Currencies were traditionally the domain of businesses, institutional investors, and hedge funds, but online trading has now made it available to individual traders. Currency is the fastest moving and most liquid kind of trading. It far surpasses the speed and volume of equities. Currencies are traded on the ‘foreign exchange’ or forex.
The overall forex market sees average daily volumes of more than $3.2 trillion.48 This is four times more than all the equity and futures markets combined. About 20% of those trades come from businesses that need to move money from one currency to another to conduct international business. Speculative traders account for the remaining 80%.49
The forex market has incredibly ﬂexible hours as diﬀerent countries around the globe open and close. New York begins at 1 pm GMT and closes at 10 pm. But Sidney starts at 10 pm GMT and then Tokyo opens at midnight. London opens at 8 am GMT, just one hour before Tokyo closes and the cycle continues. Currency trading desks set their own hours, but many are open 24 hours a day 5 days a week, closing only for the weekend from Friday evening until Sunday evening.
The most active trading occurs when two markets overlap. For example, London and New York overlap for four hours between 1 -4 pm GMT. At this time the USD, EUR, GBP are most actively traded. London and Tokyo only operate together for the last hour of Tokyo and the ﬁrst of London trading. The trading strategy includes timing. Some traders choose the extra activity of multiple markets and the beginning and closing hours of the London or New York markets. Others prefer the calmer times.
Getting Ready to Trade
Many beginning traders fail because they fail to plan. Trading on a hunch is no more than gambling. When you develop a strategy, you increase your chances for successful trades. Most professional traders say that each person must develop their own strategy. It’s helpful to look at how others trade, but your strategy will ultimately be uniquely your own.
Here are six factors that will go into your trading strategy:
- Time of Day: You will want to develop a consistent time to trade.
- Currency markets have patterns based on the time and the markets that are open. Trading is more active when two large markets, like London and New York, are open at the same time. Decide if you want the fast movements of this time or the slower movements of mid-market times. When both the US and British markets are open, the trades move more pips and the spread is smaller.
- Technical Analysis: Some traders depend almost entirely on charts and chart patterns to map out currency swings. They look for historical cycles. Others use very little technical analysis, perhaps just enough to ﬁnd support and resistance lines to guide them on when to enter and exit the trade. Focusing on chart patterns alone lets traders enter multiple currency markets as the patterns may be similar across many charts.
- Fundamental Analysis: In currencies, this means looking into the ‘health’ and ﬁnancial well-being of the country behind the currency. They check employment numbers, debt, consumer spending, import/export, government reports, and other resources. All these give trader’s indications to help them determine if a currency is strengthening or weakening against another currency.
- Interest Rates: This can be one of the biggest movers of currency. Often the Federal Reserve or central bank will give us helpful hints to prepare the market for interest rate changes. This helps the market factor them in more gradually. But some countries are willing to shock the market. However, sometimes a country will signal that there will be no changes expected in interest rates… and then, BANG! Change the interest rates to shock the market.
- News Events: Currency traders keep an ear tuned to the latest news events. Government reports, politics, even a presidential tweet can twitch the market. On 15 January 2015, the Swiss National Bank (SNB) suddenly decoupled the Swiss franc from the euro. It caused the Swiss franc (CHF) to rally 23% in a matter of moments. It bankrupted several currency trading ﬁrms and rocked the ﬁnancial world. This is why the news is so vital to traders. And it reminds traders how speculative and risky trading can be. Even with a stop loss order, the price may drop so quickly you will not be ﬁlled at your requested price, but at something lower. In currency markets, there is no such thing as ‘insider trading’. Any news is legal news. Hear a tip from your golf buddy who works in the central bank? You are free to use it. Traders who focus on news and fundamentals more often stick to a few currency pairs so they can keep up with all the information.
- Enter and Exit Plans: Your strategy will also include when you will enter a trade and when you will leave it. Currency trading is high-risk trading. You can and will lose money sometimes. But you may protect your assets with carefully formulated stop loss and limit order settings. Many traders recommend you set your stop loss with enough room to stay in the trade in minor ﬂuctuations, but not to risk too much capital. Some advice you to place the upside limit with a greater spread than the downside. So if you set your stop loss at 30 pips, you may want to set your limit order to sell at a proﬁt at 90 pips. This way your winning trades will give you three times as much as your losing trades. Trades like this let you absorb three losses for everyone win and still come out ahead.
How to Make a Trade
While each trading platform is diﬀerent, walking you through the process of making a trade can be useful. By now you know all trading involves risk. Only risk capital you are prepared to lose and that past performance do not guarantee future results. Here are the steps using PaxForex platform. Let’s say you have decided to trade USD/CHF. You check your watchlist and see it’s actively trading and trending down right now.
You go to the chart and check your support and resistance. You want to buy just after support and sell just before resistance. So you set up your trade and set your stops. This chart has three places where you could have entered the trade at support and exited near resistance.
You decide to enter a buy position at 1.0052. You decide to set your stop loss at the resistance line of 1.0043. Support is at 1.0075, but you decide to set it a little under support at 1.0070 to grab proﬁts if it turns before the top. That gives you an upside of 20 pips and a downside of 7 pips minus the spread. You’ve checked the fee schedule and know the spread is 3 pips.
You click the plus or minus tab, or just click on the amount and change it to the amount of money you want to trade. You choose your leverage rate. As you click on the leverage tab, it will give you the diﬀerent amounts of leverage you can use, from no leverage (1 x) from no leverage (1 x) up to as high as 400x on some currencies, which is an incredibly high risk. As you put in your amount and leverage, your preset stops and limits will update automatically.
Go in and click on them to set the limits you’ve chosen. You can choose a dollar amount, or you can choose a percentage. If you decide you are only willing to take a 5% loss, you will set your stop loss at 95%. If the value of your trade drops below 95%, it will trigger the sale. On the other side, you may present a 10% proﬁt point. Simply type in the rate ‘1.10’ and the platform will convert that to a dollar amount that takes into account your leverage.
Then simply click the open trade button. When you trade with preset exit points, you take the emotion out of the trade. You let the market make its little swings without panic. You’ve chosen the maximum loss you’re willing to risk against the hoped-for gains. Either the trade will trigger a win or a loss. You are free to focus on the next trade.
Hand presenting business strategy concept