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

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.

My interest with Forex trading grew as I learned more and more about it. e Internet is teeming with helpful resources for the uninitiated. ThTwo of the most important lessons that aspiring currency traders should understand is that of 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.

Forex Technical Analysis

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. It is also possible to create algorithms on them to automate trading. 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.

Forex Risk Management

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. Related to this rule is the use of stop loss orders which is basically an order placed with a broker to sell a security when it is already at a particular price. A stop-loss order is designed to limit an investor’s loss on a security position.

Another risk associated to the Forex market is that it is a highly leveraged market, which is ironically, also one of the reasons why many go into currency trade. This is because trading at a margin allows you to control a position for a significantly lower cash outlay, meaning you don’t have to be extremely rich to participate in the market. 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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