Forex Trading Strategies: Frequently Asked Questions (FAQ)

 

When people hear the term “trading”, they typically picture stock traders working on Wall Street. However, while stock trading certainly plays an important role in many different trading strategies, this is really just the tip of the iceberg. In reality, there are countless different assets and commodities—including domestic and foreign currencies—that ordinary people can trade on a regular basis.

Interestingly, the forex trading market is actually the largest trading market in the world. On a daily basis, according to Bloomberg, the forex market can experience more than $6.6 trillion worth of transactions. This figure represents roughly one-third of the United States’ entire yearly gross domestic product (GDP). From a monetary perspective, forex trading experiences more activity than all other assets and commodities combined.

One of the reasons the forex market is able to operate at such a high level is through the use of leverage. With leverage, a trader can potentially access 100 times as much capital as they are currently holding. In other words, even if you only have $10,000 that you want to commit to forex trading, you can potentially execute a million-dollar trade—or even more.

Because this gargantuan market plays such a force in the global economy, many aspiring traders want to learn more about the forex market and learn more about developing a successful forex trading strategy. In this article, we will discuss answer a few of the most common questions that people have about becoming a successful forex trader.

What is Forex Trading?

Forex trading (also known as FX trading or, simply, forex) is a type of trading that involves exchanging one currency for another. The forex market is overwhelmingly the busiest financial market in a world. In fact, within a single day, more than $6 trillion worth of currency will exchange hands—this is more than a quarter of the United States’ gross domestic product for an entire year. Forex trading, contrary to the stock market operates continuously, 24 hours per day, seven days per week. 

How Does Forex Trading Work?

Forex trading works by trading currencies “against” each other, through the use of currency pairs. The entire trading process is based on relative values, meaning that a forex trader will try to speculate whether a currency is likely to experience a relative increase or a relative decrease in value over time. The most commonly traded currency pair is the American Dollar (USD) and the Euro (EUR). In the morning, a trader might buy $1,000 for the price of 910 EUR. By the end of the day, depending on which financial, economic, and other events unfolded, those same $1,000 might now be worth 920 EUR. The trader could then convert their wealth back into Euros and earn a 10 EUR profit.

When executed on a much larger scale, forex trading can be extremely profitable. One of the reasons this market operates at such high volumes, as suggested above, is the use of leverage. Even if a person only has $1,000, for example, but is able to secure a 1:100 leverage ratio (not uncommon), they can enter into positions as large as $100,000. Leverage is allowed because, while there is some movement during the day, stable currencies such as USD, EUR, and GBP will not experience the same dramatic swings one might find in the stock market.

What Are the Best Platforms for Forex Day Trading?

In general, the website Trading Strategy Guides is considered one of the most useful platforms for learning about the best forex trading strategies, along with other types of trading. As for actually trading the currencies themselves, TD Ameritrade is among the most popular platforms for Americans, especially because their platform makes it easy to trade other commodities as well. Elsewhere, you will likely find that FXCM, City Index, Forex.com, XTB, and CMC Markets are all very useful. 

Which Technical Indicators Do Forex Traders Use the Most?

One of the most important components of forex trading is technical analysis. By carefully analyzing data and paying attention to trends, it will be much easier to know when to enter into or exit out of various forex positions. Some of the most useful forex technical indicators include:

  • Bollinger Bands: these helpful bands make it easy to recognize where a currency pair’s range is and when current price trends are likely to reverse.
  • Moving Averages: these averages, which come in many forms, allow traders to identify when a trend is picking up momentum.
  • Relative Strength Index (RSI): the relative strength index can help determine not only which direction is a currency likely to be moving, but also, determine how strong the trend actually is.
  • Ichimoku Cloud: this complex graphic indicator uses five specific lines that can help traders gain a more comprehensive view of the forex marketplace.

Before developing any sort of long-term forex trading strategy, it is a good idea to practice by trading on paper. This way, you will be able to become comfortable with technical analysis without risking any of your current wealth. 

What are the Best Currency Pairs for Forex Trading?

In theory, any two currencies can potentially be included in a forex trading strategy. Some experience, risk-tolerant traders will actually prefer to trade in developing markets that typically have high levels of volatility. As you will find in all markets, if you want to earn higher returns, you will need to be willing to take more risks.

However, generally speaking, the forex marketplace is typically dominated by USD, EUR, JPY, GBP, CAD, AUD, CHF, and NZD. These are the world’s most stable, tradeable currencies—the vast majority of forex trading strategies will involve using any combination of these two. In 2019, it is estimated that 88 percent of all forex trades involved the USD in some way.

How Can I Develop an Effective Forex Trading Strategy?

In addition to technical analysis, a good forex trading strategy will also incorporate fundamental analysis. Reading the news, tracking the release of national figures, and understanding the connection between world events and currency values will help you to become a successful forex trader.

Combining technical analysis (and using multiple technical indicators), fundamental analysis, and—perhaps most importantly of all—experience and education will help you move one step closer to achieving your dreams as a forex trader. The marketplace itself is far from risk-free; but if you can be disciplined, alert, and willing to assume some risk, this massive market is one that can quite lucrative.

 

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