile apps where their clients can access their account
from anywhere, ensuring that they can jump on an opportunity or exit a trade
as they need to.
One of these commonly used forex trading apps is
NetDania. It’s hugely popular as it gives access to forex interbank rates,
real-time price quotes on stocks and commodities with information on over
20,000 financial instruments! It even offers live streaming of charts and
latest market news while enabling forex traders to set price of trendline
alerts to stay on top of market changes.
Another popular forex
trading app is Trade Interceptor. Available on iPhone and Android devices,
there’s a huge range of options for traders to access technical analysis
tools and technical chart indicators. You’ll get access to live prices,
charts and have the capability to set alerts for price levels, news releases
and economic calendar events.
FX Trading Platforms
An FX trading platform is a software-based interface where forex
traders can buy or sell currencies online. They can be online, mobile based
or downloadable and provide an interface where you’re able to access the
markets to trade.
In some instances, these fx trading platforms may
have been developed by your broker, however, the most widely used platform
available for trading forex is the MetaTrader 4, or MT4 for short. Nearly
all the forex brokers in the world will give you access to this online forex
trading platform and, it’s transferrable onto all of your devices. As a
Windows based program, it’ll work effectively on all Android devices.
However, you’re even able to download the MT4 for Mac!
We’ve actually
got a selection of dedicated MT4 pages. So, for more in-depth info about the
MT4, heres some useful links:
Forex Trading Websites
As you’re probably gathered, there is a huge amount of
information of forex trading available online. So, how do you find out which
resources are reliable and useful for your trading career?
Well, as
we’ve explained already education is of utmost important when you’re
starting to trade. So, we’d recommend websites like Baby Pips, which has a whole
‘School of Pipsology’ designed to help you learn the art of forex
trading.
Other forex trading websites available are those that
provide you with news and updates about what is happening in the forex
market. Our blog provides this kind of
information as well as sites like Bloomberg and Reuters which have
huge amounts of information available.
The Forex Market: Opening Times
When you begin to start trading you’ll probably first ask yourself ‘when
is the forex market open?’ Well, there are 4 separate trading sessions in the forex
market: Sydney, Tokyo, London and New York. These individual sessions and mean that
the forex market opens on a Monday morning and closes on Friday night!
Check
out the image below to see how the FX market timing works out.
You’ve probably identified that there are overlaps between the sessions, for example; at 7am (GMT) both the Tokyo and London sessions are open. This is what ensures that the forex market provides traders with 24-hour access to trade for 5 days a week (the markets close over the weekend).
Forex as a form of investment
The investors of today have access to an extensive set of financial
instruments to diversify their trading portfolio. Spanning blue chip company stocks
and shares to investment in forex, the opportunities are endless. However, how do
you go about deciding if you want to make a forex investment or invest
elsewhere?
Well, some key factors to consider are your risk tolerance and
trading style. For example, traders that are looking to make long-term investments
over a period of years would be more suited to stocks. While those who are more
interested in shorter-term investments with higher risks involved may be more suited
to forex investing.
How to Learn Forex Trading
Learning online with guides, information, and research.
Learning with a mentor or through an online course.
Copying successful traders.
Learning while you trade and through the mistakes you make.
Let’s first state that we don’t recommend number 4 on a live
account! Beginning to learn forex trading is a time-consuming task and, as you
are risking your own funds, we’d recommend being fully prepared before starting
to trade. So, with that in mind, lets look at the first three methods of
learning to trade forex.
Learning online has always been a useful tool
for people wishing to hone a particular skill, and with a wealth of information
online, learning to trade forex is no different. When you decide to start to
learn forex, you should ensure that you’re working with a broker that offers a
range of educational material to their clients. This information could be in the
form of eBooks, educational
videos, online articles
or even webinars, where
you’re able to ask questions (usually at the end) to ensure that you’ve fully
understood the topic.
This method of learning allows you to do it at
your own pace, to extend your knowledge into areas that you’d like to develop in
and access information that may not be readily available to just anyone online.
