Trading currencies has lately become one of the most popular ways to make money grow. It’s a market with the highest liquidity and asset price volatility with a lot to offer to retail investors.
The asset on the currency market is the currency pair you trade. These assets are suitable for long-term strategies such as compounding and short-term scalping, and swing trading.
Besides choosing the trustworthy Forex broker, traders rely on some evergreen rules and techniques to maximise profits on currency trading. Here they are.
Use Leverage, But Carefully
Leverage is the tool that enables you greater exposure to the market. It’s an amount you borrow from the broker that allows you to trade more effectively.
By using leverage, you can trade larger positions on the currency market. It means that if your initial capital is, for instance, $1000 using the leverage of 1:50, you would be able to trade $50 000.
If you aim to use the leverage, there is a margin requirement set by the Forex brokers. In general, the higher the margin requirement, the lower the leverage you can use.
However, when trading with leverage, you need to pay attention to the optimal debt level. You need to be quite careful while using leverage as a way to increase profit on Forex.
By implementing all the necessary risk management steps, you can use the leverage the right way. With regards to that, we must remind you of putting stop-loss orders and never trading the amounts you are not comfortable with losing.
Compounding strategy is a method of increasing your profits over the long haul by reinvesting your returns into the new trades of the same or lower risk.
The effect of this method can be seen after a certain period depending on many factors. In general, it’s not for the traders with short term views. It’s rather for those ready to dedicate a couple of years of slow but steady and considerable profits.
In order to achieve decent returns with this strategy, you will need to set your monthly targets and stick to rigorous trading discipline.
Suppose you trade 12 days a month on days of the highest volatility with a target of 1 per cent profit per day, you can achieve approx 12 per cent over a month.
Therefore, if you start with investing $5000, you should make at least $50 per day, which comes to #600 per month.
Then your starting capital for the next month would be at least $5600, which illustrates clearly the power of this strategy. On a yearly level, it’s quite a considerable profit.
While relying on a compounding strategy, bear in mind that you should not invest more than %5 per cent of your capital in your trades.
The compounding method is sustainable and low-risk, allowing traders with low initial capital to reap significant gains over the long term.
Price volatility itself is the tool for making money on Forex. However, every trader needs to be aware of the portfolio’s sensitivity to the market price fluctuations.
Diversification makes part of risk management no matter which market you are investing in. When it comes to Forex, the diversification of the assets is also required if you want to shield yourself from the massive market fluctuations.
Unlike stocks which price moves independently, the currency pairs are related to each other. Investing in several currency pairs that are negatively correlated is fantastic risk management.
In case of one currency tends to increase, and the other depreciates, by investing in severely negatively correlated pairs, you can mitigate the risk of your investments.