As profitable as foreign exchange (forex) trading can sometimes be, it’s not without its complexities and challenges. For traders across the world, finding the perfect trade is something that requires constant skill, thorough research, and focused dedication.
When trading on the forex market, it all starts with opening a position. This is the foundation on which all your potential profit or loss will grow, and more often than not, the outcome will be heavily influenced by the accuracy of this initial position.
So, in a market as highly liquid as forex, what ways can you ensure you open the right position, and how do you use forex trading strategies and indicators to achieve this?
Read on, to find the answers to your questions, and see what you need to look for when opening a trading position on the forex market.
Costs and exposure
The first thing to look for when opening a position on the forex market, is the cost of opening the trade, in regards the level of exposure you would like.
With any trade, the first thing you need to do is deposit capital. You cannot hope to make any profit, without having an initial investment to profit from. This works the same with forex, and most commonly, in the form of a contract for difference (CFD), where you’ll deposit capital on a contract, speculating the price movement of a currency pair.
Using this CFD example, as a trader, you’ll need to establish how much exposure you want on the trade. Leverage is essential here, because you can gain a large amount of exposure from a significantly smaller deposit. That being said, your profit as wellas your loss is determined by this leveraged exposure, so you need to ensure it aligns with your confidence in the trade.
All trades should be executed as accurately as possible, and you’ll need an informed basis on which the trade is made. However, certain trades – particularly currency pairs in volatile conditions – will give you slightly more, or less confidence in its success.
Therefore, when opening a position, you should first look for how much exposure you can gain for a certain capital deposit, so you can decide the right investment amount that matches your overall confidence in the trade. This means a higher chance of profit on promising trades, and mitigated risk on volatile ones.
Analysis and indicators
Another thing to do when opening a position, is to choose which analysis you will conduct, and the type of technical indicators you will use.
There are two main types of analysis, which are fundamental and technical analysis.
Fundamental analysis is used by traders to analyse external economic variables taking place in the world, as a way of predicting the movements of the forex market. An example can be changing inflation or interest rates ina country. External factors can have huge impacts on the market, so analysing these can give you a more accurate insight into price movement.
Technical analysis involves the use of indicators to analyse market performance. These indicators are mathematical calculations that can determine trends and patterns in the market, and help predict future movements of a particular currency pair.
When opening a position, you should establish the type of analysis you want to conduct – you may even find a combination of both is optimal – and then include appropriate indicators in your strategy, if necessary, to ensure the accuracy and strength of your position.
Trade and position type
One final thing to look for when opening a position, is the type of position that would be most appropriate in the situation.
There are multiple forms of trading available, each with their own levels of risk, so ensure you choose a suitable one. For instance, you might find that opening a CFD on a certain currency pair is best, since you may be predicting a downward price movement – something you can still profit from with CFDs.
Next, you will also need to decide on the nature of the position you want to open. There are many different strategies and position types to choose from, and different options could produce different outcomes for a particular currency pair.
For instance, after looking at the market and asset thoroughly, you might decide position trading is ideal. This is a type of position held over a long periodof time, ranging from months to even years, in the hopes that it will incur substantial profit in the long run.
When opening a position, the type of trade and position you’re opening is crucial to the likelihood of success.
As you can see, opening a position is the fundamental component of every trade, and thus, should be treated with the utmost importance, and include these main considerations when being implemented.