Forex trading provides some of the most exciting global trading opportunities in the financial markets, and because it is one of the world’s most liquid markets, traders can take advantage of tight spreads.
Like with any investment, how you decide to trade Forex will depend largely on how well you know that market, what information you gather through research and analysis and the overall goals of your trading strategy.
Understanding how and why your chosen FX market moves, the markets that correlate and impact it and which trends and events could prompt price movement is important in helping you make smarter trading decisions.
To help you get started trading Forex with confidence, we’ve put together a few ideas, tips and trading strategies to help you build a more comprehensive trading plan.
Understanding market correlations
Forex markets are impacted by a number of wide-ranging factors and because currencies form the basis of trade, economic relationships and financial services, there are a number of closely interconnected market correlations between FX prices and other, related markets.
These correlations depend on which particular currency you decide to trade as some economies are modelled on different strengths. For example, the value of the Canadian dollar (CAD) and Australian dollar (AUD) are strongly influenced by commodities prices in these countries as a large percentage of their GDP comes from natural resources and mining. Similarly, the US dollar is particularly sensitive to movements on Wall Street, as the index drives huge growth and revenue.
Understanding market correlations between your chosen currency and other, related markets can help you make better trading decisions. Make sure you do as much research as possible and work to understand how and why changes in other markets could impact your FX trading.
Because of the high volume of global trades within the Forex market, as well as their relative sensitivity to events and various market correlations, there can be numerous shorter-term trading opportunities.
A Day Trading strategy may suit your approach to FX trading if you aim to take advantage of market volatility over the short term, perhaps for a period of a few hours rather than weeks or months.
Day traders will generally identify current market trends and prevailing sentiment and trade in the same direction until a support or resistance level is reached. Once their profit target has been reached, or their stop loss order triggered, their position will be closed.
Day trading can be a very intensive approach to trading the markets and requires a very strong risk management strategy, plenty of time so that you can react to fast moving market events and a solid understanding of your chosen market.
If you decide on a Day Trading approach make sure that you use our smart risk management tools like Guaranteed Stop Losses to protect yourself against volatility should the market move against you.
Making the most of support and resistance
One of the most valuable strategies for trading the Forex markets is also one of the simplest; understanding key resistance and support levels in the market you have chosen. Because currencies move in relatively stable increments outside of major events, when they begin to reach historic levels, either to the upside or downside, it can give traders pause for thought.
So what are resistance and support levels and how can they help your Forex trading?
A support level is essentially the downward price at which a currency will pause or stop its decline as demand or trading volume begins to increase again. On the other hand, resistance levels indicate a high price level at which the market begins to believe a currency may be overvalued and it could be a strong indicator of a potential sell-off in the near future.
Both support and resistance levels are useful as part of your overall Forex trading strategy in understanding potential market entry and exit points.
To help you identify key support and resistance levels in your chosen FX market, we have a number of tools for you to use. You can take advantage of our indicators like MACD, RSI and Bollinger Bands, add your own indicators or use our drawing tools to define key market levels you’d like to monitor.
In addition, you may find it useful to set up a customisable Forex Watchlist so that you can track a number of price changes across the FX pairs that most interest you or that could have an impact on your trading strategy. on. Rather, you are trading on price movements within the underlying market.