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Like most specialised industries, forex trading comes with its own jargon and set of terms. There are certain forex trading concepts you should be familiar with to understand the dynamics of this unique market, identify opportunities and trade successfully.
To understand what is forex, you may first need to open a demo account and understand the concept of currency exchange rates. The price of a currency is always quoted in terms of another currency. For instance, EUR/USD would be the price of a Euro expressed in terms of the US dollar. In other words, it represents the number of US dollars you can exchange for €1. If for example, the EUR/USD is 1.1749, it means €1 can be exchanged for US$1.1749.
The forex market offers significant opportunities to make profits. However, every opportunity is accompanied by a degree of risk. While risk cannot be completely removed, there are some risk management techniques that traders can use to hedge risks. These techniques are particularly important when using forex leverage.
Here are some risk management techniques that are commonly used in forex trading:
A stop-loss order is placed to minimise losses in the event the currency exchange market moves against you. The exchange rate of a currency pair moves up and down continuously throughout the day, even within a fraction of a second. It is unwise to exit a trade at the slightest drop in the exchange rate of your currency pair. However, if the rate drops below a certain point, you may choose to exit. With online forex trading, you can set the currency rate at which to exit the market well in advance. This is exactly what a stop-loss order allows you to do. Essentially, a stop-loss order acts as a safety net to minimise your losses.
When you open a position, or set a pending order, you can also specify the stop-loss price. If the forex market moves against you and the exchange rate reaches the low price you’ve specified, the trade is automatically closed, limiting your losses.
It’s easy to feel optimistic when the market is moving in your favour. However, in any form of currency trading, it’s important to make objective decisions, based on logic and discipline. A take-profit order can be considered as a predetermined exit strategy that comes into effect when the market moves in your favour.
Similar to a stop-loss order, a take-profit order is executed automatically at a price specified by you. The difference being, a take-profit order is executed at a currency rate better than the current market rate, while a stop-loss order automatically closes a trade at a currency rate worse than the current market rate. This means that your trade closes on a high if you are not at your desk and able to stop it before it falls.
Broadly speaking, there are two main forex trading strategies used to analyse the market and make trading decisions – Fundamental Analysis and Technical Analysis.
This forex trading strategy involves the study of news and economic results to predict future currency exchange rates. Changes in the political environment and the release of economic indicators have a direct and, to some extent, predictable impact on the value of a country’s currency. Forex traders must stay in touch with new developments in the political environment and look out for the release of economic indicators, such as changes in interest rates, inflation, unemployment and payroll data and sentiment indexes. Traders consult an economic calendar to stay up-to-date with the schedule of releases of various key economic indicators.
Forex trading for beginners and experts alike, involves the use of charts and graphs to identify patterns in price movements to predict future currency exchange rates. The underlying assumption in technical analysis is that prices move in repeated patterns. This method uses only historical price and volume data to detect the trend and forecast future price movements.
Foreign exchange rates fluctuate continuously and this may appear completely random at first glance. However, taking a series of highs and lows over time, it is possible to determine the overall direction in which a particular forex rate is headed. It is this overall direction that constitutes a trend.
This is important to understand when using charting techniques to identify trends and making price predictions.
Support level (or simply support) is the forex rate below which the currency pair has rarely fallen in the past. Identifying the support level is important for forex traders as it is the best place to enter a trade when the currency pair is on an uptrend.
Resistance level (or simply resistance) is the forex rate above which the currency pair has rarely gone above in the past. At this level, many forex traders would be looking to sell and take profit, restricting any further upward movement of the currency rate.
While identifying the support and resistance levels is important, it does not imply that the forex rate cannot breach these levels and will not move above or below them. There is no guarantee of this. It just means that this particular trading pair’s currency rate has historically had difficulty moving past these levels (falling below the support level or rising above the resistance level).
There are thousands of free and paid technical analysis tools, with varying degrees of complexity, to help traders analyse the forex market and predict future price movements. MetaTrader 4 comes preinstalled with 30 built-in indicators and offers more than 2,000 free custom indicators and around 700 paid ones.
Expert Advisors, or EAs, are programs that you can attach to various charts. They follow instructions you’ve given to execute a trade when some predetermined criteria have been met. An EA replicates your actions based on certain parameters and gives you the flexibility to simultaneously trade multiple currency pairs or continue to trade even when you’re not in front of your computer. Forex trading beginners should use EAs with caution and remember that wins are never guaranteed.
As a beginner in forex trading, how do you determine the price at which you should open a trade? While there are several forex trading strategies and techniques, it takes time to learn them and use them effectively. Till then, you may choose to use free forex signals. These are recommendations made either by an expert or a program, or a combination of both. In fact, even experienced traders use paid and free forex signals, to support their own analysis.
Copy trading means copying the trades being placed by an expert trader or a group of trading professionals. You can view the performance of different experts or groups, spot the ones you wish to follow and allocate a portion of your funds for copy trading. This system is a simple and fast way to enter the forex market and allows beginners to capitalise on the experience of expert traders.
The best way to learn to trade forex is by practising. For this, you can open a demo account. This is a practice account that simulates a real trading account. The only difference is that you use virtual money instead of real money when trading. So, you neither make a profit when the market moves in your favour nor lose anything when the market moves against you.
Open a demo account to explore and experience the market, without risking your money. You gain access to the online forex trading platform, can check out the features and get comfortable using it. During the trial period, you can view live charts and quotes, use technical indicators to make predictions or learn copy trading and trade real time.
All you need to do to open a demo account is to fill in some basic details about yourself. When this account is created, it is already funded with virtual money and you can begin practising immediately. Remember that the trial period is limited, so you should make the most of it.
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