Foreign exchange, also known as Forex for short, is the largest traded market today, with a near $2 trillion trade value on a daily basis. This provides a volatile and liquid environment ideal for profit opportunities. However, one cannot simply walk into the business and expect to accumulate a wealth from buying and selling different currencies. Sound knowledge of how this trillion dollar empire works is important otherwise the person can end up with losses.
One of the key areas of trading any market, not just Forex, is technical analysis. This encompasses chart reading, algorithmic indicators, and historical data. Most online charting software offered by brokers come pre-packaged with technical indicators, such as the moving average, stochastics, relative strength index, and average true range. Trend lines and Fibonacci retracement levels are also considered technical tools. Historical data like the previous month’s high and low prices are also used to generate buy or sell signals. The problem with many technical indicators is that they are lagging indicators, meaning they produce signals after a significant price move has already occurred, meaning the trader has to chase the signal and enter late with the hopes that the reward will still be enough to compensate for the risk taken.
Often viewed as the shadiest aspect of trading, fundamental analysis is mostly reserved for long-term traders and investors since economic fundamentals spark longer term trends, lasting from as short as a month to as long as a year. Fundamentals, however, can still affect short-term positions in that surprising numbers coming out from news reports can lead to panic buying or selling. Some market-moving news to look at are central bank announcements, interest rate changes, and employment numbers, which tend to be a good diagnostic tool for a country’s economic health. What’s tricky about fundamental analysis in the Forex market is that the results of news reports are not necessarily digested by market participants in a logical way, meaning better than expected jobless figures don’t equate to the currency’s strength.
Trading is one of the most mentally stressful careers you can pursue. Amid the advertised benefits of freedom and limitless income told to you by brokers, the truth of the matter is that you’ll likely lose some sleep while trading the Forex market. It is not the best career for people who are emotionally unstable, undisciplined, and impatient. Trading rules must be set and you must stick with them trade by trade. Find a strategy that fits you, depending on how much screen time you have per day and what pair you wish to focus on. Having a plan and a set of carefully predefined rules allow you to eliminate the emotional aspect of trading and operate mechanically. You must back test your system to assess its long-term profit potential. Risk on and risk off market sentiment should also be considered when taking trades as this alone could affect the direction or bias of a currency. Risk off sentiment tends to strengthen safe-haven pairs like the US dollar and Japanese Yen while risk on sentiment favors the Austrian dollar and New Zealand dollar.