Forex Trading Tips and Strategies

Read more about what Forex trading is, how to trade Forex and discover a range of tips and strategies.

Forex Trading - Interest Rates

01Forex Trading - Interest Rates

tips_and_strategies_interest_rates

The single biggest driver in forex trading is the interest rate set by the central banks responsible for the respective currencies.

Interest rates matter because they explain the rate of return an investor will receive on currency invested. Higher interest rates make a currency more attractive as returns are higher. That’s why when a central bank raises, or is expected to raise rates, it’s likely that the currency would rise too.

What Moves Forex Markets?

0​​2What Moves Forex Markets?

Other data moves currencies, but primarily these are in relation to expectations for future interest rate decisions.

Inflation

Inflation and inflation expectations drive central bank decisions as their chief policy mandate is to maintain price stability. In the case of major developed central banks, including the ECB and Bank of England, inflation is targeted at or just below 2%. Interest rates are the prime tool central banks have to modify inflation and they will tend to raise interest rates if inflation is seen as rising too quickly; and reduce them when inflation is running below target. Consumer price inflation (CPI) is usually the main index, but producer price inflation figures are also watched as a leading indicator.

Consumer Spending

Consumer spending is a barometer of confidence in an economy and often seen as a leading indicator for inflation.

Jobs

Employment figures are usually a factor in the forex markets as they indicate the relative strength or weakness of a particular economy – and therefore its potential future interest rate path. The monthly US non-farm payrolls report is among the most closely-watched.

GDP

GDP figures provide an overall health check of an economy. These are usually lagging indicators but surprises will affect forex markets.

PMIs

Every month the manufacturing, construction and services sectors of major economies are surveyed. The reading is detailed in a purchasing managers’ index (PMI), which are viewed as important indicators for an economy.

Forex Trading Technical Analysis

0​3Forex Trading Technical Analysis

tips_and_strategies_technical_analysis

Fundamentals such as GDP and interest rates are used to trade on forex, but technical indicators can also play an important role in a successful forex trading strategy. At ETX Capital traders can enjoy a wealth of professional charting tools on TraderPro featuring a huge range of oscillators and indicators.

Volatile Currency PaiRs

04    Volatile Currency Pairs

No two currency pairs are the same and traders cannot expect pairs to behave in entirely the same fashion. GBPJPY doesn’t tend to act like EURGBP, despite the common denominator of sterling. Some forex pairs are highly volatile, with large daily swings in price to be expected, while others are more docile. Crosses where the currencies both exhibit similar characteristics, for example the Japanese yen and Swiss franc – both reliable safe haven assets – tend to be among the least volatile.

Most Volatile Pairs​

GBP/AUD EUR/AUD EUR/JPY
EUR/NZD GBP/CHF GBP/USD
GBP/JPY    

Least Volatile Pairs​

EUR/GBP EUR/CHF AUD/NZD
NZD/USD CHF/JPY  

Strategies for Trading Volatile Currency Pairs

05Strategies for Trading Volatile Currency Pairs

Fading the gap

Experienced traders use this approach to make the most of market volatility. Fading the gap is a short-term contrarian strategy. It involves shorting the market after it gaps up (or going long if it gaps down), to make the most of short-term retracements and irrational exuberance.

Options Straddle

A straddle effectively means being on both sides of the trade at the same time - in the options markets involves holding a call and put call on the same security with the same expiry date and strike price. As long as there is a big move in the price there is a chance to profit. Low volatility – small price movements – nullify this strategy. This approach can be applied to trading on forex around key data events that could produce a sudden swing in the price, using a simple order-cancels-order system.

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