Posted by forex at 1:31 AM
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1. Learn to trade FX by understanding what moves major currency trends. Understand that fundamental analysis studies major trends of trading including balance of payments and balance of trade. Know that short term trading trends are a function of relative interest rates between countries.
2. Understand that FX is highly margined. Traders pay about 1% of the notational amount as initial margin. If margin is depleted when a trade sours you will be asked for margin maintenance (additional margin). Know that contracts roll over daily and this may result in higher margins and more fees if you hold a position overnight.
3. Enter and exit FX trades with technical analysis. Technical analysis uses price and volume data to estimate when securities will form profitable trends. Trade FX as both long and short trends. Know that profitability on short trends is usually not as profitable as long trades.
4. Know that FX trades in what is called pairs if the US dollar is part of the trade. Crosses are trades without the US dollar. Exotic trades involve emerging market currencies. Understand that FX trading is about the relative performance of currencies. FX means by going long, say, the Eurodollar/Yen pair you expect Eurodollars to rise faster than the yen does. Thus, you are trading the relative price of two currencies, not the currencies themselves. Know that trading occurs on a near continuous basis from Sunday evening until Friday evening across the world.
5. Trade FX without commissions. FX trades in increments of 1/32 of a point. This is called a pip. Pay no commission for each trade but you must pay the difference between the bid and asked also known as the spread. Trading when the spread is wide, say 4 pips or more, can be expensive and make otherwise profitable trades unprofitable. It is recommended that as soon as an order is placed and filled the trader immediately enters their sell price for the trade.
6. Trade FX for short term moves. Understand that while long term trends may develop there will be numerous pullbacks and testing of previous intermediate low prices. Because you are trading a relationship rather than owning a specific currency outright it is much harder to capture long term moves without substantial draw-downs to your invested capital.
7. Know that margin is permissible in FX trading. Do not margin positions unless you are already profitable in a trade and are willing to give back all your profits if the trade changes trend. Never go into a deficit position with a leveraged position. Use stops to close the position immediately if it turns negative.