Top Tips: Improving Your Trading Results
Forex traders are always looking for ways to enhance the results of their trading activities and ultimately, their profitability. Some of the steps one can take to improve forex trading results are linked with enhancing one’s knowledge of certain concepts and how the markets work, while other aspects required are related to forming a trading plan and carrying out risk management. A few other areas you should focus on include fundamental analysis, technical analysis and market psychology. Also, one of the most important things which you should practice, as a matter of habit, is keeping a trading journal. Let us explore this in more detail.
One important aspect of analyzing the financial markets is fundamental analysis, which is a type of analysis based upon examining the economic factors affecting the valuation of a particular asset, which in terms of Forex would mean a specific fiat currency against another fiat currency. This would include looking at relevant macroeconomic data releases, legislation changes, international trade agreements, political conflicts, central bank decisions, interest rate expectations and more. Generally speaking, the better a country’s economic outlook appears, the stronger its currency will likely be in the markets.
For instance, if an employment report on U.S. employment turns out to be better than expected, the market could react by being bullish on the U.S. dollar, pushing up the price of the asset against other fiat currencies. On the other hand, a worse than expected report may cause the price of the U.S. dollar to decrease.
Another essential type of analysis for Forex trading is technical analysis, which examines the historical price movements of an asset quantitatively. Technical analysis is based upon two subtypes of analysis known as graphical analysis and indicator analysis. Graphical analysis examines the patterns seen on price charts, such as historical highs and lows and certain types of shapes formed on the chart. Analysing individual candlesticks on the chart can yield additional information, influencing the final decision-making process.
Indicator analysis examines technical indicators which provide a quantitative measurement of current market conditions based upon historical price movements. These indicators aim to help traders predict likely future price movements. Some of the most commonly utilized technical indicators are Moving Average Convergence Divergence (MACD), Bollinger Bands, moving averages, Relative Strength Index (RSI) and many more.
The psychological mood of market participants can affect market movements and can even override economic fundamental factors as well as technical factors. Various types of emotional states can become strong drivers of the market including, fear, greed, excitement and irrational exuberance. These emotional states can create an overall market sentiment of “risk-on” and “risk-off” which can drive market participants to invest in riskier or less risky assets.
It is important to understand how these different market psychological states can affect certain assets. For example, many times, the Japanese yen can be considered a safe-haven asset and will tend to appreciate during times of “risk-off” market sentiment. Alternatively, during times of “risk-on” market sentiment, the Japanese yen can depreciate while the South African Rand can become more valuable. Additionally, being able to spot changes in market psychological states early can give traders the ability to make lucrative trading decisions.
Another highly important and often overlooked method of improving trading results is keeping a trade journal. Through maintaining a trade journal, investors aim to ensure they follow their trading plan while also reviewing the implementation and the effectiveness of their trading strategy. It is important to be sufficiently detailed and accurate in trade journaling. If the information written in one’s trade journal is inaccurate, it will not be possible to accurately review a trading strategy and to make the necessary adjustments.
Additionally, the trade journal will also give insight into you as a trader and your own trading psychology. Some traders are more aggressive while others may be naturally more risk-averse. A deeper understanding of your trading psychology will help you to devise strategies which help avoid detrimental emotional trading and improve results.
Market Risks – Final Words
Despite all of the advantages you may gain from obtaining the various types of knowledge of market analysis and the discipline and insight gained from maintaining a trade journal, you will never be able to completely eliminate the risk of loss from trading Forex. This means you should only invest money you can actually afford to lose. Also, consider utilizing stop loss and take profit orders as well as other available risk management tools. Being prepared before you step into the trading arena, will help to improve your trading results.