The Forex market can be tricky. At first, you might think you’ve really got it only for a chain of losing trades to prove you wrong. Hence, it is no surprise that so many lose. Apart from the lack of understanding of its basics, another reason for this is poor approach. Interestingly, the latter can stem from the former.
That is, when you do not understand the Forex market, you fail to devise a sound, working strategy to approach it. However, this does not have to be so. As a result, we have prepared this guide to help you in formulating a sound approach.
Approaching the Forex Market
In approaching the Forex market, nothing is to be left to chance. Unfortunately, many Forex market participants just enter and exit trades according to the dictates of their whims. They have no framework of sound rules for guiding their trading decisions. In short, their caprices, not knowledge, not understanding, and so definitely not logic, are in charge of their trades! Little wonder they struggle to make any profit. The internet is full of stories of those traders.
Summary: You have to become a Forex analyst first before you become a Forex trader.
Thus, if you want to succeed as a Forex trader, you have to be different. You have to be ready to take charge of your trades. Every trading decision you make must be informed. And a good place to start towards ensuring this is to learn to analyse the Forex market yourself.
Analysing the Forex Market
Retail Forex traders analyse the market to be able to decide when to buy or sell different currency pairs. Their analyses can be either fundamental or technical in nature.
Fundamental Forex Analysis
Fundamental Forex Analysis is the analysis of the Forex market using important economic parameters. When you do fundamental analyses of currency pairs, you monitor the influence of economic data on them which cause them to either appreciate or depreciate in relation to one another. Those data include:
– Interest rate
– Unemployment rate
– Gross Domestic Product (GDP)
– Government Debt,
– Balance of Trade, etc.
These economic factors impact the exchange rates of currencies by causing fluctuations between them. Take as an example inflation rate. A country with a lower inflation rate in relation to another will have its currency more desired by Forex investors. Why? Because a low inflation rate is equated to a higher value. The more of such a currency you have, the more goods and services you can buy with it.
Technical Forex Analysis
While Fundamental Forex Analysis focuses on economic parameters, Technical Forex Analysis, on the other hand, is based on the school of thought that if the exchange rates of currencies have behaved in such a way before, chances are that they will do so again. As a result, it is based on three working assumptions:
– The market discounts everything
– Price moves in trends
– History tends to repeat itself
Hence, a Forex technical analyst considers only price movements which he believes are based on mass psychology. And interestingly, this belief is confirmed in the movements of price during news releases and in the working of support and resistance zones. Forex technical analysts use chart patterns and indicators to predict those price moves.
Summary: Technical Forex Analysis is based on the assumption that the exchange rate as seen on the charts is the most important thing you should watch, that it moves in trends, and that its behaviour tends to repeat itself.
Applying Forex Analysis
So, how do you start applying analysis to your Forex trading? Do not be in a hurry. Our next two blog posts will be dedicated to discussing exhaustively the two approaches to Forex analysis. However, before you get to that, the following are points you should always consider in analysing the Forex market.
Understand the Factors
It is important you identify and understand fundamental and technical factors and their relationships with the Forex market. Why? Because those factors are the primary market drivers and are subject to change from time to time.
For example, what is the effect of an increasing inflation rate on the currency of a county? Also, does its exchange rate rise or fall when it increases its interest rate? How does political stability impact investors’ confidence and the supply and demand of different currencies? How is the price behaving on the charts? You will have to understand these and more as they will form the bases for your trades.
Befriend Your Charts
If you want to integrate both fundamental and technical analyses, or you intend to use just technical analysis, you should commit to understanding the basics of chart analysis. That is, you should befriend your charts. Charts have patterns that indicate the mass psychology of traders. They reflect when most traders are buying and when most of them are selling. Due to this, they reflect trends.
In Forex, there are popular recommendations such as follow the trend and the trend is your friend. When you understand chart patterns, you will be able to identify and follow tradable opportunities yourself.
Target the Right Timing
In trading generally, timing is important. In Forex trading, it is particularly so. If you are a scalper, for example, a delay of say just 2-3 pips can fatally erode much of your gains. Likewise, a similar delay can plunge you into a loss. That is why you should commit to entering and exiting positions at the right time. However, if you especially find it hard to properly time your entry and exit, then you should do well by always using low leverage and protecting your positions with stop-loss.
Finally, always be careful. Never rush. You should have noticed that we use the word “learn” a lot. It is because you have to learn first to succeed in Forex. Additionally, you should be patient and disciplined. All these will make a difference for you in the end. Join us at 1000pip Builder to follow a professional trader use this analysis in a live market.