If you are a data junkie, becoming a Forex (Foreign Exchange) trader may be a perfect investment vehicle for you. Movies, the internet, and magazines have often glamourised the world of Forex trading, painting it as both a get-rich-quick investment and as outright gambling. The truth lies in the middle. Yes, Forex traders can and do make money. Yes, as with all investments there is an element of risk. However the odds of an investor going from driving a Ford Focus in January to driving a Bentley in December are very slim. By the same token, the odds of a patient, smart trader who commits to doing the necessary research losing his entire investment capital overnight is equally as slim.
The need for research cannot be stressed enough. Look at historical trends, what has triggered price fluctuations and the best trading platforms.
Also make sure you are familiar with common terms. If you have experience investing in stocks, most of the terms will be perfectly clear.
One term that is used routinely is Pips. A pip is the smallest unit of price for any foreign currency. A pip refers to the digits added to or subtracted from the fourth decimal place (.0001) Forex traders deal with pip movements daily.
Three Best Strategies for New Traders
Forex trading can seem complex. The best way to get your feet wet is to start with some simple trading strategies. There are a number of apps and websites such as CMC Markets, that allow for the creation of demo accounts, which is a perfect way to test and master strategies prior to putting real capital at risk.
Support and Resistance Trading
Currencies constantly increase and decrease in value. Support is the lowest point and resistance is the highest point.
To determine each, the trader needs to study graphs for a couple of weeks. Both support and resistance are fairly easy to spot with minimal study. Say support is 1.18 and resistance is 1.30. Traders get in as the currency nears a support price and get out when the currency nears the resistance price.
Some traders advocate long term approaches for new traders, but the vast majority support day trading as the best strategy of beginners.
Simply put day trading means that the trader does not hold any positions overnight and all positions are liquidated by the end of day (EOD). This minimises the risk inherent in long term investments. Currency fluctuates throughout the day. The goal of a day trader is to make as many small profit trades throughout the course of the day. Start out with a modest number of trades and build up as you become more experienced. Although the profit on each trade will be small, added together they can prove to be substantial.
Fundamental Currency Analysis
Fundamental analysis looks at the influence of outside forces and government actions on the currency of a particular nation. High unemployment and political unrest are examples of forces that can affect the value of a currency. The types of events which trigger movement are usually readily apparent. This type of trading lends itself well to beginning traders who are willing to take the time to research and study tradition triggers. Fundamental analysis is also easy to test on a demo account.