How to trade Forex effectively
Here are the secrets to effective forex trading that will empower you, letting you master the forex market’s complexities. The forex market is the world’s largest market in terms of average daily trading dollar value, eclipsing the stock and bond markets. As a result, it offers traders several intrinsic advantages, including the highest leverage that may be availed of in any investment arena, n addition to the fact of there being market action every trading day. Not even once in a blue moon is there a forex markets trading day when “nothing happens.”
Forex trading is often celebrated as the last great investing frontier. A small investor with just a little bit of trading capital can actually make it ‘rags to riches’ in this one market. Moreover, it is also the most widely traded market by mammoth institutional investors, with billions of dollars in currency exchanges taking place globally every day.
Trading foreign exchange is easy. However, trading it well and producing consistent profits is hard to pull off.
Effective forex trading – daily pivot points are worth your attention
Paying attention to daily pivot points is vitally important if you’re a day trader. Still, it’s also important even if you’re more of a position trader, swing trader, or a specialist in trade long-term time frames. Why? For the simple fact that thousands of other traders watch pivot levels.
Effective forex trading – trading with an edge
The most successful traders only risk their money when an opportunity in the market presents them with an edge, something that magnifies the possibility of their initiated trade being successful.
Your edge or advantage can be anything, even something as plain as purchasing at a price level that has earlier shown itself as a level that offers not inconsiderable support for the market (or selling at a price level that you’ve earmarked as strong resistance).
You can enhance your edge – and your likelihood of success – by having several technical factors in your favour. For example, suppose the 10-period, 50-period, and 100-period moving average all converge at the same price level. In that case, that ought to render substantial support or resistance for a market, given that you’ll have traders’ actions who are basing their trading off any one of those moving averages all acting in unison.
A similar edge provided by congregating technical indicators arises when various indicators on multiple time frames offer support or resistance. An example of this may be the price coming close to the 50-period moving average on the 15-minute time frame at the same price level where it’s coming the 10-period moving average on the hourly or 4-hour chart.
Another instance of having multiple indicators in your favors is having the price hit an identified support or resistance level. Then, price action at that level indicates a potential market reversal by a candlestick formation such as a pin bar or doji.
Effective forex trading – preserving your capital
In forex trading, sidestepping large losses is more significant than making large profits. That may not sound quite sensible to you if you’re a novice, but it is nevertheless true. Winning forex trading is concerned with knowing how to preserve your capital.
Effective forex trading – placing stop-loss orders at reasonable price levels
This assumption may seem like only an element of conserving your trading capital in case your losing trade. It is definitely that, but it is also an important element in rendering forex trading effective.
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Many novice traders mistakenly believe that risk management implies nothing more than putting stop-loss orders very close to their trade entry point. Part of good money management indeed implies that you oughtn’t put on trades with stop-loss levels at such a great distance from your entry point that they render the trade an unfavourable risk/reward ratio. However, one factor that frequently contributes to lack of trading success is routinely running stop orders much too near your entry point, as proven by having the trade stopped out for a loss, only to subsequently see the market turn back in favour of the trade.
Yes, it’s important only to enter trades that permit you to place a stop-loss order near enough to the entry point to pre-empt suffering a catastrophic loss. But it’s also important to place stop orders at a reasonable price level, contingent upon your market analysis.
A reliable general rule of thumb on proper placement of stop-loss orders is that your stop should be placed a bit farther from a price that the market ought not to trade at if your market analysis is correct.
As an example, to help you better fathom this concept, consider the following two AUS/USD charts, which looks at the market price action on a random trading day (August 31, 2017). A trader observing the 5-minute chart below might have entered a buy order close to the 0.7890 price level . The latter is remarked by an up red arrow shown just above the medium-length blue candlestick that shows up just above the word “level” on the chart’s left-hand side . The same is also contingent upon the candlestick closing with the price above the two moving average (red and blue) lines plotted on the chart. The trader might also have opted to place a very close, markedly low-risk stop-loss order a tad bit below the recent lows close to the 0.7880 level, as indicated by the horizontal red line drawn on the chart.
Regrettably, the subsequent price movement (just left of the centre of the chart, to the right of the word “low”) would have stopped him out of the trade prior to there being a considerable price movement in his favour. The resulting loss would have been negligible, so to that extent, the trader can be considered to have practised good risk management. Nonetheless, as the price action chart’s right-hand side clearly shows, the price turned abruptly upward after the trade was stopped out. Were the trader hadn’t been stopped out, he would likely have realised a considerable profit.
It may seem at first glance that the stop-loss was placed at a reasonable level in being placed below recent lows that appeared to show some amount of support (just before the trade was triggered, several candlesticks in a row showed price holding above the 0.7880 level). But was that truly an appropriate place to put the stop-loss order? A scrutiny of the market’s price action as read on a higher time frame, the 4-hour chart, clearly discloses that the answer is not in the affirmative. Looking at the 4-hour chart shown below, it is abundantly clear that the price might have plummeted to as low as around the 0.7870 level (support area again shown by the horizontal red line drawn on the chart) sans the violation of a potential scenario of price moving higher. The price had plunged to around that 0.7870 level before finding buying support several times in the previous two weeks of trading.
Had the trader broadened his market analysis to observing support levels on the longer-term time frame rather than only on the 5-minute chart he was basing his trade on, then he could well have chosen to place his stop at the more well-grounded support level about 10 pips lower, below 0.7870. Yes, he would have been risking a tad bit more money on the trade, but still not any prohibitively large amount. As things panned out, he wouldn’t have undergone any loss at all. Rather than having been stopped out for approximately a 10-pip loss, he would have realised a nifty profit, with a good likelihood of the market moving even higher in his favour.
Placing stop-loss orders with acumen is one of the abilities that differentiate successful traders from coevals. They keep stops close enough to pre-empt severe suffering losses. Still, they also sidestep, placing stops so illogically close to the trade entry point that they end up being un-called for stopped out of a trade that would have sooner or later proved profitable.
Pithily, a good trader places stop-loss orders at a level that will shield his trading capital from sustaining extreme losses. A great trader does that while sidestepping the unsavory prospect of being unwarrantedly stopped out of a trade and thus missing out on a genuine profit opportunity.
Similar to other investment arenas, the forex market has its unique characteristics. To trade it profitably, a trader must learn these features through time, practice, and study.
Traders would do well to keep in mind the useful tips to effective forex trading per this guide:
- Pay attention to pivot levels
- Trade with an advantage
- Preserve your trading capital
- Refine your market analysis
- Place stops at smack-dab reasonable levels
Naturally, that isn’t all the trading wisdom there is to achieve regarding the forex market, but it’s a very credible start. If you keep these foundational principles of winning forex trading in mind, you will enjoy an irrefutable trading advantage.