Forex Trading Concepts

Money Management

For everyone involved in forex trading, money management is the most important trading concept, although it often gets overlooked. The individuals who fail at FX trading do so because they don’t fully understand how to manage their money. It is important to know the value of every penny when wagering thousands of dollars.

An important factor in money management in terms of forex trading is to minimize money lost on each transaction. This involves knowing how much to put into one trade while having enough left over for future deals.

One way to do this is by remembering that forex trading is not like gambling at a casino or pool hall.

In order to increase profits while gambling, losers need to start placing higher bets to recoup lost money and start getting ahead. The opposite principle is true for forex trading. Some FX traders call this the “Anti-Martingale rule,” which says to bet more when on a winning streak and less while losing. It is also good advice for traders to not bet more than 1% of their core equity.

Fundamental Analysis

Before telling your forex broker to make a deal, consider the principles that are behind a solid FX trading investment, called fundamental analysis. Every time a forex broker or trader exchanges currency, it is because something tipped him/her off that another country’s currency was going to head upwards. The best investors keep one eye on the market and the other on the news, looking for worldly events such as international relations, political climate, natural disasters, or economic shifts that indicate a major change in the forex market. For example, if a tsunami hit Japan, fundamental analysts will critically comb the market to see if Japan’s currency decreases.

Other indicators whether to buy or sell using the forex trading platform include inflation, unemployment rates, major policy changes, and the activities of other markets involving stocks, bonds, and money.

Fundamental analysis looks to discover the causes of market changes, while technical analysis studies the effects of those changes. Excellent forex trading involves using fundamental analysis to back up what technical analysis predicts.

Technical Analysis

While fundamental analysis often involves using intuition to make decisions involving forex trading, technical analysis is based more on data. Using charts and graphs, technical analysts attempt to predict if trends for particular currencies will continue or reverse. It brings strategy into forex trading, rather than gut instincts.

Technical analysis is similar to fundamental analysis, but it focuses more on the effects of market movements rather than the causes themselves. While a fundamental analyst might see a country’s employment rates dip significantly one month and decide to have his forex broker move money out of that currency, the technical analyst will see that same event and use it as a jumping-off point to study data from previous months and even evaluate historically how that country’s currency responded the previous time there was a major drop in employment.

Technical analysis gives up the potential gain by making quick decisions in exchange for the certainty of a well-informed decision. There are reasons to argue for both fundamental and technical analysis.

Psychology

When forex trading, it is important to understand the role emotions play in affecting an individual. FX trading can seem confusing or intimidating at first, which will create continued losses if emotions cannot be controlled. In order to become a successful forex trader, emotions must be harnessed.

It may seem easy to control your impulses, but when a huge profit is staring you down, even the most disciplined people can slip. The best investors in forex trading know how to suppress their urges and make intelligent deals. They can also remain positive while taking a loss and have the persistence to turn around a bad trade and make a profit through their forex broker.

Quantitative Analysis

In forex trading, sometimes it is wise to hire someone to provide quantitative analysis in order to maximize profits. Quants (as quantitative analysts are often called) use mathematical equations to predict how the market will react. Typically, this is done by plugging in numerical values for variables in equations that try to reproduce reality through mathematics.

Quantitative analysis can be used to measure the accuracy of other forex trading strategies. In general, it is commonly used for simple forex trading tasks such as calculating simple financial equations, like earnings per share. It can also be used for more complicated tasks like calculating option pricing or discounted cash flow.

It may be beneficial to hire a quant, but it is not necessary when investing with a forex trading platform, because often intuition and following trends can be fine without mathematical analysis.

Sentiment Analysis

When everyone is jumping on a particular currency in the forex trading market, a sentiment analyst goes in the opposite direction. Using sentiment analysis involves closely watching trends in the FX trading market and using that information to predict a shift. If forex market analysts are all leaning one way, and the majority of investors are following their advice, then sentiment analysts believe that their will soon be a change that will send the market in a different direction, and by determining what that direction is early they stand to make the greatest profit.

The best means of following what is popular include COT data, propriety bank flow, and special research like Market-Vane. If it investors believe a price will rise, the sentiment analyst will have his forex broker sell that currency, predicting a shift.

For more basic forex trading info, check out our dedicated resource pages. Experienced with forex trading? Check out our partner programs for Private Labels, Introducing Brokers, Money Managers and investors or skip to more information about opening a live account.