Six Steps to Improve Your Trading.
Whether you're new to Currency Trading or a seasoned trader, you can always improve your trading skills. Education is fundamental to successful trading. Here are six steps that will help hone your Currency trading skills.
Successful professional traders do three things that amateurs often forget. They plan a trading strategy, they follow the markets, and they diarize, track, and analyze each of their trades.
Plan How You Will Trade You may have heard the adage, "if you fail to plan, you plan to fail." This is particularly true in Forex speculation.
Successful traders start with a sound strategy and they stick to it at all times.
Choose the currency pairs that are right for you. Some currency pairs are volatile and move a lot intra-day. Some currency pairs are steady and make slow moves over longer time periods. Based on your risk parameters, decide which currency pairs are best suited to your trading strategy. Decide how long you plan to stay in a position. Based on your currency pair selection, plan how long you want to hold your positions: minutes, hours, or days. Remember that depending on your account type, having open positions at 5:00pm Eastern Time may incur rollover charges. Set your targets for the position. Before you take a position you should establish your exit strategy. If the position is a winner, at what rate will you cash out? If the position is a loser, at what rate will you cut your losses? Then, place your stops and limits accordingly.
Follow the Forex Market Use Forex charts and market analysis to monitor market information and technical levels that affect your positions.
Use Forex Charts Charts are an indispensable tool to improve trading returns. You can easily recoup the money spent on a charting package from a single well-placed trade based on the analysis from professional charts. Check out XE Charts. Please keep in mind that forex trading involves a high risk of loss, and no guarantee is made that the investment on the charting applications will be recouped. Market Analysis XE Market Analysis provides breaking currency news and in-depth analysis where the currency market is, where it's going, and why it's going there. You can access detailed market commentary and trading strategies from experienced Forex traders.
Keep a Forex Diary Most traders fail because they make the same mistakes over and over. A diary can help by keeping track of what works for you and what doesn't. Used consistently, a well-kept diary is your best friend. When keeping your diary, make sure that it contains at least the following: The date and time you took the position. The rate at which you took the position. The reason you took the position. Your strategy for the position. The date and time you exited the position. The rate at which you exited the position. Your profit/loss on the position. Why you exited the position. Did you follow you strategy?
Once you learn to recognize successful trading patterns, you will be able to spot them when they return.
In our experience, the most successful traders are not simply the ones who take the best positions. They are the ones that are smartest about risk management and disciplined in their strategy. They are never emotional about gains or losses. They set their profit target and loss limits for their positions, and use Limit Orders and Stop/Loss Orders to lock them in.
A limit order instructs the system to automatically exit a position when your target profit has been achieved. This enables you to "lock in" your desired profit on a winning position.
A stop/loss order instructs the system to automatically exit a position when your maximum loss limit has been hit. This enables you to cap your losses on a losing position.
Professional Traders use Limit Orders and Stop/Loss Orders as the cornerstone of a disciplined trading strategy. By setting both on all their positions, they have removed emotion from the equation and are letting the market work for them.
Amateurs, on the other hand, dont use Limit Orders and Stop/Loss Orders. They stay glued to their screens, trying to juggle all their positions in real time. They miss critical action points, and they let emotion rule their decisions.
Setting Limit and Stop/Loss Orders.
As a general rule of thumb, you your Stop/Loss Orders should be set closer to the opening position price than your Limit Orders. If you do this, then you can be successful while being right less than 50% of the time.
For example, if you use a 100 pip Limit Order with a 30 pip Stop/Loss Order on all your positions, then you only to be right 1/3 of the time to make a profit.
Where you place your Limit and Stop/Loss Orders will depend on your risk tolerance. However, you need to be smart when setting them. If a Stop/Loss Order is too close to the opening position price, it can be triggered by normal market volatility. This means that a temporary dip can knock out a position before it has a chance to retrace. Similarly, if a Limit Order is set too far from the opening price, potential profit may never be realized.
There are two basic approaches to analyzing the Forex market. It is important to understand how they can be used successfully.
Technical Analysis focuses on the study of price movements, using historical currency data to try to predict the direction of future prices. The premise is that all available market information is already reflected in the price of any currency, and that all you need to do is study price movements to make informed trading decisions.
The primary tools of Technical Analysis are charts. Charts are used to identify trends and patterns in an attempt to find profit opportunities. Those who follow this approach look for trending tendencies in the Forex markets, and say that the key to success is identifying such trends in their earliest stage of development.
What should I use - Technical or Fundamental Analysis?
Traders using Technical Analysis follow charts and trends, typically following a number currency pairs simultaneously. Traders using Fundamental Analysis must sort through a great deal of market data, and so typically focus on only a few currency pairs. For this reason, many traders prefer Technical Analysis.
In addition, many traders choose Technical Analysis because they see strong trending tendencies in the Forex market. They look to master the fundamentals of Technical Analysis and apply them to numerous time frames and currency pairs.
Technical Analysis uses charts to try to forecast future currency prices by studying past market movements. Using this technique, a trader has the ability to simultaneously monitor multiple currency pairs by evaluating how others are trading a particular currency. In our experience, because so many traders use technical analysis, and their reaction to market activity tends to be similar, the validity of this technique is strengthened. It becomes a self-fulfilling prophecy that feeds on itself, increasing the reliability of the signals generated from this analysis.
Perhaps the most effective and therefore the most popular form of technical analyses is the use of "support" and "resistance". Support is the "floor" or lower boundary that a currency pair has trouble breaching. Resistance, on the other hand, is simply the opposite: it is the upper boundary that a currency pair has trouble penetrating.
Support and Resistance are important in range bound markets because they indicate the boundaries where the market tends to change direction. When and if the market breaks through these boundaries, it is referred to as a "breakout" and is usually followed by increased market activity.
Using Support & Resistance.
