There are a lot of factors that determine a trader to become successful in Forex trading. In particular, these six tips are very important for you to become a good Forex trader.
There are a lot of factors that determine a trader to become successful in Forex trading. In particular, these six tips are very important for you to become a good Forex trader :
- Identify which trend to trade
- Always check the news
- Identify support and resistance level
- Use technical indicators
- Buy at dips and sell on rally (following the trend)
- Use proper money management
1. Identify which trend to trade
As a foreign exchange market (FOREX) trader, you will quickly get comfortable with the time intervals you find most appealing to your style of trading. While there is no specific time frame that works 100 percent of the time, I strongly recommend that you start with a long-term chart and work your way down to a short-term chart.
By analyzing a daily chart first, you will be able to determine the longterm trend. This long-term trend will be one of three trends — an upward, downward, or sideways trend. Determining a possible position trade on a daily chart will help you to look for specific indicators in shorter-time interval charts for entry time and price. If a daily chart does not show an upward or downward direction, you can work your way down to a 4Hour- or 60-minute chart. This follows the same pattern all the way down to superactive traders, who use minute charts for entry and exit signals.
Picking a trend is one of the first and most important decisions you will make after reviewing the long- and short-term trends and checking what announcements and market news are coming up in the near future. The trend is your friend holds true today as it has in the past and is the number 1 tool used in history. It is crucial to follow a trend and not anticipate one with an early entry. While studying charts and intervals, you may notice a possible trend reversal.
2. Always check the news
A good trading strategy is make sure that you are comfortable with the potential news if you plan to enter a trade before the news comes out. If you do decide to enter a trade prior to news being announced, make sure that you have your stops placed. Some news will affect the market very quickly and very drastically. Other events, such as wars, government elections, holidays, and even bad weather, may have significant impacts that may be unique to each currency pair in the FOREX.
Getting to know the behavior of currency pairs is very important. The EURUSD, for example, is related to the interest rate differential between the European Bank (ECB) and the Federal Reserve (FED). Also, Dollar strength can drive EURUSD lower. Such examples can be found on almost all major currencies, and owing to the differences in behavior of currency pairs, I recommend that you get to know several of them in depth and trade only those. Knowing how and why certain currency pairs act the way they do will give you insight and possibly increase your profits.
3. Identify support and resistance level
Support and resistance levels are very important to identify and use correctly. These levels are used not only to determine entry and exit prices but also in setting stop-loss and limit orders. Many trend reversals occur directly after a bounce off a major support or resistance price level. Properly identifying these price levels will help you to understand why a currency is changing trends. Many beginning traders ask why the currency changes trend just as they enter into it. Well, these support and resistance levels are a huge factor for these trend reversals.
4. Use technical indicators
A proper entry into a position is one of the most important parts of trading any market. By being able to use several charts and indicators, you will make better decisions for profitable trades. It is important to have indicators that show the same trends and to avoid entering a position where indicators show mixed signals. Look for a strong confirmation by a couple of indicators before you enter a position. As you look at long- or short-term trends, check the indicators such as the moving average convergence and divergence (MACD), the relative strength indicator (RSI), and the stochastic indicator for possible overbought or oversold signals. Even though the currency pair is strong one way or another and there may not be a support or resistance price level in the near future, the pair may be in an overbought or oversold condition, making a reversal a distinct possibility.
5. Buy at dips and sell on rally (following the trend)
While the market moves in trends, it has its small retracement trends. To maximize your potential profits, you should enter or add to your positions at dip bottoms or rally tops:
Buy at dip bottoms when price is in uptrend
Sell at rally tops when price is in downtrend
This will allow you to enter stop limits for a true trend reversal and avoid getting stopped out by a retracement. Resistance and support levels will help you with determining the retracements and possible entry points. The use of Fibonacci retracement tools will help you in calculating a buy or sell price and in determining the currency pair's retracement potential. I strongly advise you to look at the currency pair's trend history to determine what the retracement percentage usually is.
6. Use proper money management
The use of money management is the last step on your road to success—but perhaps the most important. Proper money management minimizes capital loss and maximizes profits. I cannot stress enough that the proper use of money management will be the ultimate tool and key in your success in the FOREX.
As I mentioned earlier, trading with sufficient capital is very important. This will allow you to stay in positions as they develop and not force you to take quick profits and losses. Be patient. Employ risk-to-reward ratios that will allow you to be profitable in the long run, even if you have several positions that did not have a profitable outcome. Follow the same rules each and every time, and accept your losses. Trading in FOREX or any other market with money you cannot afford to lose is never a wise idea. It will make you a nervous trader, and emotions will start running your trades. Last but not least, always use stop limits!
From the book Forex Made Easy:6 Ways To Trade Dollar by James Dicks, 2004.