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The foreign exchange market, or FX (Forex) market, is the largest and most liquid (willing buyers and sellers) financial market in the world. Traded 24 hours a day, five days a week, the FX space is designed to facilitate the exchange of currencies (through currency pairs), such as the US dollar (USD) or euro (EUR), or EUR/USD, for example.
Attaining success and consistency in the Forex market as a trader requires a unique skill set, one that involves time and dedication. To help, the Research Team at FP Markets joined forces and came up with five of the most critical skills one must grasp in order to help accomplish their goals in the Forex market as a trader.
Technical analysis is a broad discipline, studying historical price and volume data to recognise patterns and trends on charts, hence why some technical analysts are called ‘chartists’. Charts are assessed through price action and technical indicators to determine buy and sell decisions.
Some key techniques involve trend studies (attempting to identify early trends using price action and indicators). Fibonacci analysis is also a common Forex trading strategy, along with chart patterns, such as double-top patterns and head and shoulders formations. To become proficient in technical analysis, you need to learn how to use these tools and techniques and how to interpret the signals they generate.
You will often find that traders (and investors) may use fundamental analysis to determine the longer-term picture and use technical analysis to enter and exit based on chart structure.
Fundamental analysis for a Forex trader is largely focussed on macroeconomic data, such as Gross Domestic Product (GDP), inflation (CPI), and employment data, as well as the direction of the Federal Funds rate set by the US Federal Reserve (the Fed).
Ultimately, traders look to the Fed for longer-term direction, with economic indicators used to gauge shorter-term direction. When these two align, it can offer tradeable opportunities, particularly with the use of technical analysis to gauge entry and exit criteria.
As a Forex trader, you are a risk manager first and foremost. Absent risk management, regardless of the trading strategy’s win ratio, or even risk/reward ratio, it is unlikely that the trader will have any form of longevity in the market. All it takes is one unfavourable market move to occur, and it can end in account ruin.
At the core of things, setting protective stop-loss orders is crucial in your trading. This is an order communicated to FP Markets to liquidate an unfavourable position. Another key risk-management technique is understanding leverage and position sizing. Leverage is fixed; it does not change (unless you request this through your Client Portal). Your position size for each trade, however, will change as the stop-loss distance will be different on each trade.
Risk management is a broad field and worth spending the time to understand if you desire consistency in your trading.
Trading psychology can be defined as the following: the emotions and mental state in your trading that can ultimately influence trading actions. Despite an often overlooked subject, trading psychology is as important as other trading concepts such as market analysis and risk management.
The psychology of trading is complex and takes time to understand. Humans cannot remove our emotions, but they can be controlled. This is the key: controlling one’s emotional response to trading, which helps to remain calm and objective and make rational decisions under pressure. When trading, you will inevitably experience various emotions, such as excitement, euphoria, fear and greed. If you cannot manage these emotions, they can cloud your judgment and lead to bad trading decisions. Discipline and patience are also essential for Forex traders because they help you stick to your trading plan and avoid making impulsive trades.
The Forex market is constantly changing, so it is important for traders to be adaptable and willing to learn new things. This means being open to new trading strategies and techniques and being willing to change your approach if it is not working. The Forex market is a very competitive market, so you need to be constantly learning and improving your skills in order to stay ahead of the competition.
These are five of the most important skills needed to help become a successful Forex trader. In addition to these skills, getting a good education can help speed things up and keep you on the right track. With FP Markets, you can access our Trading Academy, which is packed with educational resources, ranging from beginners to advanced lessons.
Adopting the use of a demo account is widely recommended. This is a great way to learn how to trade without risking real money. Another point worth highlighting is to start small and become accustomed to the emotions of trading and the risk. You can start with as little as 100 AUD, or equivalent, with FP Markets, and access the most popular trading platforms, like MetaTrader 4 and 5 (MT4/5).
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