The beauty of Forex is that anyone can learn to trade the largest financial market and turn their passion into a job for life. However, learning is not always easy. Newbies need to devote substantial time to preparation and demo trades. Choosing a strategy is another challenge — which system should you opt for and why?
The forex market has been accessed by individuals since the 1990s. Previously, only hedge funds, corporations, and banks were allowed to buy and sell currencies electronically. Over three decades, the trading community has devised a multitude of strategies, but none of them is universal. So, how should a beginner understand what is best for them?
Why You Need a Strategy
You cannot trade relying on your gut feeling. You need a rational and calculated process of decision-making based on objective criteria. Traders decide what currencies to buy or sell using fundamentals or technical indicators. Therefore, the first thing to learn about is the basics of both systems.
Fundamentals are factors like interest rates, GDP (more info), imports and exports, diplomacy, etc. These are economic and political events and changes that may affect the rates of different currencies. For example, someone trading USD/ZAR will pay attention to news related to the American economy and the financial system of South Africa.
To expedite this process, developers include features like economic calendars into their platforms and apps for trading. For example, when the Central Bank announces plans to raise the interest rate, you know that more foreign capital will flow into the country, and its currency will subsequently strengthen.
The second approach is based on patterns. Technical indicators are applied to price charts with different time frames. Analysts look at historical data to make conclusions about the future. When they see two factors pointing in the same direction — for example, a rise in prices supported by volume, they make their moves in the market.
All of this may sound daunting for a novice, but practice makes perfect. You do not have to limit yourself to either school of thought. Try using fundamentals and indicators in the demo mode, and see which method works for you. Finally, you could make use of copy trading while you learn. The system will delegate decisions to an expert who will invest a portion of your funds for a fee.
Overview of Strategies
A forex strategy might be classified as long-term or short-term, depending on the range of data you look at. You can learn about common forex strategy types on the ForexTime site.
Scalping is the most hectic approach. Traders dip in and out of the market, making frequent small trades throughout the day. Each position may last seconds or minutes. The goal is to collect profit from a string of modest trades.
Day traders open and close all of their positions within the same trading day. Their work turns into a full-time job. Before the opening bell, they carefully analyse information that may sway the market. Their trading action takes several hours. This system is hardly suitable for someone who can only devote a couple of hours a day to Forex.
On the other end of the spectrum, there is swing trading. It is a long-term approach focused on prolonged trends in the market. Traders do not need to monitor the situation every minute or hour — their positions may remain open for days or even weeks.
Thus, if you are currently employed full-time, swing trading may be a good start. As trades are so infrequent, though, you can only achieve high profit if you trade high volumes. This requires stringent risk management (like any other strategy).
Trends or Ranges?
Learn about trends and ranges. When a price moves within a range on the chart (between the resistance level at the top and the support level at the bottom), you can make predictions more easily. On the other hand, the profit potential is limited unless the changes are significant.
Those who trade trends look for prolonged movements supported by volume. When you ride a trend, you can make more money, but more patience is required. The market goes through trend and range phases, so you may need to wait before a strong movement occurs.
Importance of Demo Trades
No strategy is guaranteed to bring profit. Moreover, no method will make you a millionaire quickly. Find a framework fitting your personal needs, resources, and character. Keep a trading journal and note down details of every trade so you can review performance.
Until you are confident about your skillset, stay in the demo mode. Do not rush into the live market. Start small, hedge risks via Stop Loss, and focus on incremental growth, rather than abrupt jumps.