Forex Trading Tips & Strategies
With so many strategies available to pick from and hundreds of markets to choose from, knowing where to start as a beginner in the markets can be challenging.
As a trader, you need to pick the strategy that suits your preferences and style. There's little point in picking a strategy that requires you to watch the markets every hour if you're unlikely to be able to commit the time needed to do so.
To help you get started, we've included a selection of tips and strategies below.
For more information on strategies, please contact our Client Management team.
Top 5 tips for beginners
It can be slightly daunting placing that first trade when you're new to the markets. So, before you do, here's our top 5 tips for beginners to the markets:
- Know your market – understanding your market, how it moves and what factors influence price action is a crucial part of trading. You wouldn't drive blindfolded and you shouldn't trade blindfolded either.
- Have a trading plan – every trade must have a comprehensive trading plan attached that considers the rationale for entering a trade, the risk management and profit targets associated, as well as the key factors which could affect prices for the period you expect the trade to be live. A detailed trading plan can go some way to helping you avoid rash trading decisions based on impulse or emotion.
- Have a positive risk/reward ratio – a key part of successful trading is to generally only trade when you have a positive risk/reward ratio. For example, if you're aiming to profit $500 and risk $100, then you have a risk reward ratio of 5:1. Generally, most traders should aim to have a minimum 1:1 risk reward ratio.
- Be disciplined – trading can be hard on the emotions, particularly during periods of high market volatility. Sticking to your trading plan is the best way to stop yourself from acting on impulse.
- Expect losses – even the best traders get it wrong. Don’t let losing trades damage your confidence. Learning from them will help you plan your trades better in the future. To review the risk management tools that City Index offers, please click here.
Introduction to technical analysis
Technical analysis is a form of market analysis that looks at historical price action to help determine the likelihood of future price direction. In essence, traders look at how prices have behaved and, taking the assumption that history tends to repeat itself, use previous behaviour to predict how prices will react in the future.
For example, if the price of EUR/USD historically found support at $1.29 and rallied higher having hit near or at this level, technical analysis would highlight $1.29 as a key support level and this would convince them to buy EUR/USD when prices are at or next to this level.
There are hundreds of different tools that can help you analyse the markets on a technical level.
As a City Index client, the charts available via our trading platforms cater for a full range of technical analysis, regardless of your experience level.
Our Advantage Trader platform, for example, has over 100 technical analysis tools to help you to find the right strategy for your chosen market, time frame and trading plan.
As a technical analsyst, your aim is to utilise the different tools available - such as daily moving averages, MACD or RSI - to provide trading signals for:
- Trend – the current market bias; bullish, bearish, sideways (what direction the market is currently moving in)
- Momentum – the strength of the current trend
- Reversals – when a market trend reverses
- Divergences – when the price of a market and an indicator diverge in trend (move in opposite directions)
Introduction to fundamental analysis
Fundamental analysis is the comprehensive evaluation of a market to ascertain its prospective value and help the trader determine when a market is overvalued (which would indicate a sell opportunity) or undervalued (which would indicate a buy opportunity).
Whilst fundamental analysis might be more common in equity trading, FX fundamental analysts typically look at key factors that help them determine the relative strength or weakness of a currency - such as economic data, monetary policy, political factors and natural disasters.
For example, if US non-farm payrolls shows a bigger than expected jump in jobs, this could highlight that the US economy is stronger than anticipated and trigger a rally in the US dollar as a result. Equally, a move by the US Federal Reserve to taper its asset purchase programme quicker than expected could also boost the strength of the US dollar as it could be interpreted as a sign that the Fed is turning more hawkish.
These are the important factors that fundamental analysts look out for when assessing whether they should buy or sell a market.
Key fundamental factors
Here's a quick snapshot of the factors FX traders need to watch for when it comes to FX fundamentals:
- GDP – a key gauge of the strength of an economy
- Inflation – with most interest rates benchmarked against inflation, this could have a big bearing on the strength of a currency
- Interest rates – rate setting has a direct impact on currency rates
- International trade – If the demand for goods and services from a country increases, the demand for that country's currency will also increase to pay for those goods and services
- Politics – the political security and nature of a country directly affects market sentiment to its currency, particularly during times of political crises or elections
- Monetary policy – the monetary policy of central banks has a huge direct influence on the demand for currencies
- Natural disasters – disasters such as tsunami's and earthquakes can trigger supply shortages, structural devastation and an increase in insurance claims for those regions. This affects the demand for that country's currency as a result.
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