Article: Profiting In An Uncertain Currency Market
written by Ejovi L. Efenure, CEO, www.InvesticsFX.com
The currency or forex market is an ocean of world currencies where wavelike
fluctuations in foreign exchange rates presents excellent opportunity for
financial profit.
Foreign exchange rates either move upwards or downwards depending on several
factors such as changes in interest rates, GDP, value of world stocks, oil prices, and
other economic and socio-political factors that influence the actions of buyers
and sellers in the forex market. Market outlook is never static, it is fraught
with either bullish or bearish sentiments derived from fundamental and technical analysis. There is, therefore, an element of
uncertainty as to which direction the change in the foreign exchange rates will
go. Correct speculation will result in profit for the trader while incorrect
speculation results in losses. The good side of the coin is that anyone worldwide can take advantage of
these price fluctuations by switching their possession of a given currency vis-a-vis
another and make a profit. This is what currency trading is all about - making money out of price
fluctuations.
However, the inherent zigzag motion of price movement makes forex trading a seriously
challenging business venture. The money used for trading is constantly at risk
of being lost due to price fluctuations. The ever-present challenge, therefore,
is that of realizing winning trades
whether you made a series of wins lately or not. To be successful in the
currency trading business, it is pertinent to make more winning trades than
losing ones. Thus, success implies the ability to be able to make sustainable
profits. In order to be successful, certain
factors must be taken into account by the forex trader as follows:
- Trade With Open Eyes:
Trading forex without knowing what's happening is like groping around in a dark room. News releases are the ingredients for gaining insight into the market. Following the economic calendar is not only useful for being in the know, but also useful for timing your trades. Forex Factory is one of the best sources for doing this. Each release of economic data with definite effect on the currency market is coloured either red or green. Red implies negative effect while green implies positive effect. - Use An Entry Rule:
Trading forex without an entry rule will result to more losing trades than winning ones and worse still will make you nervous and scared. A sound emotional state is necessary for continuity and success. Entry rules are usually based on technical analysis with moving averages topping the list of recommended indicators. MACD and Bollinger Bands are excellent technical tools based on moving averages. You can learn how to use them here. Those who trade based on news releases alone will end up nervous and scared traders. - Define Your Risk:
The goal of the forex trader is to grow his or her equity. Equity is defined as the difference between your account balance and real-time profit & loss. Equity cannot be less than zero and needs to be watched when trading. Maximum drawdown is the amount of loss a forex trading account can take before equity reaches zero. Thus, the best approach is to use a small percentage of your account balance to trade say 1-10% and define your risk as the maximum drawdown per open trade. A stop loss order would normally be used to effect this. Your maximum drawdown varies according to the amount of leverage available - 50:1=200pips, 100:1=100pips, 200:1=50pips and 400:1=25pips. - Use An Exit Rule:
The general idea when trading is to let your profits run and cut your losses short. This means that you should know at what point to exit the market. Drawing support/resistance trendlines are a must. You may also consider using trailing stop of 25pips if the feature is available. - Forecast The Trend:
The market outlook is a key information for profiting in the currency market. Never trade against the trend as the trend is your friend. Our web blog is a good place to look for free daily tradable FX market forecast for currency majors complete with support/resistance levels and performance tracking. - Risk Reduction:
Trading on a very high leverage such as the 400:1 requires a very high level of speculating accuracy because, the maximum drawdown on an open position is only 25 pips. The objective is to avoid hitting stop loss before any profit can be made and so, stop loss is usually set to 50 pips and above. This means that a leverage of 200:1 or smaller will make for more comfortable trading. Use a higher leverage only if you have gained sufficient experience. In any case, you should consider hedging whenever your losses are running high. This way, you can make a profit when price moves in either direction and prevent your equity from dropping further.
In conclusion, we see that while foreign exchange rates continue to fluctuate in
wavelike motion, the opportunity for profit in the forex market is ever present
with attendant challenges for success.
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