It is generally said that information is the basis of profitable Forex trading but, though correct and timely information is indeed vital for currency trading, it is the examination of this information that is the real key. There are currently two main forms of analysis used in Forex trading – fundamental and technical analysis - and in this short article we are going to examine precisely what is meant by fundamental analysis.
At its simplest, fundamental analysis looks at both political and economic conditions that could have an affect upon currency prices and Forex traders who use fundamental analysis rely upon news reports for information on a whole range of things including, economic policy, inflation, growth rates and rates of unemployment.
Basically, fundamental analysis provides an outline of currency movements together with a broad picture of economic conditions that could well alter the value of a particular currency. With this picture in mind, Forex traders will then frequently move on to use technical analysis to then plot entry and exit points into the market and to complement the information gained using fundamental analysis.
The Forex market is much like other markets and is affected by the laws of supply and demand, which are also affected by economic conditions. Two economic factors affecting supply and demand are interest rates and the strength of the economy and the strength of the economy is affected by the gross domestic product (GDP), foreign investment and the economy's balance of trade.
Various economic indicators are published by governments and other sources and are normally considered to be sound measures of economic health that are followed by all sectors of the investment market. Almost all economic indicators are published once a month although some are released more often and usually weekly.
Two of the key fundamental indicators are international trade figures and interest rates, but other extremely helpful indicators include the, consumer price index (CPI), producer price index (PPI), purchasing manager's index (PMI), durable goods orders and retail sales.
Interest rates are an especially important indictor because they can have either a strengthening or weakening affect on a currency. High interest rates could, for instance, attract foreign investment which strengthens the local currency, while investors in the stock market frequently react to rising interest rates by selling in the belief that higher borrowing costs will have an adverse affect on many companies. High volume selling by stock investors can quite often result in a downturn in both the stock market and the national economy.
Indicators of international trade are also particularly important for the Forex trader. A deficit on the trade balance, indicating that imports have exceeded exports, is usually seen to be an adverse indicator as money leaving the country to purchase goods from overseas could well have the affect of devaluing the currency. However, fundamental analysis will also indicate market expectations and these will often dictate whether a trade deficit is unfavorable. For instance, it may be the case that a county usually operates on a trade deficit and that this has already been taken into consideration in fixing the price of its currency. In general terms, trade deficits will only affect currency prices where they are higher than the market would usually expect to see.
Each country has got its own set of economic indicators (presently there are some twenty-eight major indicators being used in the United States) and these strongly influence the financial markets. For this reason, Forex traders need to be conversant with them and study them carefully when preparing their trading strategies.
Luckily, for traders who are working on the Internet, many websites today provide an abundance of the latest information, but it is up to individual Forex traders to extract this information and then apply the principles of fundamental analysis to it before making their trading decisions.
Posted by forex14 at 10:05 AM 0 comments Links to this post
Just What Goes Into Making A Successful Forex Trader?
Would you like to enjoy the lifestyle of successful forex traders? If you were to split foreign exchange traders into two groups – the successful and the less than successful – could you identify those characteristics which separate the two groups?
It does not really matter what we do in life, which includes foreign exchange trading, but, whatever we do, one thing that will have more affect on our success than anything else we do will be setting goals.
It is a simple fact that the human mind works best when it is given a roadmap to follow and, by setting a goal, you start building your roadmap by clearly defining the end point of your journey. However fixing a destination is not sufficient and you will also need to define the route which you are going to follow to get to your destination. Here is an example.
Suppose you decide you want to build a fortune as a foreign exchange trader, and who doesn't after all! This in itself is not however much help as any goal which you set needs to be measurable, otherwise you have no way of knowing whether you have reached it. So, at this point, you need to be clear about exactly what you mean by a 'fortune'.
Let us assume therefore you set a goal of making $1,000,000 in the next twelve months. Now you have a clearly defined destination. The next problem however is that, since you are almost certainly new to the world of foreign exchange trading, are still learning the ropes and possibly have limited capital to invest at this point, making $1,000,000 in the next twelve months is possibly an unrealistic goal.
