FX Trading Tutorial
The foreign currency exchange market (forex, or FX) is one of the most risky financial markets due to the quick fluctuations that occur in currency exchange rates. It remains popular with investors and is more than 10 times the size of all the world's stock markets. This popularity is party due to the market's 24-hour operation, allowing many people to try active trading at night while keeping their day jobs. But money is made or lost very quickly and risks are among the greatest in any trading environment. An organized strategy for trading forex is necessary to succeed.
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Instructions
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Chart any forex currency pair--for example, the U.S. Dollar and the Japanese Yen. In foreign exchange, you trade units of a currency pair. The price of this pair equates to the exchange rate between any two currencies. To determine if a particular pair is worth trading, you must first chart it using any forex charting software. Your foreign exchange currency broker usually provides this software.
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Identify the highs and lows in the forex chart. A "high" is a price point that preceded a decline in forex prices, while a "low" preceded a rally, or rise, in forex prices. These are easy to see on any price chart as they resemble peaks and valleys in price movement.
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Compare the most recent high with its previous high. Also compare the most recent low with its previous low. If the recent high is higher than the previous high, and the recent low is also higher than the previous low, the currency pair is "trending" up, based on trend definitions by "Dow Theory," a century-old concept for analyzing price action.
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Buy into the forex pair if those up-trend conditions are evident.
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Sell the forex pair if it appears to be in a down trend. In this chart pattern, the recent high is lower than the previous high, while the recent low is lower than the previous low. Foreign currency exchange trading allows you to "short" a currency pair as easily as you would buy it. This makes it possible to profit from a decline in prices.
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Chart another forex pair if the current pair is not trending in either direction. Until you gain experience with other foreign exchange strategies, you should continue to look for other pairs that show a solid trend. If you attempt to trade a forex pair that is not trending, the price fluctuations will seem random to the untrained eye.
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Tips & Warnings
Trend trading is just one of many strategies you can employ. However, it is among the easiest to learn and generally offers the greatest rewards since a trend may continue for a long time. Trends are easy to identify on a price chart. If you successfully enter a strong trend, the rewards are quick and substantial. Only after you gain experience with one strategy should you look to trade using other techniques. Patience is required to successfully trade forex long-term.
There are substantial risks associated with forex trading. You can quickly lose all the money in your forex brokerage account. Never trade with money you cannot afford to lose.
References
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