An introduction to Forex trading
Trading in Forex offers some of the best trading opportunities in the global financial landscape, and due to the liquidity of this market, participants can benefit from the tight spreads that are available.
Just like any other market, the way you choose to trade Forex will highly depend on your understanding of the market, the information you gain from research and analysis, and the specific objectives of your trading approach.
To make smart and informed trades, you must understand the factors that move the currency market, how it moves, its correlation to other markets that impact it as well as the key events and trends that trigger price movement.
We’ve compiled several ideas, trading strategies, and recommendations to assist you to build a thorough trading plan as you begin your journey in trading Forex.
Comprehending market correlation
Forex markets are swayed by several multi-dimensional influences and since currencies are fundamental in conducting global trade, executing financial transactions, and economic relations, there are several interlinked market correlations between Forex prices and different associated markets.
These interrelationships are based on the specific currency you select to buy or sell as various economies have different strengths. For instance, the value of the Australian dollar (AUD) and Canadian dollar (CAD) are heavily driven by commodity prices in their respective countries since a huge portion of their GDP is derived from mining activities as well as natural resources. In the same vein, the US dollar is highly linked to events on Wall Street, as this market contributes to and supports a high amount of revenue and growth.
Certainly, the effectiveness of your trading strategy will be highly influenced by your understanding of market correlations. Ensure that you conduct extensive research and put the effort in discerning why and how movements in other markets could affect your FX trades.
Speak to Forex Racer for expert advice.
Day trading
Due to a large number of global transactions in the FX market, and their respective sensitivity to different market correlations and events, there are plenty of opportunities for short term trades.
A Day Trading tactic may fit your approach to Forex trading if you focus on taking advantage of volatile markets in the short term – for several hours instead of some months or weeks.
Most of the time, day traders identify the prevailing market trend and read the current sentiment and then take an aligned trade position up to when resistance or support is hit. They exit their position once their profit target is achieved or when their stop loss is triggered.
Day trading is a very demanding Forex trading strategy and needs a deep understanding of your selected market and the corresponding correlations, adequate time to respond to the rapidly changing market, and a robust risk management framework to protect your capital.
If you settle on Day trading ensure that you utilise the best risk management systems such as Guaranteed Stop Losses to limit your exposure to volatility if the market moves against your position.
Taking advantage of resistance and support
A top trading approach for engaging in Forex trading is also a very straightforward one, understanding the main support and resistance levels in the market you’ve selected. Since currencies are relatively stable unless there is a major event, their prices move up and down within a certain range. Therefore, reaching a downside or upside target leads to a pause.
So what is support and resistance and how can they improve your Forex trading?
A support level is simply the lower price level at which a currency’s decline stops or its downward trend pauses or buying volume spikes up again. On the contrary, the resistance price level is the upper price point where the market sees the currency as overvalued which implies that there is the probability of a sell-off in the coming days or weeks.
The support and resistance levels can be used as part of your trading strategy to help you determine suitable prices to open or close positions.
We have several tools that you can apply to help you determine key resistance and support levels in a specific FX market. You can make use of price action indicators such as RSI, MACD, Bollinger Bands, introduce your preferred indicators, or utilize our drawing tools to identify key price levels to track.
Also, it may be valuable to create a modifiable Forex Watchlist to enable you to monitor several price movements in different FX pairs that you are keen on or that could affect the overall performance of your trading plan. These will help you better predict price movements in the underlying market.
