How to Trade Currency Pairs
Trading currency pairs is a high risk financial adventure that has the potential to deliver incredible and instant profit. Exchanging the currency of one nation for the currency of another creates an environment for profit in the exchange because of demand and supply, global news, and the general tendencies of human behavior. The Internet provides a platform for these exchanges and with training, discipline, and patience, it is possible to trade currency pairs as a full-time or part-time income source. The sheer variety makes it impossible to explore all the ways to trade currency pairs, so look at one strategy that works well in most time frames with most currency pairs.
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Things You'll Need
- High speed Internet connection (required)
- Computer
- More than one monitor (optional, but highly recommended)
- Trading platform
- Starting capital
Instructions
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Establish yourself as a Forex trader. Before you can start trading currency, you must establish yourself as a Forex trader with all the tools. In particular, you will need to establish a platform to begin your currency trading (see Resources).
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Choose a trading strategy. There are many currency pairs available for trading and there are many ways to trade currency pairs. Some strategies will only work with a specific pair in a specific time frame, other strategies will work with all the major currency pairs and some require access to specific indicators or memberships.
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Plan your trade. Before entering any trade, review your charts in several time frames and check the economic calendar for any upcoming reports that may cause spikes in the market. In the examples shown, the currency pairs traded were the EURUSD and the EURJPY during the month of April. Open up these currency pairs in the daily, 4-hour, 60-minute, 15-minute and 5-minute time frames, to establish an overall trend direction and look for any discrepancies that may indicate a pending trend change. There is a well accepted saying in the trading industry, "The Trend is your Friend." If the overall trend for the currency pair is down, then look for sell entries or triggers that match your trade strategy. If the trend is up, then look out for buy triggers.
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Trade your plan. Having planned the trade, you now need a way to execute the plan to sell or buy a currency pair as per your trade plan. That means therefore, you must have a trade plan. These are often referred to as trading strategies. The one discussed here uses three main tools (a) the 50-day Exponential Moving Average (turquoise line) (EMA), the 200-day EMA (purple line) and (c) a directional trend line. Any time frame can be used, but the trades shown were executed based on triggers on the 15-minute charts. The entry trigger for trades are based on the direction that the 50-day EMA crosses the 200 day EMA. The exit strategy is either (a) when the candles cross the trend line or (b) when the 50-day EMA recrosses the 200-day EMA.
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Execute the trade when the trigger is received. Chart A shows an actual trade for the EURUSD (Euro currency versus the U.S. dollar. The 15-minute chart entry trigger was the 50-day EMA (turquoise line) crossed the 200-day EMA. Since the 50-day EMA crossed the 200-day EMA (purple line) to the south, the trade entered was a sell. This trade was exited when the trend line was broken. Chart B shows an actual trade still in progress. The EURJPY (Euro versus the Japanese Yen) triggered a buy signal when the 50 EMA crossed the 200 EMA to the north. Within 8.25 hours, 149 pips were accumulated.
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Measure the effectiveness of your strategy regularly. It may take a while to develop the discipline to wait for the entry and exit signals that match this strategy. Once a trade is open, if you are not able to watch the trade through to completion then set an exit option that allows your absence. This could be a trail stop which will close your transaction should the trade reverse on you, or you set a target, say 100 pips away from your entry point at which time the transaction will automatically close.
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Manage your risk. This strategy allows for a tight stop loss. The stop loss point is just behind the point where the 50-day EMA crossed the 200-day EMA. Ideally, this point is no more than 50 pips away from your entry point, so this means, if you notice this trigger when more than 50 pips have gone by, then look for a retracement entry point, or wait from the next time.
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Tips & Warnings
Relax and trust your plan. Allow a minimum of 10 attempts of using the strategy to come up with a success ratio. So if the plan works for you 50+ percent of the time, OR, the pips earned in the successful trades put your account in the positive, THEN you can determine if the strategy works for you or not before setting it aside for another strategy.
Don't bail out of the trade just because the market pulls back a bit. As long as your exit trigger has not been met, stay in the trade.
Resources
- Photo Credit Screen shot from the Writer's Currency Trade Account