We can use these support and resistance levels in many ways. A range trader would want to buy above support and sell below resistance while breakout. Trend traders, on the other hand, would buy when the price breaks above a level of resistance and sell when it breaks below support.
The concept is still the same as we stated earlier. We want to buy a currency pair if we anticipate the market moving up and then sell it at higher price. We can also sell a currency pair if we anticipate the market moving down and then buy it at a lower price.
Each currency has an overnight lending rate determined by that country's central bank. If inflation is deemed too high, a central bank may raise the interest rate to cool down the economy. Conversely, if economic activity is sluggish, a central bank may reduce interest rates to stimulate growth. Lower interest rates usually depreciate the value of a currency - in part, because it attracts carry-trades. A carry-trade is a strategy in which a trader sells a currency with a low interest rate and buys a currency with a high interest.
The unemployment rate is a key indicator of economic strength. If a country has a high unemployment rate, it means that the economy is not strong enough to provide people with jobs. This leads to a decline in the currency value.
These key international political events affect the foreign exchange market, as well as all other markets.
In May of 2005, there was growing anticipation that France would vote against accepting the European Union Constitution. Since France was vital to Europe's economic health (and the value of the Euro), traders sold the Euro and bought the dollar; this pushed the Euro down so far that many traders thought it couldn't go any lower.
But, they were wrong. When France actually voted against the constitution, the EUR/USD currency pair fell by more than 400 pips in three days. Traders who bought the Euro lost thousands. On the other hand, traders selling the Euro made thousands.
Many traders take shopping more seriously than trading. Few people would spend $500 without carefully researching and examining a product. But many traders take positions that cost them well over $500 based on little more than a hunch.
This cannot be stressed enough. Most traders fail because they lack discipline. Be sure that you have a plan in place before you start to trade. Your analysis should include the potential downside as well as the expected upside. So for every position you take, you should place both a Limit Order and a Stop/Loss Order.
Set Smart Trade Limits.
For each trade, choose a profit target that will let you make good money on the position without being unachievable. Choose a loss limit that is large enough to accommodate normal market fluctuations, but smaller than your profit target. Lock these in using Limit Orders and Stop/Loss Orders.
This simple concept is one of the most difficult to follow. Many traders abandon their predetermined plans on a whim, closing winning positions before their profit targets are reached because they grow nervous that the market will turn against them. But those same traders will hang on to losing positions well past their loss limits, hoping to somehow recover their losses.
Sometimes traders see their loss limits hit a few times, only to see the market go back in their favor once they are out. This can lead to mistaken belief that this will always keep happening, and that loss limits are counterproductive. Nothing could be further from the truth! Stop/Loss Orders are there to limit your losses.
No trader makes money on every trade. If you can get 5 trades out of 10 to be profitable, then you are doing well. How then do you make money with only half of your positions being winners? By setting smart trade limits. When you lose less on your losers than you make on your winners, you are profitable.
Don't Marry Your Trades.
People are emotional. It is easy to do objective analysis before taking a position. It is much harder when you've got money invested. Traders holding positions tend to analyze the market differently in the hope that it will move in a favorable direction, ignoring changing factors that may have turned against their original analysis. This is especially true when losses are being taken on a position. Traders tend to 'marry' a losing position, disregarding signs that point towards continued losses.
Don't Bet the Farm.
Do not over trade. A common mistake made by new traders is over-leveraging an account. Just because one lot (100,000 units) of currency only requires $1000 as a minimum margin deposit, it does not mean that a trader with $5000 in his account should be able to trade 5 lots. One lot is $100,000 and should be treated as a $100,000 investment and not the $1000 put up as margin. Most traders analyze the charts correctly and place sensible trades, yet they tend to over leverage themselves. As a consequence of this, they are often forced to exit a position at the wrong time. A good rule of thumb is to trade with 1-10 leverage or never use more than 10% of your account at any given time. Trading currencies is not easy (if it were, everyone would be a millionaire!).
Be aware that trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
Forex Trading Strategy.
What is a Forex Trading Strategy?
A forex trading strategy is a technique used by a forex trader to determine whether to buy or sell a currency pair at any given time.
Forex trading strategies can be based on technical analysis, or fundamental, news-based events. The trader's currency trading strategy is usually made up of trading signals that trigger buy or sell decisions. Forex trading strategies are available on the internet or may be developed by traders themselves.
Forex trading strategies are the use of specific trading techniques to generate profits from the purchase and sale of currency pairs in the forex market. Manual or automated tools are used to generate trading signals in forex trading strategies. Traders working on their own trading systems should backtest their strategies and paper trade them to ensure that they perform well before committing capital.
Forex Market Basics.
Basics of a Forex Trading Strategy.
Forex trading strategies can be either manual or automated methods for generating trading signals. Manual systems involve a trader sitting in front of a computer screen, looking for trading signals and interpreting whether to buy or sell. Automated systems involve a trader developing an algorithm that finds trading signals and executes trades on its own. The latter systems take human emotion out of the equation and may improve performance.
Traders should exercise caution when purchasing off-the-shelf forex trading strategies since it is difficult to verify their track record and many successful trading systems are kept secret.
Creating a Forex Trading Strategy.
Many forex traders start with a simple trading strategy. For example, they may notice that a specific currency pair tends to rebound from a particular support or resistance level. They may then decide to add other elements that improve the accuracy of these trading signals over time. For instance, they may require that the price rebound from a specific support level by a certain percentage or number of pips.
There are several different components to an effective forex trading strategy:
Selecting the Market : Traders must determine what currency pairs they trade and become experts at reading those currency pairs. Position Sizing : Traders must determine how large each position is to control for the amount of risk taken in each individual trade. Entry Points : Traders must develop rules governing when to enter a long or short position in a given currency pair. Exit Points : Traders must develop rules telling them when to exit a long or short position, as well as when to get out of a losing position. Trading Tactics : Traders should have set rules for how to buy and sell currency pairs, including selecting the right execution technologies.
