Generating a profit on a forex trade takes two things. One is making a correct call on the direction of the market. The other aspect, which is often overlooked, is staying in the position for the optimal amount of time. When looking for a forex market to trade, you need one that suits your personal skill set – one where you’re able to spot the entry and exit points and can also ride the volatility out until the end.
If anyone tells you that they can consistently predict the direction of the market, then block them. Any trader who is better than the rest at picking those moves is likely sitting on a yacht and keeping quiet about it. They won’t be online trying to sell you their ‘signals’.
The good news is that you don’t have to be perfect. One common misconception among new traders is that every trade needs to be a winner. You can make a long-term profit with a much lower win-loss ratio, and, in fact, accepting and cutting losing positions is a fundamental element of successful strategies.
Different currency markets have different characteristics. These stem from the differing underlying features that drive price. As a result, it might be easy for you to spot trade entry points in one market and impossible in another.
Let’s say that you toss a coin and base your trading on the outcome. If 50 out of 100 of your trades are correct, then you’d expect to at least break even.
Unfortunately, this isn’t the case, and more traders lose money than make money. This comes down to trade management.
USDGBP – 2015-2020
One slightly oversimplified but valid enough saying is, “Run your winners and cut your losses.” You’ll soon be able to see how that pans out if you test a few strategies using a demo account. A review of the best forex demo accounts can be found here.
The demo account trade history might also show that your strategy works better in one forex market than another. Again, this comes down to the different characteristics of the different forex pairs.
Forex pairs that have higher price volatility might trigger stop losses if you set them too tight. However, they might also suit your trading if you favour short-term ‘scalping’ strategies.
Lower-volatility markets can be associated with longer, gentler price changes. This may be something that fits in well with your lifestyle if you are trading while working your day job and can’t check your account very often during the day.
The next question is, what are the characteristics of the different forex pairs? Before we go into this in more detail, it is worth noting the generic features of forex trading.
The greater the amount of trading in a currency pair, the greater the liquidity. This is important to consider for several reasons:
As many traders stepping into the forex markets have exposure to the equity markets, it’s worth pointing out a difference between the two groups’ price movements.
Equity prices are a function of future income flows to a firm. With long-term global economic expansion continuing, the price chart broadly goes from the bottom left-hand corner to the top right. There are blips along the way and corrections and sell-offs, but there is a long-term bias towards one direction.
S&P 500 Equity Index 1982-2020
Forex markets are different. They represent the respective strength of the two economies. There is no reason to assume that the US economy will outperform the Japanese one, or vice versa.
The price of EURUSD in February 1990 was 1.215, and despite some interim price swings, that price is what the pair was trading at 30 years later in December 2020.
Most brokers will offer all or more of the following forex pairs. They are broken down into three categories: major, minor and exotics.
Other major currency pairs and their nicknames are:
The major currency pairs are popular markets for beginners and advanced traders. These are the markets with the most liquidity and all the advantages that come with that.
Minor forex pairs are often called ‘cross-currency’ pairs. You’ll note that USD is not involved in these. As the base currency of the global financial system, USD is categorised as major when traded against another important currency.
Some of the exotic pairs are listed below. There are more, but not all brokers support all exotics due to liquidity in the markets drying up. There are also market anomalies such as USD/HKD being a pegged currency, where price trades within a pre-determined and closely managed price range.
Forex trading is a 24/5 business, so something else to consider is choosing a market that suits your day-to-day activities. This review gives a detailed breakdown of the global forex market hours.
Hands-on trading of virtual funds in a demo account is the best way to get to know the different markets. It’s also a risk-free way to establish which ones turn a profit and which don’t.
Unfortunately, there is no time to relax because market conditions can quickly change. What works for a while might stop working, and ‘paradigm shift’ is the enemy of all traders.
Between 1997 and 2020, the value of USD/ZAR increased by 335%.
If you’re new to trading, then starting out trading the major pairs would appear to be an excellent first step. There would also be value in trading them all and understanding the nature of the different markets.
While engaging in this research, be sure to use a demo account. If you don’t learn the basics using ‘paper trading’, then you’ll likely burn through your capital before you complete that project.
Liquidity is a key consideration, but do keep in mind that even the major currencies have quieter times of the day.
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