Due to its high liquidity and frequent price fluctuations, the foreign exchange market, or Forex for short, is popular with online traders. Trading platforms allow traders to buy or sell (otherwise known as going ‘long’ or ‘short’ on) one currency out of a pair. The changing exchange rate then determines the outcome of the bet, or trade. Brokers tend to make their money out of the difference in the buy and sell price they offer, which is called the spread. This means that they are not usually biased toward whether traders win or lose a bet, although occasionally brokers will take some opposing positions for further profit.
Trading takes place over differing timescales. Some traders choose to place larger trades over long periods of time, such as days or weeks. Others prefer to place smaller stakes and day trade, while scalpers risk less still over very short timescales. Day traders generally close each bet by the close of the market each day. Scalpers open bets lasting just minutes, or even seconds. Each type of trading aims to take advantage of current trends in the changing exchange rate. Price changes are usually larger over longer periods, and smaller over shorter ones. Shorter term trading requires more time and attention as well as quicker reaction times, so think about this before deciding which type of trading suits you.
Traders use different ways to decide when and where to place trades. This depends largely on whether the trader has a high-risk or low-risk mentality, and on how hands-on they want to be with the trading. Some methods are very technical, requiring more specialized knowledge than others, so the amount of time a trader is prepared to spend learning to trade is also important. Factor in these considerations when deciding how to trade.
Some traders use technical analysis to help them predict likely trades. This involves looking at the changing price structure within trading charts, or at technical indicators attached to these charts. Trading charts depict the way each currency pair is performing over time. Traders look for patterns in the prices structure, and/or at technical indicators which represent the changing market in different ways. Recognized price patterns and indicator readings highlight potential upcoming shifts in the market. Do plenty of research. Then design and use strategies based on your favorites.
Fundamental analysis looks at current overall market trends, news and trading discussions. Sometimes it is used alone, but it is a valuable tool in combination with technical analysis.
Traders who don’t enjoy trading, are risk-averse, or have little free time in which to trade sometimes use managed Forex accounts. Experts take commissions to do the trading. No trading method is guaranteed to be profitable, however. Look at past and current performance, and read reviews and forum discussions about these services.
Forex traders sometimes choose to use robots, otherwise known as expert advisors. These pieces of software use a predetermined strategy, along with programmed optional settings, to automatically place trades. They are relatively simple to install on most trading platforms and can be back tested over historical trading data. This does not necessarily mean that they will be profitable in future, however. Consistently successful robots are rare, so look into discussions on current performance before purchase.
Another way to trade the Forex is to use signal services, which tell you when and where to place trades. Some are free of charge while others charge a subscription fee. Providers that charge don’t necessarily perform better than free signal services. Trading strategies can also be bought online. It is debatable, however, whether truly successful traders would need to sell these kinds of products. Popular trading strategies can often be found free of charge online.
Arbitrage trading is very high tech and seeks to take advantage of slight differences in currency prices between brokers. Complex software buys and sells currencies rapidly at the different prices. The aim is to make lots of small, quick, guaranteed profits from these (usually very short term) price gaps. Unless you are tech savvy and know the market well, you will probably need to buy ready-made arbitrage trading software. Again, ongoing successful performance is never guaranteed.
Whatever trading method you decide to use, always do plenty of research before trading. Lots of marketed strategies and software applications are scams. Practice trading strategies and robots on demonstration accounts before going live. Many online brokers offer this facility for up to 30 days at least. Work out precise entry and exit strategies before entering each trade. Use stop-losses to avoid losing more money on each bet than you can afford. Stop-loss and take-profit points cut off a trade when price reaches a previously set point. Mini and micro Forex accounts are ideal for novice traders and small investors. These allow smaller stakes to be risked than in standard accounts. Never risk money that you can’t afford to lose and don’t risk more than 2% of your total capital on any one trade. Don’t forget that most traders lose money in their first year and very few are successful long term.