The 24-hour-operational foreign exchange market represents opportunities for the savvy trader. You can realise profits from currency price fluctuations around the clock, taking advantage of the market’s high liquidity that allows quick entry and exit from trades. You can also use leverage.
Starting Strong With Copy Trading
If you’re new to forex, copy trading can help improve your chances of success. It is a functionality available in some of the best global trading platforms that lets your account automatically mimic the trades of experienced traders.
How does it work? You must select a trader to follow from the list of experienced traders who have made their available for other traders to copy. You can also set specific criteria for the trades your account can copy, such as limiting copy-trades to certain volumes.
Copy trading is an excellent “hack” for beginners. By following an experienced trader with a proven track record, you can benefit from that trader’s expertise and make good trades even if you don’t know much about forex trading.
Of course, you do need to continually monitor your results and make adjustments if needed. Furthermore, you must learn. Analyse successful trades and try to understand what determines each outcome. Do the same for losing trades.
If you do this regularly, you will eventually get a handle on the key factors that determine the success of forex trades. This is crucial because, in the long term, you can’t rely on blindly copying trades. If you want your day trading endeavour to be sustainable, you must develop a deeper knowledge and understanding of the forex market.
Key Economic Indicators to Track
Forex traders keep their eyes peeled for news and announcements that pertain to or will affect key economic indicators like those listed below. They can influence the forex market, and knowing them will enable you to anticipate market reactions and movements and close, open and adjust your positions as needed:
1. Interest Rates
Central bank interest rate decisions are the primary factor currency traders track. Interest rates directly affect the strength of a currency.
On the one hand, if a country’s central bank raises interest, this can trigger an influx of foreign investments. These investments can strengthen that country’s currency.
On the other hand, if the central bank lowers interest rates, foreign investment may stagnate, which can weaken the value of the country’s currency relative to other currencies.
Takeaway: The strength of a currency is correlated with interest rates.
2. Inflation Rates
Are consumer prices increasing or becoming more expensive? Are they expected to rise?
An increase in consumer prices is inflation, and economists track it using the consumer price index (CPI). Forex traders monitor CPI, too, to gauge inflation. An increasing CPI means inflation, while a decreasing CPI means a low rate of inflation or even deflation.
Inflation is important because of its impact on interest rates. When inflation is high, central banks may raise interest rates to control prices. When CPI is low, central banks may keep interest rates low, a move that can weaken currency.
Takeaway: Traders monitor inflation trends since central banks typically increase interest rates as a response – and number one above tells you why that matters.
3. Gross Domestic Product (GDP)
A country’s GDP reflects its economic strength and rate of economic growth. A rising GDP signals a bullish market, while a contraction may suggest a downturn. Currency traders track GDP reports because economic growth (or lack thereof) can also affect interest rates.
When GDP is rising, the economy is growing. Currency traders can take that to mean the economy’s central bank will eventually increase interest rates.
Takeaway: Forex traders typically take GDP growth as a sign that interest rates will eventually increase.
4. Employment Data
A low unemployment rate and high wages translate to a strong economy. The opposite – high unemployment rates and low wages – are signs of a stagnant economy.
A strong economy translates to a robust currency and potential inflation. As mentioned earlier, inflation (or the expectation of one) can lead to higher interest rates.
Takeaway: Good employment statistics (e.g., low levels of unemployment, good wages) are positive indicators of economic growth. Remember that a growing economy usually means a stronger currency and a possible inflation that can lead to rising interest rates.
Margin and Margin Levels
Aside from tracking economic indicators, particularly news about a central bank’s interest-rate decisions, as well as other factors that can affect interest rates (e.g., inflation, GDP, and employment data), currency traders must also understand the concept of margin and margin levels in forex trading.
Margin
In forex, you can leverage a small deposit to control a bigger position. At a 100:1 leverage, for instance, you can open a $10,000 position with just $100. This $100 deposit that allows you to open and maintain the $10,000 trading position is known as the margin.
Margin Levels
Margin levels, expressed as a percentage, are the ratio of your equity to the money tied up as a margin. The higher your margin level, the healthier your account and the lower your risk exposure.
If you have total equity of $10,000 and used $2,000 of that as a margin for open positions, your margin level is $10,000 divided by $2,000 or five, equivalent to 500%. This means you have 500% of your margin in equity.
What if your equity declines to $5,000 because of withdrawals and losses, but your used margin remains the same? In this case, your margin level is $5,000 divided by $2,000, which is 2.5 or 250%. Now, you have a lower equity-to-margin ratio and have less equity to absorb further losses.
Why should you track your margin level? It’s to prevent margin calls and stop-outs, both of which will prevent you from opening new positions.
Margin Call
A margin call is a request by a broker to deposit more funds into your trading account or close some leveraged positions to reduce your used margin amount. Margin calls occur when margin levels approach 100%.
Stop-Out
It’s a stop-out when a broker forcibly closes some or all positions—particularly losing positions—in an account. They do this when margin levels fall between 30% and 50%.
Getting Started in Forex Trading
Forex trading can be rewarding, but it requires discipline and effort.
You must study, so you can learn its basic concepts and, eventually, advanced trading strategies. However, if you want a shortcut (or something to help you get started as you learn), try copy trading.
**’The opinions expressed in the article are solely the author’s and don’t reflect the opinions or beliefs of the portal’**