As well as being measurable, goals also have to be realistic. It does not matter what goal you set for yourself in foreign exchange trading, but it must be within your reach. There is no point in deciding that you are going to win Wimbledon if you have never even picked up a tennis racket.
So, instead of aiming for $1,000,000 let us set a far more realistic target of say $120,000. Having done this, we then need to split this figure up into marker posts which we can put onto our roadmap and we can do this by looking at our target on a monthly instead of a yearly basis. This gives us a dozen $10,000 markers. However, if we continue along these lines we can then break our goal down further into weekly markers of $2,500.
At this point we have got something which we are able to examine against our current and recent experience and it is a fairly simple matter to see whether or not this figure is possible. Is it possible, against the background of your current experience, to make $2,500 trading foreign currencies in the coming week?
Your goals must be measurable and realistic, but they must also be attainable. It is one thing to set a realistic goal, but you also need to have the right tools, in the right place at the right time if you are going to reach that goal. If you are currently making $750 a week then you probably won't convert this into $2,500 overnight so, in this instance, your goal is unattainable and you will need to go back to the beginning and start all over again.
But, if $2,500 is feasible, then there is one additional step that needs to be taken before you are ready to head off on your journey. This final step is to paint a picture in your mind's eye of your destination.
Although you have set a goal of making $120,000 in the next twelve months, the money itself is of course not really what you are aiming for, but it is what you can do with the money which is important. So, having got your $120,000 what do you intend to do with it? If you want to buy yourself a new sports car then paint a picture in your mind's eye of driving into the sunset with the roof down and then you really have got a goal.
If you want to achieve success in foreign exchange trading then you have to set yourself a goal which is measurable, realistic and attainable and than paint a picture of your goal in your mind's eye. If you do this you will be amazed at how easy a matter it is to get to your destination.
Why Most Forex Traders Use Technical Analysis
For many years Forex traders based their trading decisions on fundamental analysis which examines both past and current political and economic events in order to predict movements in currencies.
However fundamental analysis is a difficult art requiring considerable knowledge and experience and the ability to handle and analyze enormous amounts of data. As if this were not enough, there is also considerable disagreement in many quarters about just what data is and is not important when it comes to fundamental analysis and, even when it is agreed that certain data is relevant, there is often further argument about just how much weight should be attributed to each factor in the equation.
Today there is also a second form of analysis which is widely used and which is known as technical analysis. While proponents of technical analysis would probably tell you that it is no easier and in many ways more difficult an art to master than fundamental analysis, the truth of the matter is that it is a lot easier to learn technical analysis and this in no small measure explains why so many traders are adopting it in preference to fundamental analysis and are opting for technical analysis training. Which method is better is of course a whole different argument.
In considering technical analysis it is necessary to understand its three underlying principles:
1.All sorts of things will produce movements in currency prices, including political and economic events, but the forces which produce currency price movements are not important. As far as technical analysis is concerned it is simply the price movements themselves which are important and not the reasons for them.
2.A currency price will follow a trend which can be identified by looking at the patterns which emerge in the market over time.
3.A currency price not only follows a trend in terms of looking at historical market data, but will continue to follow this trend in the future. In effect this principle reflects the technical analyst's view of human psychology and a belief that currency price movements are a consequence of the manner in which people have reacted, and will continue to react, in certain circumstances.
Many of the 'old school' and 'fundamentalist' Forex traders find it hard to accept the principles of technical analysis and still hold firm to the belief that you cannot accurately predict a currency's movement unless you have a sound understanding of just what factors affect the price of that currency and indeed just what effect these factors will have on its movement.
Nevertheless, the fact of the matter is that many traders believe that this is not necessary and base their often extremely successful trading purely on technical analysis. No system, at least none that has been devised so far, will predict currency movements with one hundred percent accuracy but fundamental and technical analysis do a pretty good job.
In its simplest form technical analysis consists of taking historical price data (the foreign exchange market has over one hundred years worth of recorded price data) and feeding it into a computer which will then look for patterns in that data and display these in a graphical format. The trader can then look at the manner in which a currency's price is currently moving and compare this to similar past patterns to predict the future direction of that currency's movement.
This is of course a very much simplified view of technical analysis but in today's computer age it is easy to see why many younger traders entering the Forex market are drawn to technical analysis.
