The international regulatory bodies allow you to trade most currencies for European and USA pairs at the market rates. Currency trading is all about taking a viewpoint with regards a currency pair based on some indicator or news event, if your viewpoint is correct you will make money.
Where the risk comes into play is knowing the time frame you are trading and having key stoploss exits and also when to take your profit. It is quite extraordinary the amount of money in USD terms traded through the forex arena on a daily basis, sitting in the wings waiting for an opportunity to make 50 pips – if you think you have the type of personality and patience that would suit this scenario, if you follow your trading plan and hone your skill set there is a lot of money to be made.
You must stick to your stoploss stoploss strategy properly to preserve your capital, this is in stark contrast to gambling. It is quite realistic to expect returns of anything between 6% – 10% per MONTH trading Forex.
Should you decide to trade trends you need to spot them by using things like ADX or some sort of moving average crossovers, the key is to have this in your trading template and to us them consistently..
So firstly need to decide if you are going to trade a trending market or you are going to trade the ranges when the currency pair is bouncing around with that particular range.
Second on your list of considerations is your buy point trigger. What will get you in to trade? Fundamentals or news driven aspects or indicators such as MACD etc?
The third is the stop-loss order; in essence, this says “Stop the trade if the price changes outside of the following band”. Given the automatic arbitrage systems, this is useful to minimize risks.
The forth aspect is all about when you take your profit assuming that the trades goes your way. How will you decide this? What basis will you use for taking the profit?
Last but no least we need to consider money management – how much of your total bankroll (%) are you going to place on each trade?
You also need to look at the volatility of the different time frames and decide as to whether you will trade as a position trader or a day trader or scalper.
Knowing when each market opens and closes will also be of benefit to you as you need to make sure you are not caught in a thinly traded market when bid and offer proces are wide and there is no liquidity. You’ll also want to keep well versed not just on financial news, but world events. Changes in oil prices, trade policies, union rules, even fashion trends, can foretell trends on how currency exchange rates will move.
Don’t cling to investments for patriotic or sentimental reasons; that’s the surest way to lose your shirt. It’s also important to diversify – take your profits out of commodity and currency exchanges and put them aside in something more stable, to minimize your risks.
I hope you get some idea as to the component parts of a good strategy, the key is to have all these parts in your trading plan BEFORE you even execute a single trade.
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