Traders should consider developing trading systems in programs like MetaTrader that make it easy to automate rule-following. In addition, these applications let traders backtest trading strategies to see how they would have performed in the past.
When Is It Time to Change Strategies?
A forex trading strategy works really well when traders follow the rules. But just like anything else, one particular strategy may not always be a one-size-fits-all approach, so what works today may not necessarily work tomorrow. If a strategy isn't proving to be profitable and isn't producing the desired results, traders may consider the following before changing a game plan:
Matching risk management with trading style: If the risk vs. reward ratio isn't suitable, it may be cause to change strategies. Market conditions evolve: A trading strategy may depend on specific market trends, so if those change, a particular strategy may become obsolete. That could signal the need to make tweaks or modifications. Comprehension: If a trader doesn't quite understand the strategy, there's a good chance it won't work. If a problem comes up or a trader doesn't know the rules, the effectiveness of the strategy is lost.
Although change can be good, changing a forex trading strategy too often can be costly. If you modify your strategy too often, you could lose out.
Example of a Basic Forex Trading Strategy.
Chris is a novice trader. To get started, he calculates exponential moving averages for USD/JPY, a currency pair his research indicates will be profitable, to spot trends in the pair. Subsequently, he trades the pair at opportune times during the next few days to profit off its price changes.
You may have heard that maintaining your discipline is a key aspect of trading. While this is true, how can you ensure you enforce that discipline when you are in a trade? One way to help is to have a trading strategy that you can stick to. If it is well-reasoned and back-tested, you can be confident that you are using one of the successful Forex trading strategies. That confidence will make it easier to follow the rules of your strategy--therefore, to maintain your discipline.
A lot of the time when people talk about Forex strategies, they are talking about a specific trading method that is usually just one facet of a complete trading plan. A consistent Forex trading strategy provides advantageous entry signals, but it is also vital to consider:
Position sizing Risk management How to exit a trade.
Picking the Best Forex & CFD Strategy for You in 2020.
When it comes to clarifying what the best and most profitable Forex trading strategy is, there really is no single answer. Here's why. The best FX strategies will be suited to the individual. This means you need to consider your personality and work out the best Forex strategy to suit you. What may work very nicely for someone else may be a disaster for you.
Conversely, a strategy that has been discounted by others may turn out to be right for you. Therefore, experimentation may be required to discover the Forex trading strategies that work. Vice versa, it can remove those that don't work for you. One of the key aspects to consider is a timeframe for your trading style.
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There are several types of trading styles (featured below) from short time-frames to long, and these have been widely used during previous years, and still remain to be a popular choice from the list of best Forex trading strategies in 2020. The best forex traders always remain aware of the different styles and strategies in their search for how to trade forex successfully, so that they can choose the right one, based on the current market conditions.
Scalping - These are very short-lived trades, possibly held just for just a few minutes. A scalper seeks to quickly beat the b >
50-Pips a Day Forex Strategy.
This strategy leverages early market moves of certain highly liquid currency pairs. The GBPUSD and EURUSD currency pairs are some of the best currencies to trade using this particular strategy. After the 7am GMT candlestick closes, traders place two positions or two opposite pending orders. When one of them gets activated by price movements, the other position is automatically cancelled.
The profit target is set at 50 pips, and the stop-loss order is placed anywhere between 5 and 10 pips above or below the 7am GMT candlestick, after its formation. This is implemented to manage risk. After these conditions are set, it is now up to the market to take over the rest. Day Trading and Scalping are both short-term trading strategies. However, remember that shorter term implies greater risk, so it is essential to ensure effective risk management.
Forex Daily Charts Strategy.
The best forex traders swear by daily charts over more short-term strategies. Compared to the forex 1-hour trading strategy, or even those with lower time-frames, there is less market noise involved with daily charts. Such charts can give you over 100 pips a day due to their longer timeframe, which has the potential to result in some of the best forex trades.
The trade signals are more reliable, and the potential for profit is much greater. Traders also don't need to be concerned about daily news and random price fluctuations. The method is based on 3 main principles:
Locating the trend : Markets trend and consolidate, and this process repeats in cycles. The first principle of this style is to find the long drawn out moves within the forex markets. One way to identify forex trends is by studying 180 periods worth of forex data. Identifying the swing highs and lows will be the next step. By referencing this price data on the current charts, you will be able to identify the market direction. Stay focused : This requires patience, and you will have to get rid of the urge to get into the market right away. You need to stay out and preserve your capital for a bigger opportunity. Less leverage and larger stop losses : Be aware of the large intraday swings in the market. Using larger stops, however, doesn't mean putting large amounts of capital at risk.
While there are plenty of trading strategy guides available for professional FX traders, the best forex strategy for consistent profits can only be achieved through extensive practice. Here are some more strategies that you can try:
Forex 1-Hour Trading Strategy.
You can take advantage of the 60-minute time frame in this strategy. The easiest currency pairs to trade using this strategy are the EUR/USD, USD/JPY, GBP/USD, and the AUD/USD. You would need a 100-pip momentum indicator and indicator arrows; both of which are available on MetaTrader 4.
Buy Trade Rules :
You can enter a long position when both of these conditions are met:
The 100 pips Momentum indicator triggers a buy signal when its blue line crosses the red line from below The Indicator arrow gives a green arrow signal.
In this case, you can place the stop-loss below the red indicator line or the most recent support line. You can either close the trade after 30-pips, or you can also take profit when the indicator arrows give a red arrow signal.
Sell Trade Rules :
You can enter a short position when the following conditions are met:
The 100 pips Momentum indicator triggers a sell signal when its blue line crosses the red line from above The indicator arrows give a red arrow signal.
Place the stop-loss above the red-indicator line, or the most recent resistance line. Close the trade after 30-pips, or when the indicator arrows give a green arrow signal.
Forex Weekly Trading Strategy.
