5 Tips for Trading Forex
The forex market is the most popular financial market in the world, popular due to the liquidity of major forex pairs, as well as because it's a 24-hour market. Here are some tips to improve your forex trading experience:1. Be educated
Which currencies will you trade? If you are squeezing your trading in around a job, then choose a trading session that will work for you:
• The Asian trading session - opening at 0:00GMT and closing at 9:00GMT
• The London trading session - opening at 8:00GMT and closing at 17:00GMT
• The New York Trading session - opening at 13:00GMT and closing at 22:00GMT
Once you've chosen your forex trading session, which currency pairs will you choose? Generally Asia-Pacific currencies, like the JPY, AUD and NZD are active in the Asian trading session. European currencies are active in the London trading session, like GBP/CHF, GBP/JPY, GBP/USD, EUR/GBP and USD/CHF. And in the New York trading session, major forex pairs (paired with the USD) are more liquid, along with some European currencies due to the session overlap - AUD/USD, GBP/CHF, GBP/JPY, GBP/USD, USD/CHF and USD/CAD.
Although most of your forex education will come from trading experience, a trader should learn about the markets and economic factors that affect them, using the media and online resources, along with market updates than some forex providers have on their sites.
2. Make a plan
We've already discussed when you want to trade forex, and this will probably influence the currency pairs you choose to trade. So why are you trading, then?
Setting goals gives you a framework for your forex trading - not only are you more likely to achieve your goals if you clarify them, but if you have a specific goal for a trade you are also more likely to get out of trades with your profits before the markets turn, rather than greedily waiting for an extra pip.
Once you've defined your objectives, find a system and stick with it - take every trading entry, adjust every stop, and close every trade as the system says.
If you aren't sure about your trading system, being consistent is the best way to find out whether it works or doesn't. And, if it works, sticking to it will result in more consistent profits.
Your forex trading system should address:
• Trading rules for entering, adding to, and closing positions
• What to do if the internet connection, telephone or computer fails
• What you will do if you are unable to trade due to holidays or illness
• What percentage of your account you can afford to lose
• How to set orders for when the market opens
Once your plan is in action, keep records to monitor your success.
3. Reduce your risk
You should never risk more than 2% of your capital per fx trade - this means that even if you lose ten trades in a row you have still only lost 20% of your account. The more you lose on your trades, the more difficult it is to turn your situation around, so doesn't it make sense for you to just risk a small percentage per trade?
So if you had $1000 capital and you lost 2%, you would be left with $980. You would need to make back $20 to return to your original equity value, that's only 2.04% of $980. If you continued your streak of bad luck for ten trades, losing 20% or $200, you still only need to make back 25% to get back to your original equity value (200/800 x 100 = 25%).
This may seem like a lot, but imagine if you had lost $750, or 75%, on a single forex trade, you would only have $250 of your capital left, so would need to make a 300% return to get back on top (750/250 x 100 = 300%).
As you can see, the more you risk, the less likely you are to get it back.
4. Cut your losses
If you are just trading forex for an hour or so a day, then find a trading platform that allows you to set automatic stops. An automatic stop allows you to program your trade to exit automatically if the market turns against you to a certain degree, and it means you know your maximum losses if you can't be in front of your computer all day.
For example, if you bought the AUD/USD at 1.5789 with a stop loss at 50 pips, your stop is set at 1.5739. That means if the value of the AUD drops to that level, your trade will be automatically closed and you won't sustain any more losses.
Once you have a stop-loss, it is usually a good idea to stick to it, rather than moving it further and further away in hope that the market will shift in your favour. Some trades are winning trades, and other ones are losing trades. A good trader learns when to get out of losing trades, rather than desperately adding funds to the trade in the hope that it will turn around.
5. Protect your profits
As the forex markets are very liquid, your profits can turn into losses very quickly. Two methods of protecting your profits are using trailing stops, and trading in multiple lots, a lot being the number of contracts you buy in one transaction.
A trailing stop is when you create a stop that follows the forex market when it moves in your favour. So if we take the example from point 3, you bought the AUD/USD at 1.5789. Instead of having a stop loss at 50 pips, you could set a trailing stop at 50 pips, making your opening 1.5739. If the Australian dollar goes up to 1.6322, your stop will rise to 1.6272, meaning that even if the value of the AUD falls, you will still make a profit as your closing price is now set higher than your opening price.
Trading in multiple lots give you separate profit targets. If you place one at a conservative level, like 20 pips from your entry level, and the other one further away, you are more likely to make some profits than losing everything.
In conclusion
If you educate yourself, make a plan, reduce your risk, stop your losses and protect your profits, you are on the way to being a profitable forex trader.
Check out my blog Talking Forex - a beginner's guide to forex. Also, the site of my preferred forex provider has a lot of good information on forex and forex trading, including examples and FAQs.
I am not a financial adviser, and the information in this blog is just intended to inform and not advise. Please remember that forex is a leveraged product, so it's possible to lose more than your original investment. Forex trading might not suit everyone, so please ensure that you fully understand the risks involved with this type of trading.