Forex trading refers to an international, 24/7, over the counter, exchange market where currencies of different nations are bought and sold. Trading is always done in pairs assuming the price of currency bought to go up and that sold to fall down. It is the largest liquid financial market making it impossible for any single investor to influence the prices of currencies.
There are two kinds of Forex investing strategies: Technical Analysis and Fundamental Analysis.
Technical Analysis
Technical analysis is mostly undertaken by small and medium size investors. A technical analysis considers factors that are actually affecting the market rather than factors that can affect it. Thus the price quoted reflects all the factors that have influenced it. Only market generated facts and figures are taken into account and factors like fear, hope, expectations or other changes are not considered. Thus the analysis is generally based on these suppositions:
- Price reflects all actual market movements. That means price includes everything known to the market like supply and demand of foreign exchange, political factors, trade agreements etc. It is not concerned with what resulted in change rather deals with actual changes. It works on the assumption that price can take only one of the three directions: upward, downward and sideways.
- It rest on those market patterns that have been identified as significant. That means those factors which are repetitive in nature or will produce desired results.
- History always repeats itself as human psychology changes very slowly with time. That is market movements are predictable.
Technical Indicators
Relative Strength Index
It takes into account the ratio of upward and downward movements in index and expresses it in the range of zero to hundred.
Chart patterns
Charts include various hills, slopes, curves that develop on a chart over a time and reflect some major and minor changes in pattern. Some of the chart formations include: Triangle, Rectangle, Head-and-Shoulders, Double Top and Bottom, Saucers, V.
Gaps
A gap represents area on a bar chart where no trading took place:
- Gap up: it is formed when the lowest price on a particular day is more than the highest price of previous day.
- Gap down: it is formed when highest price of a certain day is less than the lowest price on previous day.
Numbers
Various number theories are used in technical analysis like Fibonacci theory and Gann.
Stochastic oscillator
This indicates the overbought and oversold condition. It uses a scale of zero to hundred percent.
Fundamental Analysis
It is the one where current economic, political, financial situation of the country of currency is studied. A country's economical and political condition depends upon many factors like the interest rate, unemployment level, exports and imports, per capita income, percentage of population living above and below the poverty line, inflation, trade relations with other countries, tax policies etc.
A fundamental analyst studies and evaluates all these factors before coming to any decision. Thus it helps in long tem decision making and making profits in short term by extra ordinary developments.
Fundamental indicators
Gross domestic product
It reflects total market value of all the goods and services produced in a country during a given year.
Retail sales
This reflects total receipts by all the retail stores in a country.
Consumer price index
It reflects change in prices of consumer goods.
Business cycle
It reflects various phases through which a business passes. These phases include:
- Expansion
- Peak
- Recession
- Depression
Monetary policy
It controls the supply of money in an economy.
Conclusion
Trading successfully needs knowledge, time and understanding of a market. You cannot earn continuously in a Forex market due to its volatile nature. Thus as a trader you should try to consider both technical and fundamental strategies of FX trading and make decision based on market expectations and trends. Try trading with money that you can afford to loose without any regrets. Trade with logic and if you are not sure quit and take rest for some time.
by Willie Reynolds
