WITH the global economy on the back foot, forex is one of the hottest markets at the moment as it is possible to make a profit even when the overall trend is downwards. However, finding the right opportunities to enter the market without risking blowing your whole account in one go can be a tricky balance to achieve.
Opportunities in trading forex
Forex is a huge market and dwarfs any other kind of financial trade, with a volume of around $1.9 trillion every day. As you can imagine, with a global trade this massive, the number of opportunities being offered are countless. Googling anything to do with forex returns millions of results.
To start with, it is far easier to clarify what not to do and what forex will not bring. Despite the number of sites that claim to bring overnight riches and guaranteed returns, forex is not an immediate earner. To be truly successful in forex trading, you need to build up your knowledge over a period of time, researching, monitoring the market and practicing before risking a cent of your own money. There are many sites offering courses, which come at a hefty price, that suggest that you can bypass this and become very wealthy very quickly. Anything like this should be avoided as it implies a lack of knowledge about the market.
Once you have spent some time reading up on the subject and think you are ready to see how things work, it is time to find a broker. The best brokers to start with are free and offer their services at no charge. Finding a broker who has a platform that is easy to navigate around as well as providing a free simulation account are two of the most important features a novice should look for.
Strategy and trading tools
Identifying the right opportunity to enter the market is one of the key skills which need to be mastered to become profitable, as well as when to exit. Common questions which traders ask themselves are how low is low enough and how high is too high? Judging when the market is close to reaching its limit and is about to swing and getting in quick takes a while to learn.
However, one helpful facility that some brokers offer is the option to mirror their successful traders. This means that the positions of the top traders on the site are made public, which allows novices to either watch and learn, or copy their movements in the hope they will be profitable. There is no guarantee that the deal will bring a profit but it is the equivalent of having a experienced trader looking over the novice`s shoulder and whispering what they would do if they were trading. Some other brokers also offer the chance to opt in to expert advice. This involves being sent tips based on technical analysis and the trader can choose to either act on or ignore the information.
After a while, it will become much easier to identify the right entry and exit points and there is little substitute for experience. However, regardless of how experienced you become as a trader it is always essential to have a strategy to prevent becoming carried away in the heat of the moment.
Making good use of technical tools and charting analysis is an excellent way to enhance the possibility of earning a profit. The use of pivot points is becoming increasingly popular as a way to identify support and resistance levels and can be very helpful for those looking to reverse trade. Once a currency breaks through a pivot point, it generally can be expected to continue the trend until it reaches the next pivot.
There are many tools that are available to help predict future market movement and it can be easy to overload your charts. Most experienced traders suggest sticking to around three indicators, which is considered the optimum number to confirm the trend without blurring the picture.
No matter what strategy you work with, it is essential to keep risk to a minimum, as it is very easy to lose a lot of money on one losing position. This can do a lot of psychological damage and dent your confidence for future trades, but on a more practical level it can wipe out an account.
Stop losses are the obvious choice to minimize risk and both novices and experienced traders use these. This involves deciding in advance at what point you want to close the trade and accept any losses that you have incurred. In the heat of the moment it can be very tempting to hold a position open in the hope that it will turn profitable but in reality all that happens is that the losses become devastating and the account is bankrupted. Very few traders have sufficient funds to hold out until the market turns. By setting a stop loss before opening a position, as soon as the market reaches your predetermined point, the trade will be closed, saving you from a big loss.
But managing risk is not all about knowing when to cut your losses. It also involves taking profits at the right level and not waiting too long. Holding out, hoping to gain a bit more leaves you vulnerable to a sudden retracement and losing everything you have earned, so keeping a winning position open is always a risky gambit. Again, deciding in advance what level you think would be acceptable and setting a stop loss to close your position at this point is a good move.
Trading with small lots may not sound particularly exciting but it will protect you from a wipeout. Keeping trades small to start with will allow you to slowly build up your balance while gaining experience. Even experienced traders do not recommend placing more than 2-5% of your available funds on a single trade.
The number of positions you open and what they are is another factor to consider. You may think that you are hedging your risk by opening up different positions but if you are not careful you could end up doubling your exposure in the same direction. For example, if you chose to go short on GBP/USD and went long on USD/EUR, you are effectively going long on the USD twice, meaning that if the currency drops you are in for a heavy blow.
Currency trading is a world of opportunities and offers potential gains for everyone. The key to success is getting as much forex information as possible, patience and plenty of practice.