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Trading Currencies

Currency Trading Timescales: Failure to understand the importancecurrency trading forex online anna of timescale for your trading is one of the main reasons most traders fail in trading currencies.

Currency Trading Charts : Timescales

As a currency trader, in terms of timescale for your trades on the currency trading charts, you have only three principle ways to trade currency. If you fail to plan your strategy in advance, you will fail, and become one of the 90% failures. In simple terms, these timescales are short, medium and long. Each requires a different approach, and they cannot be mixed. Now I have to say straight away that your trading timescales and strategy, may be dictated by your time zone and personal circumstances. The major market moves always occur when the US and UK markets are open, which represents a window of 11 to 12 hours approximately. For international traders in the Southern hemisphere it can be doubly difficult as the major moves occur during the night, so with a day job, intra day trading is almost impossible. You will need to consider this point carefully and you may have to fit your strategy to your lifestyle in order to make it work - this is fine so long as you stick to the strategy. 

Currency Trading Strategies : Scalping

Short term trading is synonymous with scalping. Traders may open tens or hundreds of trades per day, looking to take a few pips from the market on each trade. Trades are opened with strict profit and loss targets, and are based on pure technical analysis of the charts. Traders use candlestick patterns and technical indicators, using charts from 5 minute to 15 minute timescales. Trades are entered with a 2:1 or 3:1 risk reward ratio so if a trade is entered on a pair with a stop loss at 15 pips below the opening price, then the target price for exit is 30 pips or 45 pips above the opening. This is a very simple way to trade, and may suit your trading personality and lifestyle. Obviously to follow this type of trading, you need to be in front of the screen all the time if you do not want to miss any trading opportunities. Alternatively you can set up alerts on most trading platforms, based on your own criteria. Common sense will tell you that you will have no interest in the fundamental economics of the country or the currency. This is trading purely on technical analysis -nothing else. In its own right it is a perfectly valid way to trade - do not try to mix it with other styles. The reason people fail with this strategy is twofold :

  1. They never use stops - so a short term trade becomes a long term trade
  2. The long term trade then takes them out of the market as they are under funded.

Currency Trading : Medium Term Trading

The medium term currency trader uses both technical analysis and fundamental economic analysis. By medium term I mean trades that are open for weeks and months, somewhere between  1 and 3 months. Trades are identified using a technical approach, and based on chart timescales of hours, days and weeks.  Stop losses are set much wider, as with a longer term trade, we want to give the trade ' room to breathe' without being closed out by whipsawing, which happens all the time as prices move. A typical long trade would have a stop loss at 100 pips below, with a reward target of 3 to 1 say, so we would be looking for 300 pips in the move before closing out. The same reasons for failure apply as above.

Currency Charts : Long Term Trading

The long term currency trader uses fundamental analysis almost exclusively, with only a passing interest in the charts. Trading positions are open for months if not years looking for long term trends based on the economic outlook both locally and globally. Stop losses are set at 300-500 pips with profit targets of three or four to one. Trading this strategy involves considerable funding in the account and should not be considered unless you have a minimum of 10,000 USD and preferably 20,000 USD to start.

In summary, and before you start trading, you must understand and plan your strategy based on the type of trading and the associated time you have available. These trading strategies do not mix. On a personal note I have two accounts, and use one for short term, and the other for long term - the trades and accounts are kept separate which is a perfectly valid approach, but I repeat again, they are NOT mixed. If I feel like trading for a day using short term scalping then I use one account, while the second account is purely for long term trades. Remember that your personality and trading style go hand in hand. If you would like some further help on the psychology of trading please click here and it will take you to the appropriate page on Making Bread.

Now let's look at some of the basic technical indicators for trading currency, but remember, everyone else is looking at them as well, so they can become a self fulfilling prophesy?

 

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