While many forex traders prefer intraday trading, because market volatility provides more opportunities for profits in narrower time-frames, forex weekly trading strategies can provide more flexibility and stability. A weekly candlestick provides extensive market information. It contains five daily candlesticks, and changes which reflect the actual market trends. Weekly forex trading strategies are based on lower position sizes and avoiding excessive risks.
For this strategy, we will use the Exponential Moving Average (EMA) indicator. The previous week's last daily candlestick has to be closed at a level above the EMA value. Now we have to look for the moment when the previous week's maximum level was broken. Next, a buy stop order is placed on the H4 closed candlestick, at the price level of the broken level.
The stop loss has to be placed at the nearest minimum point, somewhere between 50 and 105 pips. The previous extreme value is taken for calculations if the nearest minimum point is closer than 50 pips. Here the last week's movement range is taken as the profit range.
The Role of Price Action Trading in Forex Strategies.
To what extent fundamentals are used varies from trader to trader. At the same time, the best FX strategies invariably utilize action. This is also known as technical analysis. When it comes to technical currency trading strategies, there are two main styles: trend following, and counter-trend trading. Both of these FX trading strategies try to profit by recognising and exploiting price patterns.
When it comes to price patterns, the most important concepts include ones such as support and resistance. Put simply, these terms represent the tendency of a market to bounce back from previous lows and highs. Support is the market's tendency to rise from a previously established low. Resistance is the market's tendency to fall from a previously established high. This occurs because market participants tend to judge subsequent prices against recent highs and lows.
What happens when the market approaches recent lows? Put simply, buyers will be attracted to what they regard as cheap. What happens when the market approaches recent highs? Sellers will be attracted to what they view as either expensive, or a good place to lock in a profit. Therefore, recent highs and lows are the yardstick by which current prices are evaluated.
There is also a self-fulfilling aspect to support and resistance levels. This happens because market participants anticipate certain price action at these points and act accordingly. As a result, their actions can contribute to the market behaving as they had expected.
However, it's worth noting these three things:
Support and resistance levels do not present ironclad rules, they are simply a common consequence of the natural behaviour of market participants. Trend-following systems aim to profit from the times when support and resistance levels break down. Counter-trending styles of trading are the opposite of trend following--they aim to sell when there's a new high, and buy when there's a new low.
Trend-Following Forex Strategies.
Sometimes a market breaks out of a range, moving below the support or above the resistance to start a trend. How does this happen? When support breaks down and a market moves to new lows, buyers begin to hold off. This is because buyers are constantly noticing cheaper prices being established and want to wait for a bottom to be reached. At the same time, there will be traders who are selling in panic or simply being forced out of their positions.
The trend continues until the selling is depleted and belief starts to return to buyers when it is established that the prices will not decline further. Trend-following strategies encourage traders to buy on the markets once they have broken through resistance and sell markets, and when they have fallen through support levels.
In addition, trends can be dramatic and prolonged, too. Because of the magnitude of moves involved, this type of system has the potential to be the most successful Forex trading strategy. Trend-following systems use indicators to inform traders when a new trend may have begun, but there's no sure-fire way to know of course.
Here's the good news:
If the indicator can establish a time when there's an improved chance that a trend has begun, you are tilting the odds in your favour. The indication that a trend might be forming is called a breakout. A breakout is when the price moves beyond the highest high or the lowest low for a specified number of days. For example, a 20-day breakout to the upside is when the price goes above the highest high of the last 20 days.
Trend-following systems require a particular mindset, because of the long duration--during which time profits can disappear as the market swings--these trades can be more psychologically demanding. When markets are volatile, trends will tend to be more disguised and price swings will be greater. Therefore, a trend-following system is the best trading strategy for Forex markets that are quiet and trending.
A good example of a simple trend-following strategy is a Donchian Trend system. Donchian channels were invented by futures trader Richard Donchian, and are indicators of trends being established. The Donchian channel parameters can be tweaked as you see fit, but for this example we will look at a 20-day breakout.
Basically, a Donchian channel breakout suggests one of two things:
Buying if the price of a market goes above the high of the prior 20 days Selling if the price goes below the low of the prior 20 days.
There is an additional rule for trading when the market state is more favourable to the system. This rule is designed to filter out breakouts that go against the long-term trend. In short, you look at the 25-day moving average (MA) and the 300-day moving average. The direction of the shorter moving average determines the direction that is permitted. This rule states that you can only go:
Short if the 25-day moving average is lower than the 300-day moving average.
Long if the 25-day moving average is higher than the 300-day moving average.
Trades are exited in a similar way to entry, but only using a 10-day breakout. This means that if you open a long position and the market goes below the low of the prior 10 days, you might want to sell to exit the trade--and vice versa.
4-Hour Forex Trading Strategy.
One potentially beneficial and profitable Forex trading strategy is the 4-hour trend following strategy. However, the 4-hour timeframe makes it more suitable for swing traders. This strategy uses a 4-hour base chart to screen for potential trading signal locations. The 1-hour chart is used as the signal chart, to determine where the actual positions will be taken.
Always remember that the time-frame for the signal chart should be at least an hour lower than the base chart. Two sets of MA lines will be chosen. One will be the 34-period MA, while the other is the 55-period MA. To ascertain whether a trend is worth trading, the MA lines will need to relate to the price action.
In case of an uptrend, the conditions that will be fulfilled include:
The price will remain above the MA lines The 34-MA line will remain above the 55-MA line and continue to do so The MA lines will slope upwards for a maximum duration during an uptrend.
In case of a downtrend, the following conditions will be fulfilled:
Price action will remain below the two MA lines The 34-MA line will remain below the 55-MA line and continue to do so The MA lines will slope downwards for a maximum duration.
