Currencies are traded in the foreign exchange market (forex) 24 hours x 7 days a week.
Forex, is the largest and the most liquid financial market in the world and the very size
of the market tends to reduce the possibility of market manipulation by a select group
of people. Hence, the foreign exchange market is loosely regulated by the Commodity
Futures Trading Commission (CFTC). Currency pairs are not traded in a
centralized
exchange but are traded between agreeable buyers and sellers in the over-the-counter
market (OTC).
Forex, is the largest and the most liquid financial market in the world and the very size
of the market tends to reduce the possibility of market manipulation by a select group
of people. Hence, the foreign exchange market is loosely regulated by the Commodity
Futures Trading Commission (CFTC). Currency pairs are not traded in a
centralized
exchange but are traded between agreeable buyers and sellers in the over-the-counter
market (OTC).
Currency Trading Tips
Using Leverage Wisely: Use of leverage is
encouraged in the foreign exchange market
since fluctuations in the price of a currency pair are typically fractions of a cent. The
maximum leverage that can be employed by a trader is calculated using the following
formula:
Maximum Leverage(Margin-Based Leverage)=Value of Transaction/Margin Requirement
For instance, if a person wants to control $100,000 worth of trade, he/she can borrow
the sum from the broker by depositing a small initial margin. Say, the margin
requirement is 2 percent of the total transaction value, the trader is expected to deposit
$2000. Thus, the trader's margin based leverage is 50:1. Using excessive leverage,
especially when one is unsure about the direction of the market, can land one in deep
trouble. Trading on margin is only advisable for people who have the capability of
interpreting forex signals or have reliable automatic forex trading robots.
Placing Stop and Limit Orders: Placing stop orders is useful from the perspective of
limiting losses and taking advantage of the potential upside breakout. Placing a limit
order allows people to enter a new position or to exit a current position at the specified
orbetter price. A limit order may never be executed because the market price may
quickly surpass the limit before the order can be executed. The term better is relative
to the natureof the limit order that is placed. A trader, who would like to sell a currency
pair, places a limitsell order at a price above the current market price to book profits;
while a trader, who would like to buy, sets a limit price below the current price. In the
first case, the sell-stop order should be placed below the current market price to
attempt to cap the loss on the position while in the second case a buy-stop order
should be placed at a level above the current price. These are useful currency trading
strategies.
Using Fundamental and Technical Analysis: Fundamental and Technical analysis are
different, although both are necessary from the perspective of gauging currency
movements.The former tries to determine fluctuations in the price of the currency by
assessing factors that have a direct bearing on the value of the currency; while the
latter relies on charts and graphs to effectively compare past trends and repetitive
patterns to predict fluctuations in value. The charts, that are used in technical
analysis, are Line Charts, Bar Charts and Candlestick Charts.
Line charts connect the opening and the closing price with a line while bar charts
use vertical bars to indicate the range of the currency for a given time period.
Candlestick charts give the opening price, the closing price, the highest price and
the lowest price with the help of a
vertical bar. If the closing price is less than the opening price, the vertical bar is
colored.
Understanding Chart Indicators: Understanding leading and lagging indicators is
critical from the perspective of being able to spot changes that may occur in the
movement of currency pairs. These are important currency trading basics.
Leading indicators help a trader spot a change where the previous trend has run its
course and the price is ready to change direction again. Lagging indicators provide an
indication of the possible changes in trend once the change is clearly visible. The latter
is meant to encourage people to move with the herd while the former is useful for a
trader who is adept at spotting reversals before they occur.
Although, leading indicators seem like a potential gold mine, they have the tendency of
misleading or giving wrong signals. Lagging indicators, on the other hand, rarely mislead.
However, the downside is that a person may lose the opportunity to make a huge kill
and may end up with a smaller chunk. The most common leading and lagging indicators
are Oscillators and Momentum indicators respectively.
