We live in “interesting times”, as the Chinese blessing-cum-curse says. When times are interesting that tends to mean that politics and markets are unstable, ergo the curse, but that also means opportunities abound. With financial markets less predictable than they were even just a few years ago, many people are looking to foreign currency exchange to make a profit. Here are a couple of tips for those of you hoping to capitalise on these interesting times.
- Keep a Wins and Losses Journal
“I won’t forget” or “I’ll write it down later” are phrases that might end up costing you. Keeping a journal of your investments is the best and easiest way to consolidate your experiences and turn them into experience. Note down purchasing and selling prices, units purchased or sold, time of year, and anything else that might seem salient, such as current politics. Over time you’ll start to notice trends that can guide you in the future.
- Be disciplined and don’t trade with your emotions
Money and love can lead people to take huge risks and stupid decisions (and of course some sound ones too). If you want to succeed at foreign currency trading, you’ll be wanting to keep your emotions in check. One can easily get overexcited and buy too much or terrified and sell everything at once. Remember your longterm goal and try not to let everyday ups and downs influence you much. How emotions affect investing is well-documented and international bank Barclays has a good overview of the cycle of investor emotions that is well worth checking out.
- Choose the right exchange broker
In the same way that you would choose a car based on your needs and desires—a van if you have kids or have lots of equipment that needs to be transported—or you would go to a specific kind of doctor for a specific problem, you should make sure you use the broker best suited to your needs. Specialized websites such as Forex Bonus offer comparisons between brokers and explain the advantages and strong points of each one. For newcomers to the forex scene, brokers may seem all the same, but in fact, your choice of exchange broker can make or break your experience and profits in the long term.
- Use this E= [1+ (W/L)] x P – 1 to track your success
By way of example, let’s say you made 100 trades and turned a profit on 70 percent and lost on 30. Your earnings were 2,100 dollars and you lost 1,200, which means you made 30 dollars per successful trade and lost 40 dollars per failed trade. With W as your average winning trade, L as your average losing trade and P as your percentage win ratio the equation would read E= [1+ (30/40)] x 0.7 – 1 which equals .225. This translates to 23% expectancy, which in turn means that over the long term, whatever system you are using returns 23 cents to the dollar. Taking simple equations like this into account will help you tweak your system and experiment in order to come up with the best outcome for you.
- Follows news and financial analysis closely
Although the relationship between politics and finance isn’t always predictable, it is certainly reliable. Keep an eye on the political situation of countries whose currency you are or are planning to be trading in. Elections affect the market in a big way as we recently saw after the French elections and staying on top of political develops at home and around the world will give you an advantage when trying to turn a profit on currency exchange.
As has been the case during times of social, political, and economic upheaval the haves can easily become the have-nots and vice versa. In times such as ours nothing is certain, but by following these simple rules in foreign currency trading, we can hope that the Chinese proverb is a blessing instead of a curse.