Should you be looking for a more structured method to learn forex
trading, then you may be inclined to go for an online course or work with a
mentor. A good broker will also offer this option because they’re in the
position to be working with a variety of educators with the knowledge and
experience to help further your understanding. As an example, Tickmill offers
clients the opportunity to attend in-person seminars which you can check out here.
Now, as you’re
probably aware, there are millions of traders across the globe that already have
that knowledge and experience in forex trading. So, people looking to learn
forex trading can copy already successful
traders. Again, most brokers offer this to their clients and usually
have a wide range of different traders available to copy from. You can use a
variety of platforms to do this.
As we mentioned previously, we don’t
recommend jumping right into trading on a live account. However, by using a demo
account you can trade and learn with no risk to your capital! A demo
account is quite simply an account with a broker that mimics live
trading conditions. You’ll be able to see the prices that brokers offer, check
out how fast their execution is and, test or improve your strategy on an
entirely risk-free basis. We’d recommend that you test yourself before trading
with a live account.
Once you’ve decided on a learning method it’s
important to then learn about the currencies you’re going to trade. New traders
tend to jump straight in a trade lots of different instruments without first
learning about what affects prices and the market overall.
Understanding
how the instruments that you trade will have a huge impact on your success as a
trader. As an example, let’s imagine you identify a currency where you can see
that price has fallen significantly over the last 3 months. Using your knowledge
of technical analysis, you identify that it is likely to bounce back up, so you
try to 'catch the bottom'. However, if you had done more research into the
currency itself, you’d see that within the country employment reports have been
bad for quite a few months, meaning that the currency isn’t that likely to make
a significant bounce back. If you don’t have the information about the currency
itself you could find that you make mistakes in trading that could be avoided
with a little research!
Now finally, one of the most important things to
address when learning forex trading is the managing of risk and emotions.
Imagine yourself needing to make an important decision under two different
conditions:
If you’re like Bill, you’re more likely to
consider all of the options available to you while being able
to assess all of the risks associated with your trade. However, if you’re like
Bob, then you’re far more likely to make
mistakes which could be costly to your strategy and account
balance. Manage your emotions… Be like Bill. DON’T be like
Bob!
To ensure that you’re able to be like Bill, you should approach
trading with logic rather than excitement, fear or greed. If you’re feeling
emotional towards your trading, stop, evaluate why you’re about to trade and
then try to regain an objective mindset.
Examples of Forex Strategies
When you’re getting down to the nitty gritty of choosing a Forex trading strategy, its crucial to understand the best ways to choose one. There’s three main parts you should consider:
Time Frame
Trading Opportunity Frequency
The next question you should be asking yourself is "how many times
do I want to be opening and closing trades?" If you’re looking to be opening a
larger number of trades, then you would likely be more suited to scalping where
you’ll be opening a higher frequency of small trades.
Some traders
however will be spending a huge deal of time on their analysis of economic data
and macroeconomic reports. This will be enriching their fundamental analysis
approach; however, they’ll likely spend less time analysing the charts. If
you’re going to take this approach, then perhaps a trading strategy using longer
time frames and larger positions would be more suited to you.
Position Size
The last, and debatably the most important question you’ll be asking
yourself is "how big do I want my trades to be?"
At this point of
deciding what strategy to use, you’ll need to have an understanding of the risk
that you would like to take while trading. Larger trades tend to lead to bigger
risks and possibly bigger losses. To make sure that you’re able to manage your
risk effectively you’ll need to work out how much risk you want for each trade.
Some traders tend to have a 1% risk limit on each trade, meaning that they are
only willing to risk up to 1% of their account on a single trade.
For
example, you’ve got $10,000 in your account. Should you set yourself a risk
limit of 1%, then you’re only going to be opening trades of $100 each time. By
general rule of thumb, if you’re going to be opening fewer trades, then the
position size should be larger and vice-versa.
