How To Help Simplify The Forex Trading Process

Forex trading is not necessarily difficult. However, trading profitably may be challenging for those who don't have the time and resources to consistently follow changes in the market. Fortunately, there are resources available for traders who want to explore the market's opportunities without making it a wholly time-consuming endeavour.

Strategy Building

While adopting a trading strategy may sound like an arduous process, it can pay off in the long run. Traders who use strategies—rather than those who rely on instinct—add discipline to their skill set while taking some of the guesswork and stress out of trading by sticking to a predefined plan.

Strategies can be based on several analysis-based techniques that take into account price movements, price momentum, trading volume and volatility, among other factors. These strategies can then be put into effect when traders place market orders or entry orders that define entry levels, stop-losses and profit limits in advance of a trade.

Strategy Archives

Traders who may not want to take the time to develop their own strategies can opt to simply borrow strategy ideas from others. There are repositories online where software developers have made their indicators and strategies available free of charge to other traders such as FxCodebase.com. This site hosts hundreds of custom files from trading developers that can be applied to a wide range of market and trading situations.

Alerts

Setting up alerts is another efficient way to make trading easier. Many online trading platforms will allow traders to program signals that will sound off when a currency pair reaches a predetermined price or other set condition to let them know to buy or sell the pair. The signals can be sent to mobile phones or tablets so that traders don't have to monitor the market in order to know when they have a good opportunity to trade.

Automated Trading

Automated trading has become commonplace among retail traders and it's easy to understand why. Many trading platforms provide the opportunity to use automated trades with pre-programmed strategies, allowing them to step back from the market and carry out other activities while the platform works for them. This feature may be especially helpful for traders who have other obligations, such as a full-time job or studies.

Risk-Reward Ratio

Adopting a risk-reward ratio is an important rule of thumb for traders that can remove doubts and relieve stress. This technique allows traders to limit the amount of risk they assume on any given trade.

To implement a risk-reward ratio, traders will determine the amount of loss they are willing to accept on a trade and set a stop-loss order at a corresponding price level. Then, they will multiply that amount by the amount of profit they are seeking and establish a profit limit at that level in the opposite direction.

For example: a trader accepts a 1-to-3 risk-reward ratio with a maximum loss of 10 pips on a buy order. They then set a stop-loss at 10 pips below the entry level price of their trade, and a profit limit at 30 pips above their entry level price.

If they entered a trade buying a currency at a price of 1.0500 and the price fell to 1.0490, then their stop-loss order would be triggered and they would lose an amount equivalent to 10 pips. However, if the price moved upward to 1.0530, then their profit-limit would be triggered and they would profit the equivalent of 30 pips.^[1]

While establishing a risk-reward ratio can't eliminate the possibility of losses, it can improve the probability that earnings will be greater than losses overall on a series of trades.

Careful Use Of Leverage

Use of leverage can potentially increase the rewards in trading by helping multiply the earnings on winning trades.

The only problem with using leverage is that it can allow for the risk of traders multiplying their losses. Determining the leverage you want to use will depend on how much capital you are comfortable putting at risk and how-risk averse you may be. Although brokers can offer leverage of up to 400:1, some traders recommend limiting leverage to 10:1 to avoid large exposure to losses.

In a typical mini lot, each pip earned or lost in a trade is worth £1. With 10-to-1 leverage, that will be multiplied to be worth £10. In a standard lot, each pip earned or lost in a trade is worth £10 and 10-to-1 leverage will yield a value of £100 per pip.

Social Trading

For traders who decide they just don't have the time or nerve to invest in developing their own strategies, there is another alternative available: social trading.

Social trading is a practice in which experienced traders allow others to simply copy their trades directly with the hope of making a profit in doing so. Social traders sign up on a social trading network, much like a social media network. From there, they can gain access to trading forums to exchange ideas and interact with other traders who will allow them to copy trading strategies.

Summary

Trading forex, like trading in all financial markets, involves some risk and concerted effort. However, trading doesn't have to be difficult or stressful. By adopting some widely used practices and safeguards, traders can reduce risk and stress, and over time make their trading activity progressively easier and more profitable.

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