How to trade currencies
Currency trading is one of the most prevalent topics in the world, where many see it as an alternative source of income under the disturbed conditions and the spread of unemployment. While others see it as an investment opportunity to earn an additional income. Pessimists see forex trading as a gamble and a way to steal money.
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Let’s be clear; Forex trading is already one of the most important ways to make profits, but not all traders are winners. There is a significant percentage of loss. There is no commerce in the world without profit or loss and the same goes for currency trading. In these markets, professionals have lost transaction, but in return, they maintain a higher percentage of winning transaction, that eventually provides them with a significant source of additional income.
Those who think about trading need to provide clear answers to some questions such as: How can currencies be traded? What is the best way to make profits? These and other questions will be clearly answered in this article.
How Can we Trade Currencies?
Currency trading, or Forex trading, is the process of selling and buying a currency for another. To some extent, it is quite similar to the transactions we make while dealing with exchange companies. However, the difference in Forex trading is that trading is done through online brokerage firms in a speculative manner.
When traders expect the value of one currency to rise, they buy. The profit, in this case, is the difference between the number of points at the time the deal was opened and its closing time. On the other hand, when they expect the value of one currency to decline, they sell the currency at a high price to earn a number of points after the price drops and its value decreases.
Therefore, traders need to have an account with one of the brokerage firms, which must be carefully selected according to a number of rules and bases including:
- The company should be reliable, accredited and licensed by international financial institutions, and has a set of strict safety standards to ensure protecting the traders’ money.
- The technology used for high-quality trading platforms should be without any technical errors or problems in executing the transactions. The withdrawal and deposit process should be as easy and safe as possible and should be done as soon as possible.
- The brokerage company should obtain liquidity from a number of the best suppliers of liquidity, to ensure the possibility of opening and closing transactions at any time without any problems. In addition, it is preferable that the commission obtained by the company is reasonable and does not affect the profit rate significantly.
Many brokerage firms offer additional services and advantages so traders should research, compare, and select the best firm that suits their needs.
What is the Second Step in Currency Trading after Choosing a Brokerage Firm?
As mentioned previously, online currency trading differs from buying and selling through exchange companies. In forex markets, the currency exchange rate changes over time. According to accurate scientific data, the EUR/USD fluctuates by 150 pips on a quiet day, and on the most volatile days the movements reaches about 300 pips during the day.
Therefore, before traders start trading, they must choose an appropriate strategy based on different analytical methods and then test them on a demo account to make sure that they are effective before moving to work on the real account.
What are the Trading Strategies in Forex Markets?
Trading strategies are techniques used by Forex traders to determine whether to buy or to sell a currency pair at any given time. Forex trading strategies can be based on a technical or fundamental analysis.
Depending on time frames (short-term to long-term), there are some trading strategies such as:
Scalping: Are short-term transactions, signals in such case are taken from 1 minute to 15-minutes chart timeframe, scalpers target a few pips and they choose “stop loss and take profit” orders to be small and close to the entry point.
Day trading: Transactions that are held for one day and closed before the end of the day, signals in such case are taken from 30 minutes to 1 hour chart timeframe.
Swing trading: Transactions that are held for several days, traders target more pips, signals in such case are taken from 4 hours to 1 day chart timeframe.
Forex trading strategies can be either manual; where transactions are executed by a trader, or automated; where transactions are executed by a forex robot. Manual systems require a trader to sit in front of a computer screen, looking for trading signals and deciding whether to buy or sell. Automated systems require a trader to develop an algorithm that finds trading signals and executes trades on its own. The latter system takes human emotion out of the equation and may improve performance.
A set of points should be taken into consideration when building a trading strategy:
- Selecting the Market: Traders must carefully determine what currency pairs they trade and become experts at reading those currency pairs.
- Position Sizing: Traders must carefully determine how large each position is to control the amount of risk taken in each individual transaction.
- Entry Points: Traders must develop rules governing when to enter a long or short transaction in a given currency pair.
- Exit Points: Traders must develop rules telling them when to exit a long or short transaction, as well as when to get out of a losing position.
After selecting the brokerage firm, building the trading strategy and testing its efficiency, the trader can move to a real account and start making profits, taking advantage of market movements.
What is the manin of Bullish and Bearish?
Depending on the nature of the trend, the market has two types:
Bullish market: is when a currency pair is trending in an upward manner, as people are buying it.
Bearish market: is when a currency pair is trending in a downward manner, as people are selling it.
There are many ways to determine if the market is bullish or bearish. Traders often use many technical indicators for this purpose. One of the most popular technical indicators used is “moving averages”. For instance, we can use a 200-day moving average to determine if the overall trend is up or down. When the overall slope of the moving average goes from lower left to upper; meaning that the market is in an uptrend. Of course, it works in the opposite direction as well.
One of the key advantages of forex trading is the chance it offers traders in both bull and bear markets. This is because forex trading is always done in pairs when one currency gets weak then the other gets strong. This allows traders to take advantage of rising and falling markets.
Is There a Certain Profit Rate in the Forex Market?
It is wrong to talk about a certain profit rate in Forex trading. This depends mainly on the traders’ diligence, their ability to accurately analyze the market, enter into the trend and thus execute successful trades. If the opposite happened; the trader did not properly analyze the market and entered the opposite direction of the transaction, it will certainly cause a loss in such situation.
Some traders may come out of the transactions with a profit while others may come out of them with a loss, but the good trader is the one who maintains a larger number of winning transactions. It should be noted that the profit ratio is commensurate with the capital. Therefore, it is unreasonable for a trader to invest in a small amount and at the same time ask for much higher profits. In such case, the only certain thing is that the loss will be the trader’s ally.
What is the Best Way to Trade?
There is nothing like “the ideal way to trade”, since currency trading is governed by many variables and methods of analysis and indicators, the way used by a trader may be suitable with the purpose of trading, and may not be suitable with the other. In the end, each trader is trying to achieve his goal using a certain strategy and according to a number of appropriate data.
What are The Common Mistakes in Which Traders Commit and How Can they Avoid them?
There are a lot of problems that many traders commit, which may cause bad results, we mention some of them:
- Start trading without possessing minimum experience and without using any of the known methods of analysis.
- Using a large leverage that does not fit the capital.
- Not to commit with predetermined profit and loss stop orders.
- Trying to pursue the trend and enter the largest number of transactions, and execute transactions also in times of bad mood.
- Start using a trading strategy without testing it and ensure its effectiveness and its ability to achieve good results. It is also wrong to enter the market in times of fluctuations and political and economic events.
Traders should take caution and avoid these problems. This depends mainly on owning great experience which enables them to trade in a professional way.