The MA lines will be a support zone during uptrends, and there will be resistance zones during downtrends. It is inside and around this zone that the best positions for the trend trading strategy can be found. Learn to trade step-by-step with our brand new educational course, Forex 101, featuring key insights from professional industry experts. Click the banner below to register for FREE!
Counter-Trend Forex Strategies.
Counter-trend strategies rely on the fact that most breakouts do not develop into long-term trends. Therefore, a trader using such a strategy seeks to gain an edge from the tendency of prices to bounce off previously established highs and lows. On paper, counter-trend strategies are the best Forex trading strategies for building confidence, because they have a high success ratio.
However, it's important to note that tight reins are needed on the risk management side. These Forex trade strategies rely on support and resistance levels holding. But there is also a risk of large downsides when these levels break down. Constant monitoring of the market is a good idea. The market state that best suits this type of strategy is stable and volatile. This sort of market environment offers healthy price swings that are constrained within a range. It's important to note that the market can switch states.
For example, a stable and quiet market might begin to trend, while remaining stable, then become volatile as the trend develops. How the state of a market might change is uncertain. You should be looking for evidence of what the current state is, to inform whether it suits your trading style.
Discovering the Best FX Strategy for You.
Source: Admiral Markets Demo Account Example.
Many types of technical indicators have been developed over the years. The great leaps made forward with online trading technologies have made it much more accessible for individuals to construct their own indicators and systems.
You can read more about technical indicators by checking out our education section or through the trading platforms we offer. The best forex trading strategies for beginners are the simple, well-established strategies that have worked for a huge list of successful forex traders already. Through trial and error you should be able to learn Forex trading strategies that best suit your own style. Go ahead and try out your strategies risk-free with our demo trading account.
Risk Free Trading With Admiral Markets.
Professional traders that choose Admiral Markets will be pleased to know that they can trade completely risk-free with a FREE demo trading account. Instead of heading straight to the live markets and putting your capital at risk, you can avoid the risk altogether and simply practice until you are ready to transition to live trading. Take control of your trading experience, click the banner below to open your FREE demo account today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
Currency Hedging - How to Avo > by TradingStrategyGuides | Last updated Aug 26, 2019 | Advanced Training, All Strategies, Forex Basics, Forex Strategies, Trading Survival Skills | 0 comments.
Hedging currency risk is a useful tool for any savvy investor that does business internationally and wants to mitigate the risk associated with the Forex currency exchange rate fluctuations. In this currency hedging guide we're going to outline a few standard and out of the box currency risk hedging strategies .
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If you want to learn more about what is hedging in finance, please check out our guide: Hedging Strategies - How to Trade Without Stop-Loss.
Currency hedging is a great tool to preserve your profit margins and minimize your costs, without potentially leaving money on the table. Foreign currency hedging can help you do business internationally while mitigating these risks and at the same time maximizing your business opportunities.
Big companies don't necessarily do currency hedging because they know where the market will go. Quite contrary, they hedge because they don't know where the market will go!
Hedging currency risk simply gives a company the change to lock in the Forex exchange rate fluctuations and secure the profits if the hedge currency rates are less favorable.
Are you prepared to revamp the foreign exchange equation in your favor?
After this lesson, you'll be able to understand the purpose of hedging currency risk and identify profitable currency risk hedging strategies .
Hedging Currency Risk.
When it comes to doing business abroad as a US investor, investing overseas, you've got a big problem.
When you do business abroad and buy or sell goods in a different country you'll have to either pay for purchases in the foreign currency or earn income from sales in the foreign currency. You can lose market access if you don't operate in the local currency.
So, pricing in local currency can open the door to do business internationally.
Let's see now how investing overseas exposes you to investment and currency risk.
Currency Hedging Explained Through a Real Example.
Currency hedging example:
Let's imagine you have $10.000 to invest and you decide to invest the money abroad in the European market. The first thing you need to do so you can have access to the European market is to exchange your US dollar into euros.
The EUR/USD exchange rate is trading at 1.1154, which gives you 8,965 euros to invest in the European market.
Let's assume you invest the money successfully and the investment rises by 5,000 euros. Now, you've got:
8,965 initial investment + 5,000 profit = 13,965 euros.
You now want to cash in and bring back the money home. However, to accomplish this you have to exchange your euros back into US dollar.
We're going to assume the EUR/USD exchange rate has remained unchanged at 1.1154. That's a bit unrealistic because we're ignoring transaction costs and other factors. However, this example will teach how the currency exchange rate can impact our investment strategy.
At the EUR/USD exchange rate of 1.1154, will net you $15,548, which is $5,548 in profits on your original investment of $10,000.
This is a positive scenario that rarely happens.
In some instances, you may sell your product when the hedge currency rate is favorable, but not get paid until later when the exchange may shift and is less favorable eating from your profit margins. In some instances, if the currency exchange rate movement is more severe you can incur even a loss instead, despite earning a profit from the sale of your goods.
Let's now imagine the same scenario where you invest $10,000 but when you bring back the money into the US the EUR/USD exchange rate has moved. The euro has weakened considerably and suddenly the 13,965 euros you have at the new exchange rate of 0.7165 turns back into $10,000, which means that your overall US dollar profit is zero.
What happens here is that our investment abroad, which generated a profit of 5,000 euros was canceled out by the currency exchange rate.
The beauty of the currency exchange rate is that they can move in your favor to increase your profits. You can make a profit from your investment and some more once you bring back your money.
The problem is that we have a big range of outcome and lots of uncertainties that is down to foreign exchange movements. A lot of investors don't want to live with that kind of uncertainty and take that foreign currency risk so they do currency hedging.
Hedging currency risk allows investors to protect against FX fluctuations that can annihilate their hard work. You can use currency hedging strategies if you're not comfortable running foreign exchange risk.
Currency Risk Hedging Strategies.
Luckily for us, there are some sensible practical things we can do relatively easily. Moving forward, we're going to explore some of these ways to hedge currency rates.
