Forex Trading Strategies for Beginners
Developing effective Forex trading strategies is critical for beginners who are just getting accustomed to the market. There are an apparent infinite number of strategies out there, but as someone who is new to the market, you need to carefully choose which one to use. With so many other aspects of trading needed to learn, you should be keeping your strategies as simple as possible.
Choose Your Currency Pair
Before you can even begin to consider a strategy, you need to know which currency pair you are going to be trading. For a beginner this should always include the US dollar (USD) alongside another equally liquid currency such as the Euro (EUR) or Canadian dollar (CAD). Predicting the movements of the more popular currencies is typically easier due to the wealth of information available about them.
Pick a Chart to Analyze
To make reading the movements of currency easier, most Forex investors will refer to charts and graphs depicting their currency pair. There are a number of different types to choose from, including bar charts, line charts and candlestick charts, with each having their own benefits. Candlestick charts however contain the most amount of information in one place, making them a good choice for a beginning Forex trader to work with.
Now that you have your currency pair picked and the type of chart you are going to use, you need to understand some basics in reading the chart to help develop your strategy:
Support and Resistance Levels – Support and resistance lines will help in predicting when there is going to be a sudden reversal in your currency pair. If the market is moving down and then takes a turn upwards, it has created a support level. Adversely, if the market is moving higher and then drops in price, you have a point of resistance. Once you start connecting those pivot points to create the support and resistance lines, you can use the preceding information to help predict when then the next turnaround will take place.
Trend Trading – You will have the most opportunity to profit if you can recognize a trending market and strategize where to enter and exit successfully. A trending market is when a currency pair is clearly moving in one direction for an extended period of time. There will be small breaks in the trend, but they will never break the support or resistance line. Instead, it is a series of higher highs and lows in an uptrend and lower highs and lows when on a downtrend.
Being able to identify these key elements in a Forex chart, you should now be able to create a simple trading strategy to profit from. Start by following these easy steps towards building a strategy:
When to Enter the Trade – Knowing the right time to enter a trade only comes from carefully studying your charts. If you are able to visualize the pattern that is creating the support and resistance levels for example, you can plan to enter at the very beginning of the next pivot point. If you are planning on trending on an uptrend, then the line of support will define your entry point, while the resistance line will indicate the starting point for a trader looking to profit on a downtrend.
Risk Management – The next step in developing a trading strategy is making sure that you are not risking more than what you stand to gain. In Forex trading, controlling how much money you lose is just as important as developing strategies that earn you profits. Risk management is in knowing how much money you have to cover the trade, and how much of that money you can afford to lose. Only then can you continue forward with developing a strategy.
Setting Your Stop Loss – This is a critical step in any Forex trade, and one which should never be skipped. A stop loss order is basically telling the broker when you have lost the maximum amount of money you are willing to. Think of it like an insurance policy for Forex traders. Just like you have car insurance for the chance that you may be in an accident, you have a stop loss order for the chance that your trade heads off in the wrong direction. Since you have already assessed how much you can afford to lose when managing your risk, it should be easy to set your stop loss order to stay within that range.
The Exit Strategy – Now you can go ahead and choose when you are going to leave the trade if it is successful. Don’t make the mistake of just letting it ride, like your stop loss having an exit strategy is a big part of risk management. In order to maximize your potential to profit, you should have a positive risk to reward ratio of 1:2 or more. For example, if you are setting your stop loss at 100 pips, then your exit strategy should reflect a gain of 200 pips. In this way you always stand to gain more than you could lose.
These steps towards creating a strategy are easy to follow for a beginner trader, and will assist you in building chart reading and analysis skills. Consider it a lead in to creating more complex strategies as you grow stronger with technical and fundamental analysis.
What About Leverage?
Leverage is part of the lure of Forex trading, yet it is also behind the downfall of many beginner traders. This is a practice where the broker will help augment your profitability by loaning you money to trade with. While this is a good way to increase your profit potential, it is also a fast way to lose all of your money fast on a bad trading plan. Make sure that you apply the same principles of risk management if you intend on using leverage when making your trades.
Take your time in learning strategies as you start your career in Forex trading. Over complicating your trades in the first months will only serve to make you frustrated and inevitably broke before you ever get to fully appreciate the profits it can bring you.
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