Be a Smarter FOREX Currency Trader: Three Basic Principles
Below I will describe three basic principles that may come in handy for currency traders. They are very easy to implement and potentially take advantage of as you will see.
Principle 1
Some currency traders find that it is useful to always trade a given currency pair at the very same time every day. The reasoning for this is that most of the other traders buying or selling that currency pair may also trade at the same time. Major trading pits may also be working the exact same shift every day. This technique may be especially useful for currency traders who exploit technical analysis. Again, the reasoning for this is that it may be possible to standardize the trading conditions if one trades during the same time frame every day, if only for a very little bit. However, that small bit of standardization may yield several pips worth of profit. Nevertheless, it is readily obvious that the foreign exchange market can be very volatile and random.
Principle 2
Certain currencies trade with a certain volatility at a certain time. Once you've finished practicing your trading skills on a demo account and you decide to test the waters using your own investment capital, you may want to minimize the amount of liquidity and volatility to hedge your risk. Alternatively, you may want to increase the risk involved, and potentially increase your profit potential. (It should be noted that very heavy risk is involved under any circumstances.)
The foreign exchange market follows the sun around the world moving from the United States to Australia and New Zealand to the Far East, to Europe and finally back to the United States. Overall foreign currency trading volume is determined by which markets are open and the overlap in the times that these markets are open. Currency trading volume is relatively high 24 hours a day, but there are considerable peaks in activity when the British, European, and US markets are open simultaneously, which is from 1 pm GMT to 4 pm GMT. Pacific Rim markets, such as Japan and Hong Kong, show a dip in their trading volume while there is extensive volume in the US market at the very same time. Nevertheless, it is still possible to perform technical analysis on Pacific Rim currencies. By trading during a certain time frame, one may be able to either minimize or maximize the level of volatility (and risk) for a given currency pair.
Principle 3
Although the above is a general statement about the activity volume for certain currencies, it may be a good idea to attempt to capture the level of volatility for given currency pairs. You can potentially use Bollinger bands, a tool used by technical analysts, to quantify volatility. Bollinger bands compare volatility and relative price levels over time. Some currency traders cannot trade a day in their life without using Bollinger bands, while others may not find any use for them; it is really up to you to decide whether Bollinger bands are of any use to your specific situation.
I have described three basic principles that may potentially come in handy for currency traders in the foreign exchange market. They are very easy to implement and may reap rewards (or lack thereof) depending on market conditions. Hopefully these principles will help you come up with your own successful strategies for trading currencies in the foreign exchange market.
Joshua M. Kunken is Currency Analyst for ForeignMarketWatch.com. His articles may also be found at ForexTrack.com.
Latest News
Currency Trading Market Conditions Remain Challenging: Breakout ... Daily FX, NY - Sharp US Dollar gains have produced profits in several of our currency trading strategies on the week, and a continuation of US Dollar strength would make ... US Dollar Forecast to Rally Against Euro, British Pound, Fall ... |
 Voice of America | Treasury’s Lead Role in China in Flux New York Times, United States - Besides, some noted, China’s currency, by maintaining its peg to the dollar, has risen in relation to the currencies of other trading partners because the ... Yuan's Fall Watched Ahead of US-China Summit China hopes talks with US boost coordination Paulson Seeks to Broaden Access to China |
Stocks drubbed at open CNNMoney.com - US crude for January delivery tumbled $3.46 to $50.99 a barrel on the New York Mercantile Exchange. In currency trading, the dollar fell against the yen and ... |
 Maktoob | Yen Strengthens as Manufacturing Slump Weakens Yuan, Ruble Bloomberg - Bank Rossii, which manages the currency against a basket of dollars and euros to mitigate the effect of currency swings, widened the ruble’s trading band to ... Dollar Rises as Global Manufacturing and Stock Markets Plunge Down Is Dollar's December Direction Yen Extends Gains as Signs of Global Recession Sap Carry Trade |
Yuan Falls to One-Month Low as China Seeks to Shore Up Economy Bloomberg - “The central bank may want to test the market’s response to the possibility of a weaker yuan, but most likely it will keep the currency stable till the end ... Yuan tumbles to end at bottom of band vs dollar Yuan posts record low against dollar Rate cut sees yuan decline |
 New York Times | Some Nations That Spurned the Euro Reconsider New York Times, United States - After turmoil in the currency markets nearly destroyed the currencies of Iceland and Poland, the two countries are rethinking their opposition to the euro. ... |
GLOBAL MARKETS-Grim economic outlook pummels stocks, oil slides guardian.co.uk, UK - ... also lifting the dollar, so it's possible the dollar will get a bit of a bid out of this, but currency trading is going to be choppy," Reid added. ... |
AU Preview: Q3 GDP Should be Bo... ForexTV.com, NY - Forex (or FX or off-exchange foreign currency futures and options) trading involves substantial risk of loss and is not suitable for every investor. ... |
Ruble Plunge Prompts Doubling of Reserve Spending, Survey Shows Bloomberg - Bank Rossii buys and sells foreign currency to keep the ruble within a trading band against a basket comprised 55 percent of dollars and rest in euros. ... Russian Stocks, Ruble Drop as Production Falls More Than in ’98 |
China's currency falls by record against US dollar MarketWatch - The yuan eased to 6.8848 against the dollar, falling to its 0.5% trading limit, its lowest level since May. Against the dollar, the Chinese currency was at ... Chinese market closes higher Manufacturing Contracted At The Fastest Pace In 25 Years During ... |
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