Thursday, August 12, 2010

It's Time to Start Trading Currencies

Are you feeling left out of the forex action? After all, the forex market is a fast pace action market that is open 24 hours a day / 5 days a week. What excites most new forex traders and experienced is the volatility the market provides; it’s a non-stop reactive market. Forex has become ever popular since the stock and commodity markets took a dip in recession; which gave forex trading a popular edge. The Forex market consist of multiple currencies but there only four major ones that you should stick with; Euro (which is made of 27 member states), Sterling (which is also commonly referred to the British Pound), U.S Dollar, and the Japanese Yen. The reason why these four currencies hold larger weight then the others, it’s because they are globally liquidated and are traded by over 80% percent plus of the forex traders. However, in order to be a long-term successful forex trader you need to be disciplined and have an all-inclusive strategy. The critical points that will separate a long-term forex trader from others would be fundamental analysis, technical analysis, and candlesticks.

Fundamental analysis is the study of the news outcome. In the forex market, the economic news is an on-going and overlapping at times. Not all economic news hold the same weight; some are more important then others. It is very important to follow the news of the currency you are trading; if you are trading U.S dollar against the Euro then it would be wise to watch the U.S economic indicators and the large stake economic players in the European Union (France, Germany, and United Kingdom). For example, if the U.S unemployment rate comes out better then forecasted it would give the U.S dollar a boost against all other major currencies but if unemployment rate climbs more then expected; it would create a negative rippling effect on the forex traders and they will start selling off there current positions (which would downtrend the U.S dollar against other currencies). News outcomes that hold little or no weight consist of the micro-economic picture of the overall country, for example, natural gas storage, construction spending, and total vehicle sales; don’t hold a significant role in shaping the U.S dollar outlook. All major currencies react to both the positive and negative news sentiment. The importance of the forex news indicators have changed over the years; if you are planning to enter the forex market it will be best to keep an eye out for the unemployment news, NFP (Non-farm employment), retail sales, and the Federal fund rate. Previously, the unemployment news had no role in the forex market but ever since the global recession has started, its role has increase and it is expected to hold its position for the next few years.

The most liquidated forex currency to trade would be the EUR USD, since it has the largest margin of traders, liquidation, largest financial institutions in the world (Banks, Investment firms, etc.), and it’s trend is based on cause and effect.

Technical analysis is the ability to determine the forex trader’s sentiment. Forex charting is very important to stay on pace with the forex traders mind-set. If you are looking to become a profitable forex trader it is extremely important to understand trend and resistance lines. To find the trend you need to ask yourself this question, is the currency moving from the top left corner to the bottom right (downtrend) or is the currency moving from the bottom left corner to the top right (uptrend)? There are three important reasons to follow the trend in the forex market because it will be your “best friend”.

(1) The trend gives you the overall sentiment of the traders (buyers or sellers).

(2) They are persistent and have long-term duration.

(3) Trends have a tendency of not breaking easily without a cause and effect (economic news, political event, etc.)

The next important fact about technical analysis is ability to determine where the resistance lines are. Resistance lines are the price action points on the chart of where the buyers decided to sell there position’s (high point) and where the buyers decided to re-enter the market (low point). In the forex market, currencies strength is measured by the ability to break the previous high or low; which makes increases the trader’s confidence of the currency to execute his or her trade. Every currency pair, will usually have three to five resistance lines that are symbolic to the trader’s strategy. In an uptrend, the forex trader is waiting for the currency to break the next resistance line to give him the confidence of pulling the trigger and executing his trade and vice-versa in a downtrend; the trader is waiting for the currency to break the next low resistance line to enter a sell position.

It is best to have your forex chart be set on the (Japanese) candlestick model because candlesticks are excellent at picking up extensive information. Candlestick will inform you of the overall market sentiment (green is bullish and red is bearish), a candlestick with long line trail is consistent with the buyers or sellers executing there position and leaving the market … so you know that the currency is direction bias has increased, currency reversals, and the visual cues it provides makes forex trading much more easier to deal with.

(This article is a contribution from Martin Short of