For anyone starting out trading the forex market, managing your trading can be a daunting task. Everything else seems to take priority over proven evaluation techniques. Learning the currency pairs and the myriad of technical indicators can at first be all encompassing, but building a solid market evaluation approach will allow you to maintain the big picture necessary for successful forex trading.
It all begins with a trading plan. Your forex trading plan should be your hard and fast guide to trade execution. Your trading plan should reflect your trading philosophy and style. Your plan should also contain key forex market evaluation strategies. Below are some currency market evaluation rules that can be embedded into your forex trading plan.
1. Price Action
In the end it is all about the price. Take a look at the current price behavior. Determine if the market is oversold or overbought. Are there any signals indicating a reversal, continuation or retracement? Where are the areas of support and resistance?
2. Market Condition
Access the overall market conditions. Look at both long and short term views. Access if the market is range bound or trending. Look deep into the market using multiple time frames in your technical analysis to determine if the currency pairs are trending short term in a long term range bound market or vice versa.
Stay current with the news and geo-political events. Technical analysis is the direction and the news can be the catalyst. Get comfortable with the principals of that Italian mathematician named Fibonacci.
3. Price Target
Determine what your price target is for the respective ranges and time frames. Patiently time your trade executions. You will be rewarded. Use your price action evaluation and market conditions to determine your price target.
Ask yourself if it makes sense and look for reasons NOT to enter a trade. When you cannot find those reasons then it is onto trade execution to determine reward-risk ratios and stop losses!
4. Stop Loss
Determine the criteria for stopping the trade on both profit and loss side. Decide upon both technical and fundamental stops. No one is correct 100% of the time, in fact when we trade leveraged instruments like currencies we can be profitable with less than a 50-50 win-loss ratio when we have excellent money management skills.
If you trade without a stop-loss then your forex experience will be a short-term activity!
Anyone can enter a trade, but it is the truly skilled forex trader that knows when to exit the trade. On the profit side, as well as the loss side!
5. Risk Management
Determine how much capital you are going to risk in a given trade. This is critical. You have performed all your evaluation and your exact risk should be a known quantity.
You should also have a minimum reward to risk ratio established in order to limit your losing trades while giving the best odds for the trade to be profitable. This risk to reward ration should be determined by your trading style and time frames used.
Finally, talk the trade through with your trading group or out loud if you are alone. Trust me; you will not be the first forex trader to talk to yourself. Being able to talk through a trade will reinforced the positive aspects of the trade and confirms that your trade will be executed in accordance with your trading plan.
Then it is time to celebrate, because even if the trade does not go your way you had solid execution. You had a losing trade and not a bad trade. That is the difference between successful and non-successful traders. The law of averages will eventually reward you.
If forex is your path to financial freedom, then it should be your business as well. Developing a solid business (trading) plan and market evaluation approach will be your foundation for success in the forex market.
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