Top 10 Currency Trading Tips From Deutsche Bank

An e-mail from Deutsche Bank contained the following list, which will serve an investor well who is contemplating buying foreign currencies as part of their overall portfolio.

Top 10 currency trading tips from Deutsche Bank dbFX

1. Know what moves currency markets. Like any asset class, there are a number of factors that drive a currency's performance. A country’s macroeconomic situation can have a major influence--economic data releases, policy decisions, and political events can change an economist’s outlook on the country, and therefore its currency. There are also technical factors such as interest rates, equity markets, and international trade, which may also have an impact. Spend time getting to know these.
2. Understand the strategies. Yes, there is a method to the madness. As a trader, you need to be aware of three crucial trading strategies, which are often used by currency traders: the carry, momentum, and value trade. Momentum tracks the direction of currency markets; the carry strategy sees investors selling currencies with low interest rates and buying those with high rates; and the valuation strategy takes a position based on the investor’s view of a currency’s value. However, the strategies that you use are up to you.
3. Decide on your trading strategy. Are you macro-driven or a technician? In currency trading, as in any form of active investment, it is important to understand how you arrive at your investment decisions. Are you someone who looks at the big picture (fundamental economic data such as inflation, or central bank decisions) and makes a call on how that may affect a currency pair? If so, then you’re macro-driven. If you are someone who looks at the changes to a currency pair and then tries to understand what this may mean from a macro-perspective over the long term, then you are a technical investor.
4. Manage risk. As with any investment decision, you must decide how much risk you’re willing to accept. Ask yourself, “how much am I prepared to lose on this position?” If you don’t have a convincing or comfortable answer then you should rethink the trade. Do not risk more than you can afford to lose. Think about how you can mitigate your downside risk; make use of trading strategies such as stop losses or limit orders.
5. Stick to what you know. There are 34 currency pairs that can be traded on dbFX, each of which have their own characteristics and considerations to understand and analyze. If you’re participating in the market on a part-time and non-professional basis, it is probably better to concentrate on just a few pairs and commit to thorough and robust research on those, rather than superficial research on the many. Some key things to consider when analyzing a currency pair are its liquidity, transaction costs (the spread), and volatility. As a general rule, major currencies usually have better liquidity, tighter spreads, and lower volatility, versus emerging-market currencies, which have poor liquidity, wide spreads, and volatile movements.
6. Plan your trade, and trade your plan. It’s one thing to have a plan, it’s quite another to execute it. When trading currency, it's important not to get caught up in the moment--the markets are fast moving and in the short-term can be unpredictable. Rather than trying to make a quick profit, stick to your long-term plan based on your research. Good currency traders make money in the long term by being disciplined, not necessarily by making short-term bets.
7. Research, research, research. It’s important to stay current. All currencies move quickly, so checking the price once a week is not going to help you make strong, long-term returns. It is helpful to use an online provider that provides you with up-to-the-minute data and statistics. Traders use data to constantly assess their trading positions
8. Keep your emotions in check. Like many important decisions, it is vital to keep emotion out of any trading decision you make. If you’re upset about missing out on an opportunity and want to trade yourself into a better position, or want to stray from your trading strategy to make up for a loss earlier in the day-- reconsider, because you’ve got the warning signs of someone about to make an impetuous, irrational decision. If you do feel yourself getting emotionally involved in a particular trade, take a deep breath, review your strategy, and establish how such a decision will affect your overall approach before going anywhere near the "execute" button.
9. Don’t expect to win on every trade. That may not sound like much of a sales pitch, but even the most successful of traders don’t win on every trade. What they do have is a robust plan and long-term strategy, which carefully considers the risks. So don’t necessarily be disheartened if a trade doesn’t go your way; review why it went wrong and see if there is anything to learn from the experience. But don’t think that currency trading is an option for those seeking quick money, because like any investment, it only should be played by those with a long-term goal in mind.
10. Don’t put all your (nest) eggs in the currency basket. Foreign exchange is only one of the many asset classes you should be considering as part of a balanced investment portfolio. Forex trading is not suitable for every investor, so if you are committing all of your financial resources to forex trading, be sure you are fully aware of the risks and rewards of doing so, because commitment to one asset-class is not recommended. The same applies for currency trading itself. Risk diversification allows you to mitigate your risk by spreading it out, that is, not placing all your faith in a single trade. Diversification is key, no matter what asset class you’re investing with.

Comments

[Reinko:]

A very good strategy is to trade against the big boyz, when they unwind their positions because they are sh*tting their pants it is time to hit the 'execute' button.

I have a golden, a silver and a bronze tip on this.

I only expose bronze:

Look for Central Bank policy setting meetings, when there is no financial news of any significance you often observe (just an example from lately) a sharp rise in the US$/Euro in the hours before the rate decisions are made public.

Hence: Big players like that Chicago sh*t are unwinding.

Of course you must use your brain: What kind of crap will this particular Central Bank come up with?

But if that Central Bank comes up with what most was expected the big players will take their old positions in again and you have a good profit when you have leverage of one thousand...

Remark: The big players can also unwind on the back of the economical news of that day (that is early unwinding in the run up to the Central Bank rate decision).

Again: Always use your brain and if you do not understand the situation; DO NOT TRADE!

Good luck trading the bronze tip...;)

2008 Jun 15 05:16 PM

[Faster Trader:]

Golden rule number one: Throw out all the 10 tips presented here in this article.

Advancement in currency trading comes from yourself, not from these 10 tips.

At best, these only scratch the surface .05%. It's an ad from Deutsche Bank to get you to use their trading platform: Meaningless and useless trading principles.

2008 Jun 21 01:29 PM

[Dividend Gr...:]

I like tip #4- Manage Risk. Being a long-term investor in stocks I have always experimented about different techniques in managing risk. And most of it I have learned from books about commodity and currency futures.

2008 Jun 23 08:37 PM

[Bonnie Wyatt:]

Excellent Top 10 Tip Information.

2008 Sep 18 02:31 AM

[Kaulainais:]

I've been searching for a worthwile info about trading and this site looks interesting
especialy this post

Jan 09 08:43 PM

[John Silver:]

These tips are very helpful. I do prefer precious metals like silver, over currencies, but the leverage on currencies is excellent.

Jun 07 07:42 AM