In order not to make the content of our example too verbose, we decided to write these separate notes. We know how important a free demo is to practice with, especially for those who have never traded in their life. It is important to learn, but also not to be to risky. Whether you’ve already read it or not, follow the lesson or video tutorial on trading on Forex together with a demo account, as in doing so, you can repeat the operations carried out in the lesson personally.
Given that we are talking about Forex, it is understood that we’re discussing currency pairs and exchange rates, but if your interest is on other types of assets, such as shares or stock indexes, know that on trading platforms it is generally always possible to negotiate on these too. Equities, ETFs, bonds, cryptocurrencies, etc. are available in addition to stocks and indices.
Focus on a few tools
Especially if you are a beginner, we recommend you choose two or three currency pairs at the most and concentrate on those exclusively. To start off you could also trade on just one, so as to become familiar with the basic concepts relating to the reasons that can push a given exchange rate upwards or downwards. Later, you could switch to two and eventually three, thus closing the so-called “Forex triangle”.
An example of a Forex triangle could be the Euro, Dollar, and British Pound, with EUR/USD, EUR/GBP and GBP/USD exchange rates.
In doing so, you won’t waste any time and your concentration won’ suffer looking for exchanges on which to negotiate for whatever reasons. To use a metaphor, the list of available negotiable currency exchanges is like a big wardrobe: the bigger it is, the harder it is to decide what to wear.
Let’s reduce our choices and negotiate better. Specialize on a few currency couples and become an expert!
The importance of analysis
In our example we took a direct approach in order to show you in the simplest way possible how to open a position up or down on a Forex pair. However, the analytical phase prior to opening a position is very important.
Understanding when the right time to enter the market is what makes the all the difference.
We must take into account that prices move continuously and that profits are achieved on price changes that occur from the moment a position is opened. If after opening a position prices go in the expected direction, the result also moves towards profits.
Profits, in turn, will be higher the more the price moves in the right direction.
Entering at the moment when there could be a possible interesting upside or down will produce attractive profits. On the contrary, if you enter the market at a moment characterized by a lateral phase, or “flat” phase, it won’t produce particularly striking results.
Precisely for this reason, being able to analyse macroeconomic data and combine this with technical analysis (with which we try to predict what will happen in the future), creates the perfect mix to obtain potential positive results in Forex trading.
Use of the trading platform for analysis
A trading platform is all the more complete when it can guarantee a complete view of what is happening on the markets both from a fundamental and technical point of view.
Let’s reiterate these two concepts:
- Fundamental analysis: this is the analysis that studies macroeconomic data and events that can affect Forex prices. Examples of macroeconomic data are those of interest rates, inflation, etc., which are published by the competent bodies and which are systematically anticipated by analyst forecasts who are already starting to move the market.
- Technical analysis: this is analysis of charts where the objective is to calculate the price that an asset will have in the future (near or medium/long term), as well as calculate any inversions or continuation of price trends.
That said, a trading platform should ideally offer:
- Technical analysis tools (indicators that can be easily applied to the chart in real time)
- Tools for fundamental analysis (economic calendar in primis)
Some platforms only offer technical analysis tools and comparisons should also be made regarding their quality. However, from this point of view giant steps have been taken so the quality is usually very high, as far as the best regulated Forex brokers operating in Europe are concerned.
Regarding the opening of a position
Therefore, before opening a Forex trading position, we should study the situation well and, if necessary, wait for the most suitable moment to open a position. You must be patient.
So, don’t rush to open a position simply because you have just reloaded your trading account. Taking action in a hurry will almost certainly lead to mistakes. The right moment cannot simply be seen at a glance just because the green candles (the ups) or the red candles (the downs) seem to be protagonists of that very moment. Following the trend of the moment at a glance could in fact lead to very serious situations, that of a possible reversal that would represent a most risky situation.
It is therefore not a question of choosing the ideal moment (in absolute terms), but simply of choosing a propitious moment and a moment for which there is at least a strong risk of reversal at the time of opening a position.
There are technical analysis tools to predict a potential reversal, so refer to their study in order to avoid running into very unpleasant situations.
Another element to highlight is the importance of using stops. A stop loss, first of all, allows you to protect your capital from losses beyond those programmed.
For example, if you open a position without applying a stop, the loss of a single transaction could lead you to large losses. Instead, by applying a stop, a maximum loss limit can be set, as the platform will automatically close the affected position if the losses reach the established level.
Similarly, in opposite terms, is how a take profit (or stop limit) works. With this type of stop, you can take profit automatically, if the price reaches a certain level that you have set as a target price.
Analysis for monitoring and closure
Technical and fundamental analysis are very important not only for the opening of a position, or to understand what moment is best to enter the market, but it is also important for monitoring the position and for its closure.
In fact, the possibility exists of an unforeseen event happening or macroeconomic data is published after the opening of the position (for example a few hours or day later). In this case, if you think that the price could see changes resulting in losses, you could consider closing the position, in whole or in part. Or, decide on a hedging strategy to freeze any losses due to such events.
Similarly, technical analysis could highlight a potential trend reversal with respect to forecasts made.
In both these cases, a closing of the position (or a modification thereof) could be useful and even fruitful.
The importance of your balance
Don’t be afraid to face reality, and judge yourself on your results.
Every week, or better still every month, make an account of what you have accomplished. The trading platform will offer you a chronology of your transactions and above all will offer you the “give and take” in which the items relating to profits and overall losses are easily visible.
How much did you deposit? How much have you earned or lost?
If your losses continue to accumulate over time, obviously there is something you need to change in the way you trade and you’ll need to act on these errors.
Go to the next lesson: Forex orders