Identifying trading Opportunities in forex trading
Stepping into the world of forex trading, certainly takes courage and a will to navigate the global forex markets.
As we ‘ve discussed in previous articles, timing in the foreign exchange market is key to the success of the traders strategy. The forex market is known for its volatility, as well as the ups and downs and of course the consolidation of prices prior to the continuation of any trends forming.
Starting off, as a trader you initially need to set and determine your trading plan. Remember though: once you ‘ve prepared it, you need to stick to your trading plan. Your trading plan is therefore in place and you ‘ve determined the currency pairs you would like to focus on as well as the market direction of the pairs you have chosen, you need to start looking for trading opportunities.
When trying to identify trading opportunities in currency trading, there are various types of factors your need to look at as well as some basic guidelines you can use to spot trading opportunities.
Review last days market activity and news
Firstly, you should review the previous day's market activity and news. That will allow you to understand the market sentiment for your chosen currency pair. Most traders will refer to fundamental or technical analysis. To make better trading decisions you should try to use a combination of the two. Focus on the pairs you are interested in, and see how they ‘ve behaved previously. Make sure you check their high’s and low’s as well as the resistance and support levels they ‘ve touched.
Forex trading tip: Pay special attention to indicators such as unemployment and economic growth as well as what matters most, interest rate decisions.
Check the economic calendar
Secondly, check the economic calendar for news and announcements that are coming and might affect the currency pairs you ‘re looking to trade. Announcements from banks are known to bring the most volatility to the markets. Therefore make sure you note down the time and day announcements are being released.
Review the stock market performance
Next it’s important to check the stock market performance. For the past years price movements have been influenced by the equities market. When stock markets fall, traders might liquidate positions in risky assets and shift funds to less risky assets seeking safe haven currencies such as UD Dollar, Japanese Yuan and Gold. Likewise, when stock markets are on the rise, there is a higher demand in risky assets.
Gain confidence in your chosen currency pairs by performing analysis
Lastly you should refer to the technical analysis for the pairs you are interested in trading. The forex market often move in long term trends. Technical analysis can be used to spot a trading opportunity and help gage at the trend of a particular pair and whether its going to continue. As mentioned earlier, make sure the check the news and fundamentals to confirm your suspicions on the pairs movements and give further confidence to the trade.
Calculate the risk/reward ration
Once you ‘ve completed all the steps above, you are ready to trade. Always make sure that your trade is backed up by the risk/reward ratio. That will ensure you ‘ll never risk more than you are prepared to. The ratio is calculated as:
Amount to lose
A good strategy should have a ratio of 3/1 and the total amount risked should not exceed 3% of your total available capital.
Remember that the forex market moves very fast and is volatile. So it is important to protect your investment via a predetermined stop loss and take profit. By doing your market research analysis, you ‘ll learn to spot trading opportunities that will increase your chances of success throughout your trading journey.