Forex trading is the act of buying and selling currencies. Currencies are organised into pairs; if you think that one currency will rise against another, you can buy the pair or ‘go long’, and if you think it will fall, you can sell the pair or go short.
However, the risks of forex trading are high, so you need to be prepared for the worst.
1. Look at the charts
Forex trading charts are one of the most important tools traders use to make money. They allow them to identify trends in price movement and then predict when the market is likely to move.
Line charts are the simplest way to show prices for a particular period of time. They are made up of a series of vertical lines each representing a data point with the high, low and open price represented by horizontal shorter lines on each side of the vertical line.
Bar charts (also known as OHLC bars) are an upgraded version of the line chart that offers more information on each data point. It includes the open and close prices in addition to the high and low prices.
2. Look at the news
Forex trading based on the news is a common strategy that many traders use. It involves watching for key economic releases such as inflation and unemployment reports, business sentiment, production growth and survey results. This type of trading is often easier for novice traders to implement with currency pairs that include the US dollar as one of their currencies.
Major data releases have the potential to drastically move the market, especially in the moments immediately following release. It’s important for traders to have a well-defined strategy and to be ready for volatility. It is normal for spreads to widen when significant economic data comes out.
3. Look at the economic data
Traders follow economic indicators to make informed trading decisions. Some are coincident, confirming what has already happened; others predict what is likely to happen, known as leading economic indicators.
Labour market statistics, retail sales figures and inflation data are key market-movers. Traders also follow whisper numbers, which are unofficial projections that can amplify the impact of a release. Ultimately, traders aim to buy currencies they anticipate will increase in value or sell currencies that they believe will decrease in value. The more informed they are about a country’s economic conditions, the better their chances of making money. Ahead of each key release, traders review the latest forex market reports.
4. Look at the technical indicators
Technical indicators help traders identify ranging and trending environments in a currency’s price chart. Traders can then use them to find higher probability trades on their forex trading platform. These include moving averages, which can be simple or exponential (give more weight to recent numbers) and weighted moving averages (give each day in the lookback period equal importance).
Other popular forex trading indicators are Donchian channels, Bollinger bands (with upper, middle, and lower band), and the parabolic stop and reverse indicator. However, traders should avoid using too many technical indicators as they may conflict with each other and cause confusion. They should also be aware that these indicators do not predict future prices with certainty.
5. Look at the charts again
Forex trading is the process of buying and selling currencies. It is a global market that is open 24 hours a day, five days a week. The value of a currency is determined by the market, which is driven by economic, political, and geopolitical events. Forex traders make money by speculating on whether a currency will rise or fall in price. They do this by using leverage, which magnifies their profits but also increases their losses.
Traders use price charts to track the markets and identify opportunities for profit. There are several different types of price charts, but candlestick charts are the most common.