Many investors have considered getting involved in the foreign exchange markets at one point or another. These markets are commonly known as forex, and there is more money traded here than in any other market. With over $4 trillion in daily turnover, this is also the most liquid market in the world.
The first question many people have is how to start or how to approach investing or trading in the currency markets. As with most things in life, there is a smart way and a not so smart way to begin.
Many new traders just search online and find a forex broker or trading platform. After depositing some money, they take the plunge and start live trading. Most likely, such an approach will cost the entire account within a matter of months.
More sophisticated investors will take a smarter and more cautious approach. The recommended fashion is summarized like this:
- Demo trading
- Live test trading
- Live trading
Be prepared for setbacks
Another common question is how to overcome the huge failure rate in this type of market. It is important to keep in mind that around 95% of all currency traders (or investors) will fail.
The main reason for this high failure rate is that most people do not take things seriously enough. Each of the steps listed above should require at least a year. This amount of time will ensure that each investor has had enough time to start developing some experience with the markets. There is nothing worse than trading blind.
This is advice that any investor should take to heart regardless of the investment. It is very likely that any stock market will also lose money at some point, especially in the beginning. It is only after most investors have some time under their belts that things begin to turn around. Once again, it comes down to having solid experience.
There are a number of forex trading techniques and “systems” that can be used. These are easy enough to find after a few minutes worth of searching on the internet. Rather than just listing a specific technique or a number of different strategies, it is more important for an investor to understand what each system is trying to accomplish.
Step one—time frame
The first step is to decide how much time you want to devote to trading in the currency markets. Maybe this means choosing a time frame of 5, 15, or even 30 minutes. This is fine for those planning to devote a few (or more) hours a day to monitoring the markets. Longer time frames would be better for those who only want to turn on the computer once or twice a day.
Step two—trading tools
Most of the trading tools are technical indicators. While it is possible to just use charts that are found on any market oriented website, it is recommended to use an actual chart service. Pick one that has data updates at regular intervals. Someone spending a few hours a day would do well with real-time data. Traders who only want to look at end of the day data do not need this intensive a service.
Someone interested in trading currencies should be familiar with technical analysis and indicators. Some of the more commonly used indicators include:
- EMA (exponential moving average)
- SMA (simple moving average)
- Stochastic (fast, slow or full)
- MACD (moving average convergence divergence)
Even a simple indicator like a five-day EMA and 10-day EMA crossover can be a nice way to spot a trend reversal and a trading opportunity. The main point is to understand your tools and develop a functional strategy and system.
Step 3—choosing a currency pair
Each currency pair will have their own behavior. The GBP/USD is extremely active. Others, like EUR/JPY and EUR/GBP, are quite consistent and display steady trends. Each pair will likely be better suited to certain indicators, tools and different set ups and situations.
Another good idea for this step is to determine when the most active hours are for each of the currency pairs. This is a huge step. Taking the time while training to get this one right will go a long way towards giving a trader valuable experience.
Step 4—additional tools
This step is what really separates the winners from the losers. Here a trader decides to add a few more tools or indicators to the system. These will be used solely as confirmation after the initial signal or indicator has shown a potential trade set up.
One of the keys of this step is not to trap the system into over analysis. At the same time, having some sort of confirmation tool is needed. This will probably limit the number of actual trades; ideally, it will also make sure that confirmed trade set ups are even more likely to be successful.
Traders may have to consider indicators like RSI, Fibonacci or even other setting for currently used indicators.
Any investor interested in becoming involved in the currency markets should take care to thoroughly do their research and testing. There is no experience like real time invested. Starting out with a demo account before moving on to live testing and then to actual live trading is a sensible and logical approach. Traders should also use this time to carefully consider and test a potential system which works for them. This is the best way to approach currency trading and at the same time allow the highest possible chance of success.