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 EXPERT PANEL |
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Ask the Expert – Forex
5 essential things you need to know to boost profits trading forex
Brendan Gunn, Sales Manager, GFT
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Today's expert: Brendan Gunn, Sales Manager, GFT | Any time can be a good time for foreign currency traders, because they can seek profits in rising and falling markets. In the current market traders are seeing more opportunities than ever before, with big news and developments affecting currencies every day.
It’s a great time to make money – but also to lose it so the following tips can help increase your chances of making more profits than losses:
1. Know how to analyse the market
There are two types of analysis that help traders understand the environment they are trading in, which ultimately equips them to maximise their chances of success.
Fundamental analysis is examining the forces that make a currency move and understanding the key indictors that determine the strength of a country’s economy. These include:
- Interest rates – the dollar tends to move up when interest rates are rising;
- Global growth and demand for resources – demand for a country’s goods supports the currency;
- The economic cycle – a phase of strong growth tends to be followed by a phase of slow growth. Indicators include housing statistics, retail and automotive sales figures and employment levels;
- Budget trade deficits and surpluses – surpluses indicate growth and a rising currency; deficits indicate the opposite;
- Inflation – rising inflation tends to reduce the value of a currency.
Technical analysis is the process of identifying market patterns by examining charts of past price behaviour. This assists in determining points where the market may change direction and provides the basis on which most traders make their trading decisions. If you haven’t traded before you should study technical analysis in some detail. A book I recommend is Technical Analysis of Currency Markets by Boris Schlossberg. All reputable spot forex providers should provide access to a variety of charts.
2. Know when to cut your losses and when to let profits run
The key to successful trading is to ensure that you set levels/targets for profit and loss and stick to these level. This requires both discipline and a basic knowledge of the markets you are trading in, as well as the value of those currencies.
3. Know how to place a stop loss order
If you don’t set stops and limits, how will you ever be able to tear yourself away from your computer?
Automated trailing stops give you the opportunity to set one order that will help you to lock in profits and limit losses. They are most commonly used to protect an open position. You set the distance from the current quote that you’d like your stop to trail, and if the market moves in your anticipated direction, the stop order will automatically follow, or ‘trail,’ the market by your specified distance. If the market starts to turn in the opposite direction and moves the distance at which your stop was set to trail, your stop order will be filled.
4. Know the importance of a trading plan
Most people who lose money do so through lack of knowledge, poor discipline and no trading plan. Your trading plan should have the following essential elements:
- Trading objective – this may be a target return on risk capital or an expected percentage gain on winning trades;
- When to enter – this should be based on your study of technical analysis and chart patterns;
- Stop-losses – these are essential for risk management and should be studied closely to ensure you use them appropriately;
- When to exit – this is also a result of studying chart signals;
- Risk-management rules – designed to preserve your risk capital by limiting the amount you put at risk on any one trade;
- When to stay on the sidelines.
5. Know the risks
GFT asks its customers to acknowledge that trading spot forex is a high-risk activity. While this form of trading can be exhilarating and enables people to trade with less funds than required to invest in physical stocks, it is only for those who are fully aware of the risks. You need to constantly gather as much relevant knowledge as you can. You need tremendous self-discipline to set rules and limits for yourself and stick to them in rapidly changing markets. And you need the self-control to only risk what you can afford to lose.
Disclaimer: This article was written for informational purposes only, and is not intended to be used as advise. Trading is risky with or without the use of this information
Our panel of experts are available to answer any questions you have on products and strategies, or simply to explain a particular term. The team consists of experts on CFDs, Forex, Broking, Options, Warrants, Futures and ETFs.If you've got a question, you can post it at: Your 2 Cents, in the 'Ask the Expert' section.
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