Foreign exchange is a dynamic and demanding investment arena, where only a true comprehension of the intricacies and complexities of the market can make your capital grow every day. Of course there is no sure shot forex trading technique for success in the currency exchange market, however, here are some basic techniques to formulate a good trading strategy.
Calculate Your Risk Tolerance
As forex trading involves high risk, it is important to decide the kind of risk one will be able to tolerate and be comfortable with. The trading size can be calculated before making the investment and it is based on the risk tolerance and profit or loss targets. In forex trading, some currencies are more volatile than others and the more conservative traders follow money and risk management rules strictly, in order to avoid losses.
Follow the Trend
The current market trends give a good idea for all good forex trading systems. The investor should have a cognizance of moving averages and the government policies, in order to identify and follow trends. It is necessary to decide prudently the market you want to invest in. As the trading runs for 24 hours a day, it is not possible to monitor and trade in all the markets at all times. The European and US markets are the most liquid markets, but the profit made solely depends on the trading plan and strategies. Currency markets undergo huge trend changes when the fundamental consensus is extremely bullish or bearish.
Create Your Own Strategy
The most important of all the techniques is to create your own trading strategy. It is also necessary to keep on testing these strategies and making appropriate changes from time to time. Nowadays there is also a provision of demo accounts with the brokers, to test the trading strategy you have formed. If the strategy works, it is better to stick to it for sometime before the trend changes. Only constant research of the market and the changing policies can help an investor to come out with a profitable strategy. It is good to learn from previous mistakes and fine-tune your trading plan and strategy. As the investment and risk taking capability of investors differ by huge margins, there is no common and successful strategy for everyone.
Capital Preservation
It is important to preserve the capital when you trade in the forex market. It is not very prudent to trade more than 10% of your deposit, in a single trade, if you are not that capable of taking the risk. If the total capital is of $100,000, every trade should be limited to $10,000, in order to avoid a one time big loss.
Avoid Over-trading
Without sufficient backup, it is very risky to over-trade in the forex market. In an ideal scenario, you should hold not more than 3 to 5 positions at a time. In case of over-trading, investors generally tend to be out of control and make emotional decisions. Such situations usually occur when there is a change in market.
Before jumping head on into the forex market, an investor should remember that the two biggest emotions in trading are greed and fear. An investment should never be driven by any of these factors, as trading is a mechanical process, not meant for the emotional ones.
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