Forex Trading Strategies Are The Key To Successful Trading
Before venturing into the world of Forex trading it is vitally important that you stop and think carefully about the trading strategy that you are going to adopt, because forex trading strategies are the key to success in currency trading. There is no single strategy when it comes to trading in the foreign currency markets and every Forex trader has to develop his own strategy. It is important however to have a clearly defined plan from the very outset.
Some Forex traders choose to use a technical approach when it comes to trading while others are more at home with a fundamental approach. Both approaches are of course sound, but in reality most successful traders use a combination of the two to give them both an overview of the foreign exchange market and to permit them to plot specific entry and exit points for each currency trade.
The idea behind technical analysis is simply that prices rise and fall according to well established trends and that the currency market possesses clearly identifiable patterns which can be seen as long as you know what to look for. Knowledge and experience come into play here, but it is also a question of using the numerous analytical tools that are available and this means having a sound working knowledge not just the patterns of price movement but also of the tools at your disposal.
Many traders also rely on what are known as support and resistance levels. Here 'support' refers to a low price which is repeatedly seen as being the bottom of the market and from which there is a tendency for prices to rise. A 'resistance level is a high price beyond which a currency is rarely traded.
The principle here is that, should a currency break through either its support or resistance level, its price is likely to continue in that direction. So, if the price of a currency rises above its resistance level it is considered to be bullish and the price can frequently be expected continue to rise.
Another commonly used tool in foreign currency trading is that of moving averages. A simple moving average (SMA) shows the average price in a given time period (say 7 or 10 days) when the price is plotted out over a longer time period. Forex traders use moving averages to eliminate short term fluctuations in price and to provide a clearer picture of the movements in currency prices. A SMA can be plotted to indicate when prices are displaying a tendency to rise or fall. Prices which rise above the average will frequently continue to rise and, similarly, prices which fall below the average will often continue to fall.
These are just two of the many trading tools that can be used either in isolation or in combination and it is recommended that traders make use of several trading tools to analyze the market. If you are relying on just a single trading tool then trading can often be risky but, if the results from several different tools show that the market is moving in a particular direction then trading can be conducted with a fair degree of confidence.
Many traders will base their trading upon a fundamental analysis of the market and thus base their trading on such things as economic and political events, trade figures, inflations figures, unemployment rates and a host of other similar forms of data.
Fundamental analysis can be very powerful but it is perhaps at its most powerful when it is used alongside technical analysis, particularly as a tool to reinforce the indications derived from technical analysis.
In many ways it does not matter what trading strategy you adopt as long as you are happy that it can provide you with clear expectations about movements in the market and indicate to you just where you should be trading and when you should enter and exit individual trades.
A sound knowledge and understanding of fundamental and technical analysis should be every forgein currency trader's starting point when it comes to building a Forex trading strategy.
Posted by forex14 at 10:04 AM 0 comments Links to this post
The Second Most Commonly Seen Forex Trading Mistake
The most commonly seen mistake in Forex trading is that of establishing a set of trading rules and then failing to stick to them because traders let their emotions come into play and allow their hearts, rather than their heads, to rule their trading. It is this very same problem of emotion that also leads to the second most commonly seen mistake in Forex trading - that of doubling up on a losing trade.
If you find yourself in a losing trade then, providing you've done your homework and conducted the trade on the basis of your market analysis, the simple fact is that the market has unexpectedly moved against you.
This is something which traders experience every day and is a fact of Forex trading. It happens because, despite the fact that we like to believe that the market is predictable, it is not. It is certainly true that the market will frequently follow a pattern which modern trading tools will pick up, allowing us to trade profitably most of the time. The market however also has a mind of its own and it will frequently catch out even the most seasoned of traders.
When you get into a loss in an open trade it is human nature to feel that this is a temporary situation and that the market will reverse in your favor and turn your loss into a profit. If it did not then it would mean that you would have to admit that you were wrong about the trade and this is something that many of us don't like doing.
However, human nature will often take you even further and urge you to confirm your original decision and to show your confidence in it. This commonly means doubling up on your losing trade to show your confidence in it. You are also urged into taking this action subconsciously because, once you have proved yourself right, your profit will also be that much greater as the trade recovers from a now low position. Put simply, greed also plays a part at this stage.