If you're someone who has assets abroad and wants to eliminate the FX risks you can simply hedge currency rates.
How this works is very simple.
Let's go through a very common type of currency hedging scenario.
In this case, we assume that Boeing wants to sell its airplanes to a Japanese customer. In order for a US company to have access to the Japanese market, they need to sell their product in Japanese Yen. So, Boeing now accepts payments in Japanese Yen.
Boeing agrees to accept the payment after 90 days from the settling date. In this case, we have a transaction that settled on January 1 st and a payment of 1.2 billion Japanese Yen will be made on March 31.
Now, what is Boeing, a US company doing business in US dollars going to do with 1.2 billion Japanese yen?
Like any company, Boeing wants to sell its planes for a profit and not speculating on the Forex exchange rates. In order to eliminate the currency exchange risk they can use a currency forward exchange contract.
Note: a forward contract gives the owner the obligation to buy or sell an asset at a specific price on a future date.
The 90-day forward rate for the JPY/USD exchange rate at the settled date of January 1 st is at 0.0083. This means that Boeing will receive $10 million at the exchange rate of 0.0083 on March 31. So no matter in what direction the exchange rate goes they have locked-in the $10 million.
This is how hedging currency risk works and this is one way you can eliminate this risk. There are different Forex hedging techniques like hedging currency risk with options or using a currency forward contract.
The alternative scenario for Boeing is to do nothing and go with whatever the exchange rate is by March 31. Depending on how severe the exchange rate movement is, the amount they get can vary by several million dollars. No serious business will gamble and jeopardize their profits and that's the reason why currency hedging is a great tool to eliminate these uncertainties.
Conclusion - Currency Hedging and Risk.
In essence, hedging currency risk eliminates the exposure associated with the movement of foreign currencies. Many investors seek to reduce or even eliminate the currency exchange rate risk by adopting currency risk hedging strategies .
For the US investors, currency hedging becomes important when the greenback is rising in value since this can make it more expensive to exchange your foreign profits. This will result in eroding some of the profits and even possibly lose all the profits due to the extreme exchange rate fluctuations.
The bottom line is that the easiest solution to eliminate the FX exchange risk is to use currency risk hedging strategies through many avenues available such as forward contracts, futures, ETFs or options.
Thank you for reading!
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5 Types of Forex Trading Strategies That Work.
Last Updated on September 24, 2019.
Have you ever felt STUCK trying to figure which forex trading strategies you should use?
Should you be a day trader, swing trader, position trader, news trader, scalper, or a combination of different forex trading strategies?
It can be frustrating, right?
Because you've seen traders make money with different forex trading strategies.
When you attempt it, it fails you. @^*@^#@*#!!
Because in today's post, I'll share with you 5 types of Forex trading strategies that work and how to find the best one that suits you.
Then let's begin...
Forex trading strategies that work #1 -- Position trading.
Position trading is a longer-term trading approach where you can hold trades for weeks or even months.
The timeframes you'll trade on are usually the Daily or Weekly.
As a position trader, you mainly rely on fundamental analysis in your trading (like NFP, GDP, Retail sales, and etc.) to give a bias.
Also, you might use technical analysis to better time your entries.
You analyze the fundamentals of EUR/USD and determine it's bullish. But, you don't want to go long at any price.
So, you wait for EUR/USD to come to Support before taking your position.
Now if your analysis is correct, you could enter at the start of a new trend before anyone else.
Now, let's discuss the pros and cons of position trading...
Don't need to spend much time trading because your trades are longer-term Less stress in your trading as you're not concerned with the short-term price fluctuations A favorable risk to reward on your trades (possibly 1 to 5 or more)
Require a firm understanding of fundamentals driving the market Need a larger capital base because your stop loss is wide May not make a profit every year because of the low number of trades.
There's a trading strategy called Trend Following (which is similar to position trading).
The only difference is Trend Following is purely a technical approach that doesn't use any fundamentals.
Forex trading strategies that work #2 -- Swing trading.
Swing trading is a medium-term trading strategy where you can hold trades for days or even weeks.
The timeframes you'll trade on are usually the 1-hour or 4-hour.
As a swing trader, your concern is to capture "a single move" in the market (otherwise called a swing).
So you'll likely:
Buy Support Sell Resistance Trade breakouts Trade pullbacks Trade the bounce of the moving average.
Thus, it's important to learn technical concepts like Support & Resistance, candlestick patterns, and moving average.
Here's an example of swing trading on USD/JPY:
Now, let's discuss the pros and cons of swing trading...
Don't have to quit your full-time job to be a swing trader It's possible to be profitable every year because you have more trading opportunities.
Won't be able to ride big trends Have overnight risk.
Now, if you want to learn more about swing trading, then The Complete Guide to Finding High Probability Trading Strategy will help immensely.
Forex trading strategies that work #3 -- Day trading.
Day trading a short-term trading strategy where you'll hold your trades for minutes or even hours (it's similar to swing trading but at a "faster" pace).
The timeframes you'll trade on are usually the 5mins or 15mins.
As a day trader, your concern is to capture the intraday volatility.
This means you must trade the most volatile session of your instrument because that's where the money is made.
So, you'll likely:
Buy Support Sell Resistance Trade breakouts Trade pullbacks Trade the bounce of the moving average.
If you're a day trader, you won't be concerned with the fundamentals of the economy or the long-term trend because it's irrelevant.
Instead, you'll identify your bias for the day (whether to be long or short) and trade that direction for the session.
Below is the chart of USDCAD (4-hour timeframe) at 1.2900 Resistance.
If the price can't break above it, chances are, today will be a "down" day.
On the 15-minute timeframe, you noticed a Shooting Star has formed which signals selling pressure.
You can take a short trade with possible target profit at Support (blue box).
Here's what I mean:
Now, let's discuss the pros and cons of day trading...
If you're good, you can make money on most months No overnight risk because you close your positions by the end of the day.
