Basics of Foreign Exchange Trading

Foreign exchange currency trading is simple yet never easy. The number of people losing money is much more than people who succeeded. In fact, the rate of losing money is higher than making a very good profit or gain. However, foreign exchange trading or forex trading could give you very significant gains. Many people became so wealthy through trading. In fact, some earned hundreds or even thousands of dollars in a day.

Trading is not for everybody. It requires knowledge, experience, high risk tolerance, patience, discipline, and some element of luck to succeed. It takes years of trading to finally find a formula or trading plan that is right for you. Many people think that forex is like a magic wand or a wonder worker that could make them rich in an instant. This kind of mindset is a result of limited knowledge about the foreign exchange and is one of reasons why most people fail miserably.

The foreign exchange is all about balance in the currencies all over the world. When one currency rises, another one keeps the balance by going down. Fluctuations are inevitable in the forex, just like in stocks. These fluctuations are where you, as a trader, will earn (or lose). The premise is quite simple, you buy currencies that are most likely going to rise, and sell currencies that are most likely going to go down, either for profit or cutting your losses.

The forex is a very heavily traded market. In fact, it outnumbers the New York Stock Exchange, Tokyo Stock Exchange, and London Stock Exchange combined in average daily traded volumes. The forex averages $3.98 trillion daily, New York Stock Exchange with $74 billion, Tokyo Stock Exchange with $18 billion, and London Stock Exchange with $7 billion.

However, the staggering fact is that most of the profit in the $3.98 trillion traded daily goes to a small fraction of the traders. Most of the traders fail and lose. Imagine earning even just 0.5% of the whole traded volume? It’s all worth $19.9 billion. Wouldn’t you be so happy with that? In reality, it will take billions to earn that much in a day in the forex. But wouldn’t you be glad if you earned maybe just 20% more of your total equity in a day? It may not be in billions but it’s all worth it.

The key in successful trading in forex is simply knowing and doing the things that successful traders do. Here are some tips for you to follow in order to improve your trading turnover and avoid committing the mistakes most people do.

1.) Currencies move up when there are some positive news about a certain economy and go down with bad news. Knowing the factors that influence the economy of a particular currency is crucial in trading. This is popularly called fundamental analysis. Whether you are a day trader or an investor, everything boils down to fundamental analysis. Be keen on GDPs, GNPs, and other economic factors. Do research and if possible, get inside information from your broker. Normally, inside information comes in with fees but they are worth it. If you get the news first, you can do all the necessary actions before everybody else does putting you at a great edge. You get to buy early before a particular currency rises and sell before it reverses and takes a dip.

2.) Fundamental analysis is quite tedious so technical analysis is simpler. Technical analysis is studying and analyzing the price action and other indicators in a chart. Technical analysis believe that the market, be it forex, stocks, or other financial sectors, move in a particular pattern and could be calculated mathematically. Technical analysis however is just fundamental analysis reflected on a graph. Technical analysis does not provide any factors that affect a particular currency but gives you statistical information such as the trend. Most traders are technical analysts but it is ideal to be both technical and fundamental analyst.

3.) The unpredictability of the forex makes it very interesting. Analysis, be it technical or fundamental, are used just to predict the possible direction of a currency. Nothing is more important than the price action. There are cases where, despite the great fundamentals and technicals, a certain currency still went down. You earn or lose through price action, after all, it determines the value of your money.

4.) Money management is very important in trading. Even if you analyzed a certain currency well, you’d still struggle or even fail if you don’t have proper money management. The two simplest ways to manage your equity is by setting a target price if a currency goes up or setting a certain percentage or amount for cutting your losses. Having a good technical background can make you decide how much is your target and cut loss price is going to be. Panic, fear, and greed are three of the strongest emotions in trading. Most traders let their emotions control their decision thus end up losing. Experience is the only way to overcome such emotions and develop a good strategy. If you have a good game plan, you are less likely to be susceptible to your emotions. There is nothing wrong in losing a few bucks when you’re still starting out, just consider it as the price that you are going to pay in order to learn what does it really take to earn big and be successful in forex. Develop good money management habits by reading books and articles about risk management in forex or stocks and experiencing first hand what trading really is.

The potential that forex brings is enormous thus it requires investment of time, effort, and money in order to succeed. It is very important for you to know what you are doing when you trade. Forex goes far beyond the classic “buy low, sell high” concept. Learn what affects the price action and you’ll be ahead of the game.