The Popularity of the Forex Market
Forex trading has been popular for sometime due to the high liquidity and leverage that it offers. Many people are jumping into the market thinking it is an easy way to make money. But as any professional traders will tell you, it's not about how much money you can make in the short term, it's rather you can make money consistently in the market for the long term. There are two analysis that every traders must be familiar with to make sound trading decisions. They are fundamental and technical analysis.
Fundamental analysis
Fundamental analysis is based on looking at the state of the economy between different countries, political factors, or the trading volume between countries which determined how the currencies between the two countries will fluctuate.
Other important factors one must look into is each country or groups of countries (in the case of the European Union) will release monthly economic data regarding the countries' job employment rate, industrial outpout, trade deficit..etc. These various data acts as an indicator to gauge how an economy is doing relative to another.
Remember since most currencies in the world are pegged to the US dollar, the most obvious important news are usually coming from the US because since they are the largest economy in the world and they are the world's reserve currency. Whatever happens with the US will ultimately affect everyone else on the board. The market fluctuates the greatest during times of economic data releases or important political events and some traders will trade accordingly based on market reaction to these news.
Technical Analysis
Since most traders perform their trades on a trading platform in front of their computer screen. The trading platform that they use will show currencies chart with a variety of time-frame and features. Technical analysis is basically interpreting the data and indicators on the chart to make sound trading decisions. 3 basic technical analytic tools are price action, chart patterns, and trends.
Price action
Currencies fluctuate greatly over the course of a day. However, no matter how much it fluctuates during that day, there is a certain range that a currency can typically move and will not move beyond this range unless there's drastic intervention by the government. For example, if you are a trader trading for the long term for USD/JPY. You know that it is very difficult for the yen to break below 80 or go beyond 85 yen. Why? because Japan is heavily export based as it lacks natural resources, breaking below 80 will greatly harm Japanese companies that operate overseas in foreign currency as they reconvert it back into yen. This result in lost profit. You know it is very difficult to go beyond 85 because since it's pegged to the US, it means the US dollar increases in strength which is highly unlikely to happen with the state of today's US economy.
Chart Patterns
Every trader in the world trade according some form of system that they personally hold as a result, the market usually forms repeated patterns that are predictable or self-fulfilling on the part of the traders. Recognizing incoming chart pattern is a great way to set up a highly probable trade and following patterns can also help you determine the exact point of entry and exit point on a trade. It's one thing to know how to set up an entry position but knowing when to exit a trade before a trade goes back to zero is an important skill a trader must master.
Trends
During times of market stability when the currencies between the selected countries are political stable, long term trends can form which can help traders carry on a trade that continues to go in the same direction. Trends can also be gauged by stages where traders determine rather a trend is at its early, intermediate, or advanced stages. Skilled traders will enter a trade at its early stages and exit out during its late stages. Then from late stages determine the reversal trends and set up another trade at the opposite direction. This way a trader profits on the market as it moves up or down.
Which form of analysis is more important?
The answer is to make sound trading decision you must combined both forms of analysis. If you are day trading, more weight will obviously be placed on technical analysis as most news are just noise. However, during important economic data release, even the best technical analysis can be override by one single rumor or speech by a financial minister.
Nick is a 22 year old Chinese Canadian trader from Hong Kong and he has been learning forex online trading for 2 years. His specialization in FX is trading the EUR/USD and USD/JPY on the 1min/5min/15mins chart with multi-time frame analysis using scalping techniques. He has compiled a lists of recommended educational program and brokers that traders can use to jumpstart their trading career. He has also created a trader resource section to empower like-minded traders to enhance their trading techniques.
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