It's stressful as you're constantly watching the markets Can lose a lot more than intended if you suffer massive slippage (from Black Swan events) Huge opportunity cost as you could be earning a full-time salary elsewhere.
Now if day trading is still too "slow" for you, then the next forex trading strategy might suit you...
Forex trading strategies that work #4 -- Scalping.
I don't recommend scalping for the retail traders because the transaction cost will eat up most of your profits.
And you're slower than the machines which put you at a major disadvantage.
Still, if you want to learn more, then read on...
Scalping is a very short-term strategy where you'll hold trades minutes or even seconds.
As a scalper, your concern with what the market is doing now and how you can take advantage of it.
The main tool you'll use to trade is order flow (which shows you the buy and sell orders in the market).
Now, let's discuss the pros and cons of scalping...
Have lots of trading opportunities each day Can make a healthy income from trading.
High financial cost (paying your software, newsfeed, connection, and etc.) Glued to the screen for many hours a day It's a highly stressful endeavor.
If you want to be a scalper, I recommend you join a proprietary trading firm because they will provide the tools to help you with it.
Forex trading strategies that work #5 -- Transition trading.
You've probably never heard of this before because I came up with it.
Back while I was in proprietary trading, one of the "interesting" things I learned was transition trading.
You're probably wondering:
"What is transition trading?"
Well, the idea is to enter a trade on the lower timeframe, and if the market moves in your favor, you can increase your target profit or trail your stop loss on the higher timeframe.
Here's an example:
Let's say you traded the breakout on GBP/JPY 1-hour timeframe and the price quickly went in your favor.
You noticed the 4-hour timeframe respecting the 20MA.
So instead of taking profits, you trail your stop loss using the 20MA hoping to ride a bigger move.
And if you're wrong, you'll exit your trade when the price closes below the 20MA.
Now, there are variations of transition trading.
But the main idea is this:
Find an entry on the lower timeframe If the price moves in your favor, consider planning your exits on the higher timeframe.
Now, let's discuss the pros and cons of transition trading...
Can get an insane risk to reward (possibly 1 to 10 or more) Can lower your risk as your entry is on the lower timeframe.
Only a handful of your trades will lead to monster winners Must understand multiple timeframes really well.
Now that you have an idea of the different forex trading strategies out there.
The next question is...
Which Forex trading strategies suit you best?
Here's the thing:
I've seen traders wasting many years on trading strategies that don't suit them (right from the start).
If ONLY they considered these 3 things I'm about to share with you...
...they could have saved years of frustrations, money, time, and effort.
And, I don't want you to be one of them.
So before you attempt to trade any forex trading strategies, you MUST consider these 3 questions...
1. Do you want to grow your wealth or make an income from trading?
First, let's define what's income and wealth.
Income = Make X dollars a month.
Wealth = Grow X % a year.
If you make an income from trading, you must find more trading opportunities within a shorter time period (for the law of large number to play out).
This means you must trade the lower timeframes and spend more hours in front of the screen.
The Forex trading strategies you can use are scalping, day trading, or short-term swing trading.
If you want to grow your wealth from trading, you can afford to have fewer trading opportunities.
This means you can trade the higher timeframes and spend fewer hours in front of the screen.
The trading strategies you can use are swing trading or position trading.
2. How much time can you devote to trading?
This is a no-brainer.
But I've included it because I've seen traders who can't think logically (not you of course).
So here's the deal:
If you have a full-time job, or you can't afford to spend 12 hours a day in front of your monitor, then don't try scalping or day trading (it's silly).
Instead, go with swing or position trading.
But, if you have all the time in the world and enjoy short-term trading, by all means, go ahead.
3. Does this Forex trading strategy suit you?
Here's the breakdown:
Most trading strategies will fall into 1 of 2 categories:
A high win rate with low reward to risk A low win rate with high reward to risk.
So, which approach is better?
Well, in terms of profitability both approaches can work because it depends on your win rate and risk to reward ratio.
So a better question would be...
"Which approach are you more comfortable with?"
If you prefer a higher winning rate but smaller gains, then go for swing trading.
If you prefer a lower winning rate but larger gains, then go for position trading.
Forex trading strategies for beginners, how to get started...
Now if you're new to Forex trading, you can get overwhelmed with the sheer number of trading strategies out there.
You've got stuff like trading indicators, chart patterns, Elliot Waves, etc.
Where do you start?
My suggestion is to master Support and Resistance and here's why...
Because if you think about this, the price can only do one of two things:
It reverses at Support and Resistance It breaks Support and Resistance.
This means if you understand Support and Resistance, you have the ability to be a trend trader, breakout trader, or even a reversal trader.
It works on different timeframes whether you're day trading, swing trading or even position trading.
So here's how to get started...
1. Learn how to draw Support and Resistance.
I show you how to do it step by step in this training below...
2. Learn how the price reacts at Support and Resistance (SR)
When the price breaks SR, ask yourself:
What's the pattern that occurred before the breakout?
When the price reverses at SR, ask yourself:
What's the pattern that occurred before the reversal?
After studying thousands of charts, you'll have a 6th sense of whether the price is likely to break or reverse at SR.
3. Define your trading timeframe.
Next, commit to a timeframe you can trade comfortably.
If you have a full-time job, it doesn't make sense to trade the 5mins timeframe because you don't have the time for it.
Instead, you're better off trading the higher timeframes (like 4-hour and above) as it requires less screen time.
So, be honest with yourself and decide on a timeframe that suits you best.
4. Develop a trading plan.
Once you know your trading strategy and timeframe, you can develop a trading plan for it.
If you want to learn how to do it, go study this post below...
Here's a recap of the different forex trading strategies that work:
Position trading: A wealth-building approach for those who can't spend the whole day in front of the screen.
Swing trading: A wealth or income building approach for those who can spend a few hours each day trading.
