What is forex?
Countries have different forms of currency; the United States has the U.S. dollar, Japan has Yen, Great Britain has the Pound, and so on. Forex or the foreign exchange market is where these different forms of currencies are exchanged. People exchange currencies for various reasons such as travel, to make money, or to buy a good or service from another country.
The exchange rate is the value at which one currency can be exchanged for another. The exchange rate for all currencies changes every second of the day. For instance, one U.S. dollar could be equal to 1.2197 euros at one moment in the day, and the next one U.S. dollar could be equivalent to 1.228 euros.
To make money from forex, you buy one currency when the exchange rate is low and hold that currency until the exchange rate has increased. For instance, you would exchange one USD for 1.2197 and wait for the euro’s value to rise above the initial value. Traders study the rate at which these currencies fluctuate to determine the best time to trade forex.
Using a Managed Forex Account
A managed account for Foreign Exchange investing is when a full service brokering firm uses your money to buy and sell currency pairs. With the right company, they will have experienced traders that know the ins-and-outs of the FX market.
There are pros and cons of using a managed Forex account versus doing your currency pair trading. Some have turned to managed accounts as they got tired of searching for the right information on how to trade forex.
With one of these firms making trades on your behalf, this is a set and forget approach. No different than buying mutual funds. However, trying to find a firm that will do this well is challenging. Like mutual funds, if your money is lost, there’s no recourse. Frankly, these firms frighten me as there’s no way to know if you will wake up one day, and your trading accounts wiped out.
With the few services out there that are indeed decent, you will need to deposit a large sum of money. Typically, the starting amount is at least $25,000. You need to pay close attention to fees. Using managed Forex accounts is very expensive. When they do make money for you, they will typically take about 30% of your profits.
After a couple of years of researching and trial and error, I’ve found that being in control of my funds is the best way to go. It cannot be as hands-off as using a managed account but far more profitable. You can manage your account by using downloading automated forex software or join learning communities such as BOTS. It’s very inexpensive to buy. Plus, you can test it out in a demo account, which you cannot do with a managed service.
The biggest fear with turning over your money to a stranger is there’s no way to test them out first. Well, you can, but you have to use real money. Historical returns on their website are no indication that you will make them in the future.
It would be best if you were extremely careful about how you approach the Forex market. A managed Forex account may have sounded like a good idea, but it may be the worst financial decision you’ll ever make.
Forex charting software and how to read forex charts
Forex charting software, such as forex trendy or 1000pipbuilder, is a graphical method of taking live FX market data and putting it into a form that easy to see and interpret. Traders typically view charts in various time frames. There’s the monthly, weekly, daily, hourly, 30-minute, 15-minute, 5-minute, 1-minute charts. Depending on what trading method you apply, you will use a combination of two to four of these charts.
The best way to use these charts is to find the current trend of a currency pair. The way to do this is a top-down approach. You start with the longer time frame charts like the weekly and daily and see if a noticeable trend direction is happening. Then, you move to the shorter time frame charts to execute your trades in the trend direction.
You can add trend indicators on your charts like moving averages and MACD. These help you to be sure you have the trend direction right. I found that the best trends to trade are the ones that are obvious and don’t need an indicator to tell you this. You see that the currency pair is trending up or it’s trending down. The more prominent the trend, the better the trade will be.
In addition to finding the trend, charts are used to pinpoint trade entries. Reading forex charts is a skill that is not easy to develop. When I used to do manual trading before I bought automated forex trading software, I had a few indicators that helped me. I would draw trend lines, add the MACD indicator and the RSI oscillator to my 15-minute charts. When everything lined up, I’d take a trade.
Using the right tools like Forex charting software, is extremely important. Be sure to test out whatever system you end up using before putting your complete faith in it. Reliability of software is always something to be aware of when selecting a charting package. There are many free ones out there, but I strongly suggest you avoid these unless it’s in a demo account from a broker.
Analyzing Time Frames to Use in Forex Trading
In currency trading, there are many different time frames you can use. There are charts in all Forex charting platforms varying from 1 minute up to weekly or even monthly. You have to see the best time frame to analyze the currency pair you use. The most common ones that can be used for day trading are the 1, 5, 15, and even 30 minutes time frame but watch out and be careful with your choices.
What the best time frame a Forex trader can use:
1-min is not very good. In forex, you’ll always pay 3 or 5 pips spread, and most of the time, the 1 minute period doesn’t give you many opportunities. It is too small to avoid all the noise and won’t be enough for you to find good intraday trends.
3-min is not much different. If you use this chart, it will be hard for you to see any differences between a small price swing and a big one.
5-min is a reasonably decent time frame to day trade Forex. It allows you to find the fast trades with an excellent movement to pay for the spread and still make a profit for you as well.
15-min is just like the 5 minutes one, and it is one of the best time frames for a day trader. In this time frame, you can also hold your winners for much longer than the 5 minutes one, so this is the right choice for day traders.
30-min can only be used if you intend to hold a trade for up to 6 or 8 hours; nevertheless, it can also be used for day trading Forex.
Talking about the short-term traders, they prefer the 1-hour chart, the 2-hours chart, the 4-hours chart, and the daily chart.
The 1-hour chart is the right one to hold a trade for 1-2 days. It has excellent opportunities for this kind of trader and allows you to trade with good risk-rewards (this is almost impossible to do in time frames such as the 5 minutes chart or below).
2-hours charts and 4-hour charts are the best options for holding a trade for some time up to 2 weeks.
The daily chart is used by traders that hold trades for weeks or investors.
In forex, there are many choices of time frames available. It depends on the kind of trader you are. Bear in mind that if you are going to use technical analysis in your trading, you will need larger time frames, so it is essential to know what you want and strategically choose the chart to help you achieve your goals.