Sifting through the internet you’ll find a great many articles claiming that a particular strategy is the best, most sure-fire way of making money from trading currency. The fact is that different approaches will suit different investors depending on the level of risk that they’re willing to accept and the amount of time that they intend to spend actively trading on the market. However, there are some basic rules and strategies that everyone should take into account when trading forex.
The first thing to note is that to trade currency you will either require vast sums of money or access to a broker that is willing to offer leverage. The fact that spread betting providers allow you to bet significant sums on currency pairs with only a small deposit makes this an attractive approach for currency speculators with more limited means. Spread betting with IG and other providers also currently has significant tax advantages in the UK.
As ever with any form of trading that involves leverage be sure to set stop losses so that you’re protected if the market unexpectedly turned against your position.
For all traders, including those who are primarily engaged in technical analysis, it is worth giving yourself a grounding in the fundamentals that affect currencies. Without an understanding of how data like oil prices, employment figures and interest rates can influence currencies it is difficult to predict in advance how the markets will move after a particular announcement. You should also know when announcements on relevant data will be made so that you’re ready to act if necessary.
A good approach that many professional traders use when speculating on currency is to trade baskets. An example of this strategy would be if a trader believed that the Australian Dollar was going to be weak for the foreseeable future then rather than trying to pick the one currency against which it would be weakest, the trader would instead buy a basket of currency pairs that each involve the AUD. This has the advantage of ensuring that you won’t lose out due to unforeseen events weakening the one currency you picked against the AUD.
Another good tip is to look for currencies that are correlated. Famously, the Canadian Dollar tends to appreciate with the oil price while the Japanese Yen depreciates. You can help ensure a return from oil price changes by simultaneously betting on one of these appreciating and the other depreciating.