Stochastic, Parabolic Stop and Reversal (SAR) and Relative Strength Index (RSI) are
examples of oscillators that used to determine overbought and oversold market
conditions.
For instance, in the case of Relative Strength Index (RSI), on a scale of 0 to 100, a
value below 20 indicates an oversold market while a value above 80 indicates an
overbought market. If a chart has been indicating oversold (or overbought) conditions,
for a certain length of time, one can expect an increase (or decrease) in the price of
the currency pair in future. The problem with the aforementioned leading indicators, is
that they may provide conflicting signals. In such a situation it would be best to ignore
the signal.
Momentum indicators are lagging indicators that generally give the right signal at the
expense of delayed entry. People have to choose between leading and lagging
indicators since the signals are generally conflicting.
Forex Robots: Forex trading requires the ability to interpret a number of chart
indicators needed for ensuring profitable forex trade. There are numerous forex signal
systems that have been designed by professional money managers. These systems have
been designed using past performance and trends to simulate results that may reflect
the actual trading environment. Both mechanical and automated forex currency trading
systems are available in the market. The latter does not require the presence of a trader
in order to execute trades while the former provides currency trading tips that are useful
for executing trades.
Automatic forex trading robots ensure round the clock trades
without any supervision and are thus effective in removing the human element from
trading. Fully automatic forex trading robots can help one dispense with forex brokers
who were previously required to manage accounts. However, one must remember that
past performance is not indicative of future results. So, a robot that works well during
back testing may not always yield the best results.
A good forex system should be constantly monitored in order to ensure improved and
optimized trade. The trading account should require less investment and initially, one
should be able to trade with a demo account. Forex robot systems should also have an
inbuilt loss protection mechanism since these systems are not foolproof. These robots
can be used by traders, brokers and institutional investors.
Advantages of Currency Trading
Increased Liquidity: As mentioned earlier, forex is the most liquid market in the world.
Increased liquidity ensures that the trades gets executed at the desired price.
Ability to Use Leverage: Increased use of leverage is permitted in the forex market
since price fluctuations are typically fractions of a cent. People are allowed to start
trading with very little money in their account and are encouraged to control an
extensive sum of money in lieu of an initial margin requirement.
Increased Profitability: The ability to employ leverage results in increased
return on investment (ROI). Huge profits with a small up-front investment is one of
the benefits of forex trading. Moreover, traders are allowed to split their capital gains
to their advantage since regardless of the time of executing the trade, 40 percent of
the profits that accrue to the trader get taxed at the short term capital gains rate
while the remaining 60 percent is taxed at the lower long-term capital gains rates.
Guaranteed Stops: People are allowed to place both buy-stop orders and sell-stop
orders. The former allows the trader to buy the currency pair at a price that is set
above the current market price. The buy-stop order is triggered when the market price
touches or exceeds the buy-stop price. People place buy stop-orders when they would
like to trade the potential upside breakout.
Similarly, sell-stop orders can be placed to sell the currency pair at a price that is set
below the current price. The sell-stop order is triggered when the market price touches
or falls below the sell-stop price. These sell-stop orders are placed by traders in order
to limit their losses. These are also known as stop-loss orders.
Low/No Processing Fee: Many brokers do not charge extra fees for opening or
closing a trading account, for phone trading, for inactive accounts or for changing stop
or limit orders.
No Commissions: The absence of commission on forex trades is another benefit of
currency trading. This is because the spread between the bid/ask price is the
compensation for market makers.
Most businesses undertake currency hedging to prevent losses that accrue on
account of unfavorable exchange rate movements. For more on currency hedging one
may refer to the article, 'Currency Hedging by Importers'.
Hopefully, the above article on currency trading tips would have provided some insight
into the world of forex trading. One must remember that although an experienced forex
trader has the opportunity of reaping rich rewards but the chances of losing money,
especially when one is overly leveraged, cannot be ruled out.
(ArticlesBase SC #2526647)
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