It should come as no surprise that the forex market is one of the most popular entities of its type in the world, with trillions traded every single day.
However, the forex market is also a complex and volatile entity and one that remains at the mercy of various geopolitical and macroeconomic factors. This poses a huge challenge to aspiring investors, who may remain vulnerable in the market without the requisite knowledge or strategy.
So, how can you make more informed trading decisions and create a profitable portfolio of currencies? Let’s find out!
1. Develop a Basic Understanding of Forex Trading
In simple terms, the forex market is a place where individuals can trade different currency pairs and profit from fluctuations in the international exchange rate.
Currencies are also traded on margin and as derivative assets, which means that you can open positions that are far larger than your initial deposit and profit from speculative price movements without assuming ownership of the underlying instrument.
As a beginner, you also need to understand the factors that impact directly on foreign exchange rates, with macroeconomic factors (such as inflation, interest rates and international trade volumes) particularly important.
We’ve seen the impact of interest rates in real-time during the last 12 months, as many nations moved to slash their base interest rates as part of wider quantitative easing measures in response to the coronavirus pandemic. This has reduced demand for currencies and minimised capital inflows, lowering values considerably in the process.
2. Keep Informed and Follow the Economic News
Given the impact of the macroeconomic climate on the forex market, it’s crucial that traders follow the latest and breaking economic news stories in real-time.
This will provide a steady flow of live information to investors, which can subsequently be used to inform real-time trading decisions, minimise risk and optimise the profitability of each individual trade.
Key data releases and monetary policy changes will be significant influences on daily market swings, so using tools like an economic calendar will allow you to highlight relevant events and use the data provided to inform your trading decisions.
3. Evaluate News Sources and Events in Relation to Specific Trading Strategies
We’d also recommend that you consider multiple sources and viewpoints as a forex trader, in order to gain an overview of the marketplace and the real-times that are impacting on currency values.
You also need to evaluate the news and analysis that you read rather than simply processing it, ideally with your particular and specific trading strategies in mind.
This is crucial, as it enables you to review news stories and economic datasets in a relevant context while also factoring in whether you’re looking to pursue short or long-term gains.
Without this type of approach, you may find yourself trading news items and economic events in pure isolation, rather than factoring in your wider strategy and using determinism to drive completely informed and thoughtful decisions.