Essential Tools And Concepts To Be Familiar With When Trading In Forex

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While Forex trading is definitely not one of those get rich quick ventures, it is possible to earn a relatively stable income stream from it as one gain more experience and wisdom in trading. I was first introduced to Forex by a friend. I was apprehensive at first, knowing that the currency market is quite volatile considering the many socioeconomic and political variables that pull and push the supply and demand of a particular currency. My friend told me that while risk in Forex trading is an ever-present one, it is not unmanageable.

I became interested with Forex trading and read tutorials online. Two concepts that I think all traders should be able to grasp are fundamental and technical analysis. Having a good grasp of both schools of thought will allow you to make profitable trading decisions and avoid losses effectively. Fundamental analysis is performed in order to determine a currency’s intrinsic value by looking at economic reports.

Technical analysis in contrast does not measure the intrinsic value of a particular security but instead looks at charts which show past price and volume information in order to determine whether to buy or sell a particular currency pair.

Aside from charts and reports, there is another tool which currency traders make use of: electronic trading platforms. This application provides its users not only current and past market information but also allow trading directly from the charts. These platforms also provide portfolio management tools, and among its many features are giving the trader the ability to come up with algorithms which make automated trading possible. I own one myself, and the reason why I like this type of software is that it removes my sentiments from the equation thereby allowing me to make more profitable trades, and lower the likelihood of me lingering in positions which are losing.

One risk management style my friend taught me is the 2% rule. The primary goal of this rule is to reduce the likelihood of currency buyers or sellers becoming too emotional in their trades by limiting their risk per trade to two percent, meaning, if they already lost 2% of their trading capital in a day, they should short their position to avoid further losses. Once the trader has determined his risk per trade, he will set up stop loss orders to buy or sell a currency once it reaches a certain price.

The use of leverage while useful is also one of Forex market’s greatest risk magnifier. Then again, using leverage can magnify your earnings just as easily as it can wipe it out. In such regard, it needs to be employed with great care and foresight, and to only use it when market conditions are favorable.

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January 31, 2012 · Filed Under Currency Trading

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