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How to approach the currency markets
Thursday 16 Feb 2017 Author: Tom Sieber

You have set up an account and are itching to start trading forex but first it is worth getting some answers to some common questions about the currency markets.

What strategy should I use?

This is the number one question for new traders and is the most difficult to answer. There is not one ‘silver bullet’ approach that will ensure that every trade is a winner. There are a couple of common mistakes that can help point you towards a strategy that fits your own personal style.

Don’t be too short term. Because of the volatility in the forex markets, many are tempted to try trading for a just few points of profit every time. This can initially prove fruitful but a trade that goes straight against you from the outset can very quickly wipe out any profit from previous trades. Looking for medium term opportunities, over a few days for example, can be better for your trading balance and means you do not have to be glued to a screen around the clock.

Currencies trend so don’t fight it. Trying to pick tops and bottoms in forex markets can be an expensive exercise. Use the trend to your advantage and make sure your trades are in the same direction. For example, following the US Presidential Election in 2016, the US dollar trended higher for many days. The pain free approach here was to hop on board, rather than second-guessing where it might end.

Stop losses are all important particularly as forex trades around the clock. Look for ‘big levels’ to place your stops beyond - for example the previous days high or low. Don’t get shaken out of a good trade because your stop loss was far too tight.

How can I track key announcements that could move prices?

There is plenty of newsflow that can drive the forex markets. What’s important can change depending on the current environment -but there are some staples that all forex traders should be aware of every month. These tend to be major economic announcements unemployment numbers and central bank interest rate decisions for example. Most decent trading platforms these days will have an economic calendar to help you see what is coming up for the week ahead. And many platforms will flash up the news release as soon as it is made public so you can always stay on top of what other traders are watching, and how it could move the market.

How can I find out more Information for the forex pairs I am watching?

Today we are spoilt for choice when it comes to financial news and some would say we actually have too much information, making it hard to sort what is relevant from just the noise.

One good source that can help give you a feel for current sentiment and what is really important for your particular forex pairs is the Bloomberg news website. It breaks its sections down by market type, so it is easy to delve deeper into the economics moving forex and remain abreast of what could happen to change trends. The Shares and sister MoneyAm sites are also worth a look.

The last few years have seen plenty of market commentary move onto social media and the usefulness of this should not be underestimated. The likes of Twitter can be a very powerful newsfeed, delivering breaking news and views as they happen. It can take some time to follow the right people, but it is well worth the effort to help build your own tailored news feed of what’s important for your trading.

How quickly will I be profitable?

Too many people approach trading as some sort of ‘get rich quick’ endeavour and it really is not. If it is something you have never done before, then you shouldn’t expect to be an expert straight away. You will get better if you stick at it, that’s why it’s important in the beginning to trade small. If you have a series of losses, you will have learnt some lessons along the way, just make sure you have adequate funds left in your trading account to put them into practice.

Keeping a diary is something that many experienced traders still do, writing down the reasons for the trade can help you identify if you have developed some bad habits along the way, and change them for future trades. It can be a steep learning curve but one that many find very rewarding.

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