All traders are on the constant look-out for that piece of insider information that will lead to trading success. Unfortunately, there is no insider information on the foreign exchange rate market, but there are tips and hints available. The best guiding hint is to know when and how to trade the market. This generally involves an understanding of the different technical trading tools implemented in trading strategies.
How to trade the foreign exchange market
The majority of new traders will make the grave mistake of trading at the wrong time of day. It is important to remember that different trading strategies are most effective at different time periods. This also applies to the different currency pairs as particular currencies receive greater activity during particular times of the day. To use a trading strategy effectively you must identify the correct time frame and trading session to which your strategy is most suited.
1. The range strategy
When using a range strategy you should be aware of news releases detailing the economic state of a country. The use of forex news is often used as a trading point for fundamental traders, whereas for range strategy traders the forex news releases will be an indicator to avoid trading. The easiest method of remembering this strategy is to think that breaking news is a sign of broken ranges. When a market range is broken the range trading strategy trader will more than likely lose money. This is due to the market condition no longer being suitable for the strategy.
2. The breakout strategy
The only time a breakout trading strategy can be utilised is one a ‘breakout’ has occurred. This means that the trader using this strategy requires a catalyst to begin trading. Furthermore, market movement is required for continuation. By looking at these factors, the best time for a trader to use this strategy is during economic news releases. The ideal times would be when news releases surrounding America and Europe’s economy are presented. This is due to these areas having the greatest impact on the forex market causing more traders to be present on the ‘floor.’
When to trade the foreign exchange rate market
Research conducted on breakout traders identified that the best time to utilise the breakout strategy on the forex market is between 1pm and 5pm GMT. This is generally the time that American and European traders will be online making it a highly active period. In fact, research has indicated that approximately 60% of all foreign exchange rate turnovers are conducted during this period.
Further research indicated that range traders should trade between the hours of 9pm and 6am GMT. It was seen that this period is dominated by the Asian market making forex activity rather low. To be effective a range trader should stay away from the high activity of the breakout period.
Looking at the data presented above, it can be seen that certain time periods will increase the chance of profitable trades based on your strategy. It is important to take note of these factors when entering the foreign exchange rate market.