Thursday, February 25, 2021 / 04:00PM / Alex Scott /Header
Image Credit: Market Realist
Forex trading comprises the largest and most active investment market in the world. Countless traders conduct transactions each minute, moving trillions (in US dollars) each day. Naturally, all these traders are hoping to profit by buying and selling currencies against one another's values. But how can you expect to succeed in such a vast and competitive market?
First and foremost, you should recognize that success is not guaranteed. Forex is active and expansive, but difficult as well. Amateur traders without the proper education and experience are likely to take losses, barring significant luck. However, a careful approach based on sound strategy increases the likelihood of success. With that in mind, here are some tips for success in the market.
1. Use leverage
Leverage is defined by The Balance as "the ability to use something small to control something big." That is somewhat simplistic, but it is also a good way to boil down the concept. In forex trading, it essentially means that you can invest a relatively small sum, and trade with a multiple of that sum, to make your transactions go further. It's important to note that leverage can enhance both gains and losses. However, because forex trades are often made to capitalize on shifts in value that amount to fractions of a given unit of currency, leverage is almost necessary for those hoping to generate meaningful profits.
2. Determine Optimal Hours
One of the main points that is often brought up as a benefit to forex trading is that the market is open 24 hours a day, five days a week (whereas, say, stock exchanges have opening and closing hours). This is certainly convenient, and a nice perk for those who are maintaining forex accounts in odd hours. However, it's still best to determine the optimal hours for your own trading strategy, and for the currencies you trade most frequently. Even if the market is open 24 hours a day, you'll find that different currency pairs are traded more actively during some hours than others. These periods of time make for greater potential to profit.
3. Learn Currency Relationships
The entire forex market
is comprised of relationships between world currencies, which push and pull at
each other in a constant, complex frenzy of activity. To make the most of your
forex trading activity though, it's important to learn which currencies most
directly impact one another, and how the relationships tend to work. As an
example, a report on Reuters last month cited the recovery of the dollar
as a factor that had directly "hurt" the British pound. Thus, while any
currency in the forex market can be bought and sold against both the dollar and
the pound, it is implied that the dollar and pound are particularly closely
related. Identifying and observing these currency relationships is necessary to
gaining an understanding of the market.
4. Learn to Read Heat Maps
Learning currency relationships is one thing. But it is also a good idea to learn to recognize how a given currency is performing relative to the market at large. This can provide a better picture of the true strength of a given asset relative to other world currencies and economies. And the best way to get a quick sense of which currencies are strongest or weakest in this regard is via heat map. FXCM demonstrates how exactly this sort of tool works, in that it essentially showcases graphs depicting currency pairs' gains or losses (clearly marking them by blue and red bars, respectively). An elongated blue bar with a high percentage gain shows strong performance and can clearly be visualized alongside all other currency pairs of note to provide a broader market snapshot. This gives you a better sense of which assets are performing best and worst overall in forex.
5. Consider Using a Bot
You should also give some thought to using a bot, or automated trading program. In our piece on 'What No One Told You About How to Make a Million Dollars Trading Forex' we pointed out a number of the difficulties associated with this market. One of those difficulties is that often enough you're trading against high-tech bots that analyze and act on the market more quickly than any human trader. This is unfortunately a reality not just of forex but of trading markets in general these days. However, there are also bots and automated programs available to ordinary traders and using one can allow you to stay competitive. Generally, you can direct these programs to trade within your chosen parameters but allow them to do the minute-to-minute work of managing a forex account.
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