17
Nov
2020

How to know when it’s time to switch trading instruments

In most cases, when a beginner is still getting to understand how trading works, they focus a lot of their efforts on when to trade and when not to or when to switch to another trading instrument. Although knowing when to trade is vital, it is also as important for a trader to know when to switch trading instruments and even when to stop trading. The thing with forex trading is that if you close a position too soon, you might end up losing some of your winners, but if you don’t stop early enough, you might end up losing all of your winners. Thus, it is important to know when to stop and switch the trading instrument.

What is a trading instrument?

Many people often think that Forex is the only instrument traded on the financial market, given how big it is, how influential the markets are, and how much it brings on a daily basis. The truth of the matter is that there are a lot of instruments that can be traded on the financial market, which include stocks, indices, Forex, and all CFDs. Trading instruments are basically the different types of assets that you can trade with, just like the ones previously named.

Not all traders in the foreign exchange market have a lot of experience in trading. Still, a majority of them have not less than two years of experience in the field, and some of them also have experience trading other markets as well. In this article, we will elaborate on the various ways through which a trader can transition from one market to the other successfully using their technical and analytical methods. Below are three methods that a trader can use to switch trading instruments:

  • Technical trading
  • Fundamentals and FX
  • Tying all together

Fundamentals and FX

Just the same way that traders have various goals when joining the financial markets, so to do, they have several reasons when making the decision to purchase a particular stock. The reason could include things like companies releasing a new product, the growth in revenue or massive earnings, an improvement of the balance sheets, or when there is an acquisition by another firm for partnership. Implying that there is always a story to tell in the acquisition of the stock.

The fundamentals when analyzing Forex (FX) is the same. At times individuals argue that as compared to stock, fundamentally analyzing Forex is a bit easier but when identifying the similarities and differences in stock and FX trading, there is not a lot of differences because they are all instruments of the financial market and that is why it is even possible to switch from one to the other. The reason for this is that it all comes down to the anticipated movements and interest rates. Unlike stocks where you are trading the earnings of a particular company, in Forex trading, you are trading on economies as a whole. Because central banks summarize the whole economy’s target interest rate, which is what keeps the economy going.

When an economy is progressing, there is a likelihood that inflation ( also the amount of money chasing after services and certain goods) in the economy is high and increasing as well. When this happens, the central bank will be under pressure to balance the economy by keeping the economy from going into full-blown inflation by increasing interest rates.

The case is different if the economy in that country is close to the beginning of its cycle of growth. What the central banks do in this situation is increase interest rates many times in the course of several years in such a way that it will not affect the economy negatively or affect the GDP or job growth. Such activities in the economy are very bullish on local currencies making traders purchase high-yielding currencies to make profits. Seeing a country that is experiencing such growth is the same as discovering a stock which’s earnings are about to increase as a result of the release of a new product.

There are points where such central bank interest rates weigh on the country’s economy.  The economy begins to slow down because the cost of money is too high. At this point, central banks will be under pressure to decrease the target interest since the inflation concerns have lessened. When this happens, many investors will be pushed to go looking for higher returns in other countries to save their investment or money, and the currencies in these countries will sell-off.

From the paragraph above, you can already tell that when rates are high and rising, currencies tend to be bullish, while the reverse is true when rates are lower. Just like in many situations, there is an exception to this; when high yielding currencies during the times or risk aversion as a safe haven where weaker currencies are sold to buy safe currencies such as the USD. Brokers of any size have accurate predictions and information regarding market movement. For example, it’s expected to find the same analysis with a large conglomerate, and Axiory for example, is a relatively smaller FX brokerage, but with the same quality of the information provided.



Technical Trading

One thing that is very important in trading is patience. You should be able to understand that patience is a major key to success and not speed. Some investors have described this patience as the right time to trade and the right place. The technical analysis method of trading is the ability to know when and where to trade. It is when recurring trading patterns are determined through price charts that provide a precise open and close point for a more successful trade.

This process for Equity traders means determining the price and volumes of the various shares traded on the market. For some stock traders, when they are trading, they rely on volume to make major trading decisions, as it gives them a clue of potential movements in the market.

However, it is not as easy, many traders face a lot of challenges. One common challenge that stock traders face when trying to switch to Forex trading is what to hold on to as a tool besides the volume of shares traded. One thing to note or which you might already know is that since there is no central exchange where currencies are traded, the Forex volume figures for intraday trades are unreliable.

Despite that, there is an advantage of Forex over the market that provides some balance level to technical studies of the same size. The Forex market is huge, with an average daily volume traded going up to $6 trillion each day, which is almost 86 times larger than the stock exchange market. And also, because the Forex market is increasing in volume on a daily basis as traders continue to discover the market.

The huge size of this market makes the chart patterns and trends a little bit more obvious since the pattern has a lot of liquidity behind it. There are also examples like flags, triangles, double bottoms, and more, which increases fear and greed in the market. The pattern is more stable when it appears at a daily traded volume of $4 trillion.

Other ways through which one can get the help they need in identifying higher probability tipping points are horizontal levels of support and resistance, pivot points, and trend lines. Clues can also be provided through candle patterns such as engulfing, dojis, evening/morning, shooting stars, and hammers. To identify certain price zones on the chart, Forex traders use them to distinguish potential buying from selling chances.

Trying all together

The Forex market is operational 24 hours every day for five business days. For this reason, investors lean more towards the fundamental analysis method to know which currency pair they can trade. Which they will pair and buy stronger currency at the same time they sell weaker currencies. This practice generally results in a strong currency pair trend.

Then through technical analysis, the trader can determine which time is appropriate to open or close the trade, leading to profitable trades. And there are many strategies that investors use in stocks that can be applied to Forex, like a breakout strategy or a moving average cross strategy.

One important thing in forex trading is knowing when and where to trade, as mentioned earlier. If a trader has determined this, it is vital thatchy do so with a stable amount of leverage. Also, it was found out that traders who use conservative amounts of effective leverage are more likely to make profitable trades than those who are more aggressive when using leverage.

It is recommended to start forex trading with not more than twice more effective leverage given that a trading account with stock margin offers twice more leverage. When you are doing risk aversion, you can always change that.

Thus, one can conclude that it is important to identify which market you would like to trade on using your strategy and be conservative with the amount of leverage you use.

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