When you are starting out as a forex trader it is important to understand all of the small steps you should take before deciding what to trade. Knowing when to buy or sell a currency may appear daunting at first, but there are some basic guidelines you can use to spot trading opportunities.
Firstly, you should review the previous day's market activity so that you know what the market sentiment was and how investors may be feeling now. Most traders rely on fundamental or technical analysis or a combination of the two for this.
You should focus on the pairs you are most interested in and see how they have behaved previously -- for example, check the high and low levels they hit, and the support and resistance levels they touched. You should also review yesterdays news in order to gauge the market sentiment. Pay special attention to unemployment and economic growth indicators as well as what matter most, interest rate decisions.
Secondly, you should check the economic calendar to see what news and announcements are planned for the day. Currency rates tend to react to economic reports as they are the main barometer of a country's economic health. Announcements from central banks and those relating to employment may provoke the most market volatility, so it is important to note the time of day for these scheduled releases and the currency pairs that may be most impacted.
You should also review the daily outlooks which summarise the day ahead and give indications of market sentiment.
Next it's important to check the stock market performance. For the past four years, price movement in most financial markets has been greatly influenced by equities. When stock markets fall, traders may liquidate positions in riskier assets and shift funds to less risky assets, seeking safe haven in currencies like the US dollar, Swiss franc, Japanese yen and gold.
Conversely, when stock markets rise, there is greater demand for riskier assets and higher yielding currencies like the Canadian, Australian and New Zealand dollars. One of the best starting points to determine whether to buy or sell a currency is to monitor economic and global news that contribute to risk sentiment.
Finally, you should review the Technical Analysis for the pairs you are interested in trading. Technical analysis usually starts with identification of chart patterns. There is a multitude of tools that can be used to interpret chart patterns, and easy-forex provides traders with free chart packages that can help spot technical buy and sell opportunities based on market price action.
Forex markets often move in identifiable long-term trends. Technical analysis can be used to spot a trading opportunity and help gauge if the trend for a particular pair may continue. A technical trader may look to the news to confirm the strength of his technical signal. If the news is positive and the technical signal is positive, it would give further confidence in the trade. Remember, the trend is your friend, and unless you are scalping the market, it is safer to trade in the direction of the trend.
Once you have completed your analysis, you are ready to trade! It's important that you ensure you trade with a predefined risk/reward ratio so you never risk more than you are prepared to lose. The ratio is calculated by dividing the amount of profit you expect - the reward - by the amount you stand to lose if the trade moves against you - the risk. A good risk/reward strategy should generally have a profit to loss target of 3 to 1, and the amount risked on a specific trade, known as the margin, should not exceed 3% of your total capital.
After you open your trade it is important that you continue to monitor its performance as well as what is going on in the market. It may be that the market moves and you want to amend your trade to match the latest market conditions. Remember, the forex market is very fast paced and volatile, and it's critical to ensure your investments are protected by predefined stop losses and take profits.
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