Day trading and scalping: An income-generating approach for those who can spend the whole day in front of the screen.
Before you learn any forex trading strategies, you must consider...
Your trading goals Your time available Whether the strategy fits your personality.
Now here's what I'd like to know...
Which forex trading strategies do you use?
Let me know your thoughts in the comments below.
You are just great...!
I prefer the Swing Trading approach as I normally look at the 4 hourly and daily chart. Beside, I would prefer to monitor my trades once is live for that couple of hours.Once I'm in the money,I would prefer to trial my stops.
Thank you for sharing, Simon!
thank you so much God bless.
Great information bro.. I think I m day trading... your transition trading really works..
I'm glad to hear that, Ali.
Hi, Well done Rayner in helping us traders !!
I prefer swing trading, Uk trading times 8am to 16:30), using a 4 hr graph, I use the Alert on MT4. Always wait for the candles to show their direction, only when this happens do I strike. ! when this happens I then use the 5 min graph for my entry and exit using a stop loss of 1%. Im careful with RED news as the spreads go crazy. I dont trade FOMC and NON FARM PAYROLLS 2 hours prior their time . Personally I do NOT hold persitions over night.
Thank you for sharing, Martin!
Hi Rayner. I'm a swing/day trader but I have tried all methods. My problem is I have difficulty trading one method. Patience is my problem. Great article Rayner.
Thank you, Michael.
Your write ups are always very interesting and resourceful too. I am a swing position trader only interested in trading Price Action at Support and Resistance. For me that involves naked trading with only the MA lines on my candle chart. Still on the elementary stage for now but working steadily on it. Thank you.
You're welcome, Emeka.
Why did you not include trend following trading Rayner ?
I did. It's stated at the top along with position trading.
Very concise peace of work with one critical note:
You say in daytrading:
The cons: ............ Can lose a lot more than intended if you suffer massive slippage (from Black Swan events) ............
I don't think that Black Swan events should ever be considered in trading as they are too rare to get nervous about. Besides, if your maximum Risk is 2% of your capital and have stops in place no Black Swan is going to kill you financially.
Best Regards, Peter van der Meulen.
For day trading you're typically trading with larger size since your stops are tighter.
And during such events, you might suffer massive slippage as it's no guarantee of getting filled (e.g. the EURCHF saga where traders had slippage of thousand pips).
With large size and huge slippage, careers are over in an instant.
I prefer to do swing trading using 1 to 4 hr time frame. Hopefully there will be more trading opportunities this way. I would also very much like to use the trend following method as seen from your videos. I think my problem is emotions.
Thank you for sharing, Sum Mun.
Thank you Rayner "Our Buddy Trader" Teo, as you always keep us educating about successful trading.
Just wanted to know that, What inspires you truly for this amazing work ?.
I do get a "KICK" whenever traders tell me how much they have benefited from sharing.
As always...no one beats your passion in sharing your knowledge for free. Big thanks Rayner!
You're welcome, Junil!
Transition trading is so wonderful. This information is an eye opening indeed. Rayner I really don't have enough words to thank you.
The pleasure is mine, Dave!
Thank you Rather. Great write up.
You're welcome, Roy.
Awesome article Rayner. Learned a lot from this. Am a day trader. Like to time entries from Support and Resistance levels in the market, analyze my trades with daily and 4hr. Pick trades mostly with 4hr chart. Once again, thumbs up Rayner. Keep up the good work.
Thank you for sharing, Okere!
Thanks Rayner. Do you have any actual data as support for the claim that these can work (audited track records for example)?
You can look up firms like Dunn, Mulvaney, Winton as they are hedge funds which employ a Trend Following approach (which falls under position trading).
For short-term trading, you can look up proprietary trading firms and ask them what's the trading methodology they adopt (which are usually day trading and scalping).
hi rayner! have not receive any notifications on your weekly videos of late. for e.g. the analysis from 5-9? Did I missed it or have you stop doing the analysis?
Thank you for all the great guidance!
I haven't sent any recently.
But don't worry, it's back this week!
Great information (as always)!! I would love to hear more about the transition trading. Is there another article with more information?
Thanks for all that you do for us!!
I don't have any more on it, but I'll see how I can add more information in future.
Awesome post Rayner.
I am also wishing to know more about transition trading...
I'll write more about it in a future post, cheers.
You're awesome Rayner.....really informative article.
I prefer swing trading....I can spend few hours a day for trading. Prefer low winrate + Big wins.
However I want to both make income as well as build wealth in parallel via trading.
You're welcome, Rahul.
Thanks for sharing!
Thanks Rayner for this educational blog. It reinforces what I think I know! Hopefully get me to be profitable with real accounts.
Hey rayner! Can a daily timeframe be used for swing trading or is it better to use the 4 hour timeframe in entering trends?
Yes, that's possible. Both are fine.
How about you Rayner, what kind of trader are you?
Swing and position trader.
How to determine Support and Resistance level ??
I don't have any materials covered on it here.
But I pay attention to the most obvious levels and ignore the minor ones.
Hi rayner I like your website I would like to say that I would be a hybrid of swing trading as well as trend trading. I fail alot and well I dont like ofcourse no one does realy. I am asking for your almighty nolage on what would be a good trading stratagy for me. 1. I dont like spending all day on a screen. 2 I Love family time 3 i can do at least 2 hours a day 4 I am stuburn. (Half the reson for my past faliars witch i realised through your web site). 5 i am starting at a very younge age and i can learn alot through experience and others telling me what a good stratagy might be.
I also need help knowing what turms there are because wile i trade i realy HAVE NO IDEA WHAT I AM DOING. but i try to go in with a plan think of where i believe the market will go( mostly rong on my judgment ) and get somwhere with it i do use a stop loss and i am trying to find how to get a trailing stop loss for mql5.
Also thanks for your website it had some helpful facts and has helped alot thanks. So i hope you could help me become a better tradsman.