Forex trading is the act of speculating on the foreign exchange market, with the intention to make more money profitably. Forex trading in otherwise said as FX trading, foreign exchange trading or currency trading. Let’s see the pillars of forex trading here. The pillars are listed down as,
- TRADE ENTRY STRATEGY
- TRADE EXIT STRATEGY
- FUNDAMENTAL ANALYSIS
- SENTIMENT ANALYSIS
- TECHNICAL ANALYSIS
- RISK MANAGEMENT
- MONEY MANAGEMENT
TRADE ENTRY STRATEGY
The foremost thing to talk about trading strategies is, you need to know the simple methods. Many traders do not even realize what their strategy is or cannot easily define it, because they are trying to bring a bunch of different messy ways together. This will put the trader in trouble and trader will find difficulty in making money. So having a plan for the entry would help to succeed.
Fundamental analysis is a process of evaluating security to assess its intrinsic value, by analyzing economic, financial, and the qualitative and quantitative factors. Understanding why the currency is moving and what makes it move is called fundamental analysis. The currency market is different from the stock market in fundamental analysis. Even though the currency market and stock market involved in the analysis and understanding of the intrinsic value, the approach, and methodology in calculating and concluding the intrinsic value varies.
Sentiment analysis denotes the risk appetite that occurs in the financial market. Traders are more keen in taking a risk which leads them to have higher returns which carry great risk. But without any risk traders cannot see any high returns. In Forex, Sentiment analysis plays a specific role among all the other pillars. It clearly makes us understand which currency is in demand and thus understands the flow of capital from one currency to another. Here are 4 common indicators that examine the sentiment risk in the market.
- Equities market (stock market)
- The commitment of Traders report
- Volatility index
- Bonds spread
When the market environment is risk-on, high yield currencies, AUD, NZD, and CAD gets strengthen, whereas JPY becomes weak. On the contrary, when the market environment is risk-off, JPY is strengthening, while AUD, NZD, and CAD become weak.
Technical analysis stands as a third pillar. It is frequently discussed in forex trading. Technical analysts believe that analyzing the movement of prices is more significant to make a trading decision. Once a trend has aroused, future price movement is likely to follow the direction of the trend than going in the opposite direction. The chart patterns are based on the notion that history tends to repeat itself, and technical traders leverage on this information to trade the market.
Risk management expresses more than just deciding your trading. It includes how you manage your risk exposure, dealing with the market, protecting your capital, and how you manage your profit potential based on your risk profile. In Risk Management, control of your downside so that the upside will be at no risk. Risk management differs from individual to individual. Focusing on different key components of risk management would help. In short, risk management teaches us, how to make the potential of your capital to blot without losing the market.
Money management is the process of saving, investing, spending, and overseeing the capital usage of an individual or group. In two ways money management can be practised to succeed. A trader can take many frequent small stops and try to get profits from the few large winning trades, a trader can choose to go for many small gains and take infrequent large stops. Each and every trader in this universe must follow some money management skills to succeed
TRADE EXIT STRATEGY
Having an exit plan before entering is important. Traders spend hours developing their entry strategies but then they end up in taking bad exits. Normally, people lack effective exit planning. Entering is an easy part, but where you get out determines your profit or loss.
The above mentioned are the important pillars with each having a different role in forex trading. Altogether can make you achieve success in forex trading when followed with an aim to gain profit.