Why is having a strategy important when initially starting out in trading? The Forex market (also known as the Foreign Exchange Market or FX) is very liquid, with a high number of players. It is a well-known market as well. Due to the length and variety of the market, professional currency traders have built up a large collection of strategies.
The sheer number of trading strategies available might be intimidating and confounding, especially for a day trader looking for beginner’s trading recommendations on how to start trading on a forex trading app.
In the first technique, we look for signs that a pattern is forming. It is attempting to achieve a pricing breakthrough. Markets may swing between resistance and support bands. This method is known as consolidation. A breakout occurs when the market moves to new highs or lows after a period of consolidation. A breakout is necessary for a new trend to develop. As a consequence, breakouts are seen as possible indicators of the start of a new trend. Unfortunately, not all inventions lead to new trends.
Even with such simple tactics, risk management is critical while trading in the foreign currency market. You anticipate reducing your losses during the trend reversal by doing so. A new high signals the start of an upward trend, while a new low indicates the start of a negative trend.
So, how can we tell what type of trend we’re in?
The duration of time might help determine the greatest high or lowest low. A break above or below the extremes of the range implies a longer-term trend. Short-term breakouts are often symptomatic of passing trends. As a consequence, a breakout strategy may be modified to respond more rapidly or slowly to the emergence of a trend. Rapid response lets you ride the wave of a trend as soon as it starts, but it could also make you obsessed with short-lived fads.
A simple moving average (SMA) is used in our second Forex technique for novices (SMA). Because it employs older price data than other techniques, the SMA is a trailing indicator that moves more slowly than the current market price. The longer the time range over which the SMA is averaged, the slower it moves. A longer SMA is often combined with a shorter SMA. In this simple Forex strategy, the shorter SMA will be a 25-day moving average, while the longer SMA will be a 200-day SMA.
The red dotted line in the accompanying chart represents the 25-period moving average. It is obvious that it accurately represents real-world costs. The green dashed line represents a 200-period moving average. Take notice of how it reduces price volatility. A trend shift is indicated by the crossing of the shorter, quicker SMA over the longer one. When current prices exceed historical prices, as shown by the short SMA crossing over the longer SMA.
This is our buy signal since it shows a bullish trend. We receive a sell signal when the shorter SMA falls below the longer SMA, suggesting a bearish trend. While moving averages may provide trading indications, they are more often utilized to confirm present patterns. So, we can combine these two strategies by using the SMA’s confirmatory function to make our breakout signals work better.
We reject breakout indications that contradict the aggregate signal of our moving averages using this integrated technique. Consider the following as an example: If our break indicates that we should purchase, we will check to see if the short SMA is greater than the long SMA. Should this be the case, we should proceed with the transaction. Otherwise, maybe it is better to wait.
Understanding our long-term approach is crucial. This is not only a strategy for newcomers to the Forex market; it is also often used by industry pros. One of its best features is how simple it is to use and comprehend. The purpose of carry trading is to benefit from the difference between two currencies’ interest rates. To demonstrate the concepts at work here, let’s start with a real-world currency converter.
Consider a trader who needs a loan in Japanese Yen. Because Japan’s benchmark interest rate is so low, the cost of carrying this debt is low (essentially nil at the time of writing). The dealer puts the cash in a 0.6% interest-paying government bond after converting the yen to Canadian dollars. The interest payment on the bond must be more than the interest cost of getting the Yen loan.
The transaction involves currency risk, which is a disadvantage. If the Yen rose against the Canadian dollar, the trader would lose money. The same basic principles apply when trading forex, but you have the extra advantage of having everything in one transaction. A positive swap rate can benefit your account if you buy a pair of currencies in which the first currency, known as the “base currency,” has a higher interest rate in proportion to the second currency, known as the “quote currency.”
If the strategy succeeds, increasing leverage may increase the return since the yield is proportional to the amount of money sought. However, as previously said, there is always the danger of being on the wrong side of a currency pair shift. As a consequence, choosing the appropriate currency is crucial. You want to use a low-volatility currency pair with this technique since inertia is on your side. It’s also important to note that using leverage incorrectly might compound your losses.
The yen has been used as a preferred financial currency for decades since interest rates in Japan have been so low for so long, and the currency is usually seen as stable. Individuals with a high-risk tolerance are more likely to seek out higher-yielding investments. The more traders who use the approach, the more selling pressure there will be on the funding currency, which may be seen as a positive development for the system as a whole.