Now from time to time you will be lucky and the market will reverse and give you a good profit. Unfortunately however is compounding the error you have already made by doubling up on a losing trade and encourages you to repeat this action the next time you find yourself in a similar situation. In most cases of course your luck doesn't hold and the next time you try this trick you lose heavily.
You found yourself in a position in which your judgment about a trade was being challenged and you were faced with the possibility of having to admit that you were wrong.
You had done your homework and there was no reason why you should not have opened this trade just as you did. Unfortunately, the market then decided that it was going to take an unexpected turn which you could not reasonably have been expected to predict. You did not make a mistake, but simply experienced the unpredictability of the market which is part and parcel of foreign currency trading.
In most cases the mistakes which most Forex traders make are nothing more than a case of letting emotion rule their trading decisions. As long as you do your homework and stick to your trading rules you won't go far wrong but, if you permit your emotions creep in and influence your trading, you will find yourself in a growing number of losing trades.
Posted by forex14 at 10:03 AM 0 comments Links to this post
The Most Commonly Seen Forex Trading Mistake
Successful Forex traders know that their success comes from establishing a set of trading rules and then following these to the letter. It is perhaps not surprising therefore to find that the most commonly seen Forex trading mistake is that of traders breaking their own trading rules.
The greatest danger any foreign currency trader faces is that of emotion and trading rules are established quite simply remove emotion from the trading equation.
Another danger for most traders is that posed by greed. None of us like to think of ourselves as being greedy but this is particular deadly sins that is always close by and has a habit of creeping up on us when we are not paying attention.
A successful trader can quite easily find himself in a winning run of trades earning perhaps $2,000 a day and think to himself that, if he can get this sort of profit day in and day out, it has to be possible to earn $2,500 or $3,000 every day. However, in order to test this theory the trader needs to push himself by relaxing his trading rules so that they can make up a few extra trades each day.
With a bit of luck profits may well increase over the following days, but how long is this going to last? The answer in most cases is not long and time and again traders find that any short term gains disappear. The result is all too often that they move from being one of the truly successful traders to being one of the 90% of traders who regularly lose money.
It is very easy to allow greed to tempt you into breaking your own trading rules and once in a while this strategy will prove successful. However, you are now beginning to trade on emotion and, as with many things in life, having done it once it is much easier to do it again and again.
In the world of foreign currency trading your trading rules are your best friend and breaking them will start you down a very slippery slope.
Posted by forex14 at 10:03 AM 0 comments Links to this post
The Value Of Simulated Forex Trading To Currency Trading Success
As a novice you will probably begin trading by opening a Forex demo account and your first few trades will be paper trades, or simulated Forex trading, as you learn how the market works and how to use some of the trading tools. It is not long however before you are ready to move on and to put your paper trading days behind you.
But is it such a good idea to leave paper trading behind you?
Many successful Forex traders today are discovering that continuing to trade on paper from time to time can be both helpful and profitable.
Problems often arise for traders when they find themselves with a losing trade. Despite the fact that losing trades are an everyday part of trading life, you are always going to be affected by a trading loss and there is often a strong, albeit often subconscious, urge to recoup the money you have just lost as fast as possible. This frequently means that you go right back into the market but, because you are in a losing frame of mind, your next trade often also results in a loss or a less than spectacular gain.
For many traders the answer to this problem is to follow a losing trade with a paper trade.
In this case you trade seriously and in exactly the same way that you would trade normally but run the trade on paper. You study the market indicators, open a trading position, put a stop loss order in place and then track the trade. As the trade progresses you move your stop loss order as the market moves and, finally, you close out your position when your market indicators tell you to do so.
This paper trade might result in a profit or a loss but, as the trade is only being made on paper, it doesn't matter one way or the other. The importance of this trade is that it allows you to clear your mind and to put your previous losing trade behind you. Even if this paper trade results in a loss the affect is positive because you are happy knowing that you have not actually lost any money.
Having run this paper trade you are now ready to leave the world of simulated Forex trading and return to live trading and can open a new trading position in a winning frame of mind.
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