Posted by forex at 8:53 AM
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How to Beat the Forex Market
1. Know who you're up against. The majority of participants in the Forex market are speculators, ranging from small-time individuals with $2,000 accounts to multibillion-dollar investment funds, commodity trading advisers and banks. A third, often-overlooked category, is that of commercial hedge funds, which are composed of global manufacturers, importers, exporters and other global trade companies that use the Forex market to hedge their exposure to foreign markets. This gathering of different groups pursuing different interests in different ways ensures that there is always a lot of liquidity and volatility.
2. Thoroughly understand quotations and pricing. In Forex, curron encies are priced and traded against one another. When you're long on one currency, you're short on another. In a Forex price quote, the first currency listed denotes how much of the latter it can buy at that particular time. For instance, if the Euro/U.S. dollar (EUR/USD) is priced at 1.3050, it means that right now, one euro will purchase 1.3050 dollars. Or if the U.S. dollar/Japanese yen (USD/JPY) quotation is 100, that means $1 dollar will purchase 100 yen. Currencies are priced to the fourth decimal point, and a change in price at this level, for instance, 1.3050 to 1.3051, is called a pip, short for percentage in point. If the EUR/USD would move up from 1.3050 to 1.3150, it would have gone up 100 pips.
3. Understand leverage and unit size. Many retail Forex brokers will provide you with 100:1 leverage, meaning that for every $100 you risk, you only need to put up $1 of your own currency. This can be very advantageous, allowing you to make a lot with a little, but can also produce large losses, or even blow out your account if you aren't careful. Some brokers allow you to trade with customized unit sizes, while others force you to use a standard size called 'lots.' One lot is typically equal to $100,000, or 100,000 units of whatever currency you're trading, and with 100:1 margin you're required to put up $1,000 to buy one lot. If the position moves against you, you'll be required to put in progressively more capital until the position is closed or you run out of money. That's why trading with stop losses is imperative.
4. Determine your methodology for Forex trading. There are two principle schools of thought: fundamental analysis and technical analysis. Fundamental analysis looks at underlying macroeconomic factors that influence currency prices, such as GDP data, interest rate movements, inflation and trade balances. Technical analysis is focused on the price movements of a particular currency, which it seeks to use to determine where prices will most likely be headed in the future. Distill your approach into a simple, well-organized plan that you follow daily.
5. Pick the timeframe in which you want to trade. Decide whether you want to make long-term investments that will be held over many weeks or months or whether you'd prefer to trade on a shorter timescale, up to and including intraday. The shorter the timeframe in which you trade, the smaller your profits and losses will probably be, and the more frequently you'll be making transactions.
6. Decide which currencies you want to trade. The most popular pairs are the euro/U.S. dollar (EUR/USD), Great British pound/U.S. dollar (GBP/USD), U.S. dollar/Japanese yen (USD/JPY) and U.S. dollar/Swiss franc (USD/CHF). There are also numerous cross-pairs such as the Euro/pound (EUR/GBP) and pound/yen (GBP/JPY), which are not as heavily traded by the Forex community at large but offer some interesting opportunities nonetheless. You can even trade more exotic currencies such as the Mexican peso, South African rand or Norwegian krone, but be careful because these lack the liquidity of mainstream currencies. It's best to trade no more than three or four currencies at one time, primarily because there are different factors affecting each currency, and trading too many will dilute your focus and energy.
7. Master money management and position sizing. Before making any trade, set your stop loss and know how much capital you're going to lose if the trade hits your stop. Typically, you should risk no more than 5 percent of your account on any one position, and many experts recommend setting the risk level even lower to no more than 2.5 percent.