Survival Guide To Currency Trading
Currency trading or forex trading is an exciting and rewarding activity that no trader or speculator should leave out. It offers a liquid, fast moving market, the use of leverage and opportunity to trade global stories. Currency trading continues 24 hours a day so individuals can find a time segment to suit any lifestyle. That means that currency trading is suitable whether you trade full time or put in an additional activity while you take care of your full time profession.
Being the largest market, retail traders are pitted against the largest business and financial entities and some of the smartest brains. Coupled with the use of large levels of forex leverage (50 times in Singapore and up to as much as 800 times forex leverage offered by brokers elsewhere), trading in currencies can be a highly risky business. Therefore, early mistakes for the novice or aspiring trader can be expensive and can put one out of business right away.
In this article, I would like to present 10 essentials for the new trader. Consider them as the survival guide while you navigate unfamiliar territory. The rule is to stay in the game while you strengthen knowledge and expertise. This guide will help new currency traders eliminate mistakes that arise from lack of experience as well as personal complacency.
10 essential things to do for new forex traders
1. Investigate All You Can By Reading Up
There are plenty of literature both in print as well as the Internet. While many titles that you pick up will actually carry a lot of information that overlaps, I always consider it worthwhile if it contains one paragraph that has insight not mentioned elsewhere.
2. Consult An Experienced Trader Or Trading Representative From A Brokerage Firm
Discussion with such persons provides structure to all the information that we have gathered through our reading. We ask for their help with the questions we have and as a two-way process, they jog our memories and test our understanding by asking us critical questions.
An experienced and caring professional can also interview you to understand your needs. By pointing to a suitable path based on their experience, they can help to save us a lot of trial and error.
3. Learn Technical Analysis
No one trades currencies without knowing technical analysis because it is really a game of managing support and resistance and knowing what the trend is. Now some readers may not like that sentence but let me make some observations.
Visit popular currency trading-related websites like DailyFX and CNBC and you will realize that there are always price charts and mention of support and resistance of currency pairs. Now you need technical analysis knowledge to be able to analyze those and that means if you ignore technical analysis, you miss out half of the input.
4. Get A Good Charting Software And Price Data
We can really get good ones provided by trading brokerages if we use their trading platform. Not all brokerages provide price charts however and some provide charts that are inadequate.
What kind of charting software?
- Try to get one provided by the trading platform you are using.
- If your trading platform does not provide, there are plenty of free sophisticated software and free data for download and use so there is no reason to pay.
- They should include most technical studies and allow you to save your settings and lines.
- As currency trades Over-The-Counter and different trading spreads available, get a data source that quotes prices closest to the ones on your trading platform.
- Choose software that is not cumbersome. Good ones allow you to switch between price charts quickly and do not slow your computer down.
5. Learn To Analyze Market Fundamentals
Get acquainted with economic news and understand their implications to currencies. That said even readers who have good clear understanding of economics may not be able to fully comprehend their effects on currency movement.
That is because as retail traders, many of us do not receive enough information. In addition, the markets are forward looking, that is they anticipate and move ahead of events so that markets may not react anymore when news actually comes out.
I know of two types of traders who make use of news announcements: one to speculate and the other to avoid them.
The former speculates on the outcome of news announcements hoping that price will react decisively in a profitable direction. While it sounds like betting, some technique is involved. To be profitable in the long run, the speculator must follow some rules including limiting the downside risk of getting it wrong.
The other type of trader uses some type of strategy but does not want to be influenced by the news. Sudden movements are not welcome so no news is good news.
6. Get a good calendar
Whether you like to trade news or avoid them, a trading calendar is indispensable.
A good calendar has the following:
- Contains a comprehensive list of recurring events like FOMC (Federal Open Market Committee) meetings, interest rate announcements, options and futures expiry days.
- Include non-recurring events such speeches by influential persons in a timely manner.
- Include a simple legend or user guide that describes the importance of a piece of news to currency pairs, links to the source of the news and the exact time of announcement.
- Sophisticated calendars outdo the others by including some filtering function. They may also convert the time of news usually listed in GMT to local time.
7. Get A ‘Demo’ Trading Account That Lets You Trade Virtual Money
This is the place where we try out currency trading in a hands-on manner. After all we need to put our knowledge to application. At this stage, two things will cross your mind: what is a good demo platform and what do you do with it?
Some important features:
- You might try out a few accounts so the registration might as well be simple. You don’t want to give your personal particulars every time you sign up. Therefore your name, contact number and email address should suffice at this stage.
- A demo account must have the same functionalities as a cash trading account. Realism is important. This is where you prepare for your actual trading later.
- Get an account with sufficient time for trial. Consider how long you need to try and aim for that. Six months to a year is good. Take as long as you want to practice without pressure to using real funds.
What do you then?
- Make use of all the functions so that you can place orders fluidly and find information when you need.
- Currency trading is sophisticated and most platforms have more order functions than the stock account that we encounter locally. Know the risk management orders known as stops because you need to incorporate these into your trading.
- Many traders will recall silly mistakes like buying or selling a wrong currency pair or even placing a wrong quantity. Make such mistakes in your demo account and not the cash one.
8. Develop A Strategy Or Strategies On Your Demo Trading
Your strategies should make use of technical analysis or fundamental analysis or both. You should never be trading on someone else’s opinion because currencies is fluid and situations change rapidly.
A crucial aspect of currency trading is risk management and cutting loss. Due to the high levels of leverage at work, traders should never hang on to a losing position. Averaging is NO-NO.
Improve and refine your strategy until you win money consistently. You must fully understand the mechanics of success so that they can be duplicated. Reasons for failure must be avoided. Sometimes, you have to drop a strategy entirely and start all over.
9. Trade More
The more we trade, the more we learn. Situations continue to arise that challenge our knowledge. Gaps will appear and ‘truth’ suddenly becomes myth. Learn to recognize price setups and the events they associate with. Drill your trade execution based on the chosen strategy until you can carry them out reflexively
10. Select A Good Cash Trading Platform
Cash accounts should fit some criteria:
- Your funds should be kept separately from the broker’s so that if the brokerage goes bust, you should be able to get your money back.
- The brokerage should be regulated; brokers in Singapore should comply with MAS while overseas located brokers should comply with some form of regulation. Go to the Financial Institutions List on the MAS website to check if your selected brokerage in Singapore is regulated.
- Low trading spreads and minimum or no commission.
New traders should take note of an important fact: Brokerages offering currency trading in Singapore provide differentiation of services. The terms and conditions they offer can be varied and no one should take for granted that one broker is the same as the other. Make sure that you talk to a trading representative to discuss the finer points.
Summary: Start trading but start small. That’s because at this point emotions are involved. Make sure that you trade with disposable funds and follow a plan. After all, currency speculation is a really thoughtful activity.