to approach the market. There is more to currency trading than meets the eye, and we think the trading style you choose is one of the most important determinants of overall trading success.
Finding the Right Trading Style for You
We’re frequently asked, “What’s the best way to trade the forex market?” That’s a loaded question that seems to imply there’s a right way and a wrong way to trade currencies. Unfortunately, there is no easy answer. Better put, there is no standard answer — one that applies to everyone.
The forex market’s trading characteristics have something to offer every trading style (long-term, medium-term, or shortterm) and approach (technical, fundamental, or a blend). So in terms of deciding what style or approach is best suited to currencies, the starting point is not the forex market itself, but your own individual circumstances and way of thinking.
Real-world and lifestyle considerations
Before you can begin to identify the trading style and approach that works best for you, give some serious thought to what resources you have available to support your trading. As with many of life’s endeavors, when it comes to financial-market trading, there are two main resources that people never seem to have enough of: time and money. Deciding how much of each you can devote to currency trading helps to establish how you
pursue your trading goals.
If you’re a full-time trader, you have lots of time to devote to market analysis and actually trading the market. But because currencies trade around the clock, you still have to be mindful of which session you’re trading, and of the daily peaks and troughs of activity and liquidity.Just because the market is always open doesn’t mean it’s necessarily always a good time to trade.
If you have a full-time job, your boss may not appreciate your taking time to catch up on the charts or economic data reports while you’re at work. That means you’ll have to use your free time to do your market research. Be realistic when you think about how much time you’ll be able to devote on a regular basis, keeping in mind family obligations and other personal circumstances.
When it comes to money, we can’t stress enough that trading capital has to be risk capital and that you should never risk any money that you can’t afford to lose. The standard definition of risk capital is money that, if lost, will not materially affect your standard of living. It goes without saying that borrowed money is not risk capital — you should never use borrowed money for speculative trading.
When you determine how much risk capital you have available for trading, you’ll have a better idea of what size account you can trade and what position size you can handle. Most online trading platforms typically offer generous leverage ratios that allow you to control a larger position with less required margin. But just because they offer high leverage doesn’t mean you have to fully utilize it.
Making time for market analysis
The full version of Currency Trading For Dummies talks about the amount of data and news that flows through the forex market on a daily basis — and it can be truly overwhelming. So how can an individual trader possibly keep up with all the data and news?
The key is to develop an efficient daily routine of market analysis. Thanks to the Internet and online currency brokerages, independent traders can access a variety of information.
Your daily regimen of market analysis should focus on:
- Overnight forex market developments: Who said what, which data came out, and how the currency pairs reacted.
- Daily updates of other major market movements over the prior 24 hours and the stories behind them: If oil prices or U.S. Treasury yields rose or fell substantially, find out why.
- Data releases and market events (for example, the retail sales report, Fed speeches, central bank rate announcements) expected for that day: Ideally, you’ll monitor data and event calendars one week in advance, so you can be anticipating the outcomes along with the rest of the market.
- Multiple-time-frame technical analysis of major currency pairs: There is nothing like the visual image of price action to fill in the blanks of how data and news affected individual currency pairs.
- Current events and geopolitical themes: Stay abreast on issues of major elections, political scandals, military conflicts, and policy initiatives in the major currency nations.
Technical versus fundamental analysis
Ask yourself on what basis you’ll make your trading decisions — fundamental analysis or technical analysis?
Fundamentals are the broad grouping of news and information that reflects the macroeconomic and political fortunes of the countries whose currencies are traded. Most of the time, when you hear someone talking about the fundamentals of a currency, he’s referring to the economic fundamentals. Economic fundamentals are based on:
- Economic data reports
- Interest rate levels
- Monetary policy
- International trade flows
- International investment flows
The term technicals refers to technical analysis, a form of market analysis most commonly involving chart analysis, trend-line analysis, and mathematical studies of price behavior, such as momentum or moving averages, to mention just a couple.
We don’t know of too many currency traders who don’t follow some form of technical analysis in their trading. Even the stereotypical seat-of-the-pants, trade-your-gut traders are likely to at least be aware of technical price levels identified by others. If you’ve been an active trader in other financial markets, chances are, you’ve engaged in some technical analysis or at least heard of it.
Followers of each discipline have always debated which approach works better. Rather than take sides, we suggest following an approach that blends the two disciplines. In our experience, macroeconomic factors such as interest rates, relative growth rates, and market sentiment determine the big-picture direction of currency rates. But currencies rarely move in a straight line, which means there are plenty of shortterm price fluctuations to take advantage of — and some of them can be substantial.
Technical analysis can provide the guideposts along the route of the bigger price move, allowing traders to more accurately predict the direction and scope of future price changes. Most important, technical analysis is the key to constructing a welldefined trading strategy. For example, your fundamental analysis, data expectations, or plain old gut instinct may lead you to conclude that USD/JPY is going lower. But where exactly do you get short? Where do you take profit, and where do you cut your losses? You can use technical analysis to refine trade entry and exit points, and to decide whether and where to add to positions or reduce them.
Sometimes forex markets seem to be more driven by fundamental factors, such as current economic data or comments from a central bank official. In those times, fundamentals provide the catalysts for technical breakouts and reversals. At other times, technical developments seem to be leading the charge — a break of trend-line support may trigger stop-loss selling by market longs and bring in model systems that are selling based on the break of support. Subsequent economic reports may run counter to the directional breakout, but data be damned — the support is gone, and the market is selling.
Approaching the market with a blend of fundamental and technical analysis improves your chances of both spotting trade opportunities and managing your trades more effectively. You’ll also be better prepared to handle markets that are alternately reacting to fundamental and technical developments or some combination of the two.
Source: Currency Trading For Dummies