Now you’re caught up with
how to decide what trading strategy you’d like to use, let’s go through some of
the common strategies used.
Day Trading
As the name implies, forex day trading is strictly conducted within
the same trading day. This means that all the positions you open will be closed
before the market does at the end of that day. The timeframes that traders tend
to use will range from really short term (within minutes) or over the course of
a few hours.
The types of traders that conduct forex day trading
generally tend to focus on news related events. For example, they’ll keep an eye
out for economic releases like interest rates, GDP releases, upcoming elections
and other events that are likely to have a big impact on the market.
As a
general rule of thumb, those that choose to use the forex day trading strategy
will look to open positions when the price breaks through the 8 period EMA in
the same direction as the trend. Their exit is usually decided upon by using a
1:1 risk/reward ratio.
- You’ll find a significant number of opportunities available.
- Median risk to reward ratio.
- You’ll need to invest more time into this strategy.
- You’ll need to hone your technical analysis skills.
Hedging Forex Strategy
This strategy is usually used in conjunction with other assets. So,
basically a trader would use forex to hedge against other positions in other
asset classes or for other forex positions. There’s 2 ways you can do
this.
1. A forex
trader effectively creates a 'hedge' where they protect a position they already
have from an undesired move in the market. What they will do is hold both a
'long' and 'short' position at the same time using the same currency pair. Also
known as the 'perfect hedge' this method effectively eliminates all risk from
the position while the hedge is active. So, when the market starts to move in
one direction and the trade is sure that it’ll continue along that path, they’ll
close the trade in the opposite direction.
2. In this method of hedging forex
positions, the trader will create a hedge that partially protects them from
undesirable movements in the market. Also known as an 'imperfect hedge', this
method requires the trader who is already 'long' in a currency pair trade to buy
put option contracts on the same instrument. This means that they’ll eliminate
some of the risk using this hedging forex technique.
Scalping
Commonly used to explain the process of getting small profits from a
high frequency of small trades, scalping is a strategy conducted over very short
time frames. This can be does either manually or using an algorithmic program
like an expert advisor to do it automatically.
Generally scalpers operate
on time frames between 1 and 3 minutes. They’ll first aim to identify the market
trend using an indicator like the moving average. This will be done on a longer
time frame so that they’re more confident of the market direction. Then the
scalper will create support and resistance bands and then scalp within than
specific band.
Finally, the trader will then place stops a mere few pips
away to make sure they can protect themselves against large movements in the
market. They’ll then do this many times so that the small profits accumulated
from each trade will build up over the day.
The process we’ve examined
above can also be fully automated using an expert advisor which will not only
remove the emotional aspect of trading but will also likely be done at a much
higher speed. Enabling the scalper to acquire more profits over a short period
of time.
- You’ll have a huge number of trading opportunities available.
- You’ll need to work a lot with technical analysis and hone those skills.
- You’ll need to invest a lot of time into this strategy if you do it manually.
- You’ll have a much lower risk:reward ratio.
- A lot of the process can be automated which means you’ll have more time for your analysis.
Now, we’ve gone into a couple of strategies however, with all of the different instruments available to trade, different time frames and different styles, you’ll see that there are many different types of trading strategy available. In the graph below you can see some of the ones available and get more understanding of each individual method on our blog.
FAQs: Can you really make money trading Forex?
As a broker, we’re inclined to answer the question with a question. How
much time are you willing to dedicate to the cause? Trading forex can be
misrepresented as an easy way to make money. However, this is far from the truth. As
with most investments, you’ll need to have a clear understanding regarding how to
trade, what you’ll need to trade and where to do so.
We’re hoping that our
guide has given you some information regarding the above but, we know that in the
dynamic forex trading environment, you can always improve and learn more. So, if
you’re looking to expand your knowledge, we’d suggest that dedication and education
will be the most effective path to take to ensure that you’re aware of all the risks
of trading.
If you have any further questions please don’t hesitate to get in contact and chat
with someone on our team!
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