Forex Technical Trading Explained:
Just as you would expect with anyone trading in equities, investors in the Forex market employ strategies to help them invest more successfully. All of these strategies ultimately boil down to one thing, which is trying to predict which way the currency exchange rates will fluctuate. Predict correctly, up or down, and make a profit while we all know what happens when we are incorrect.
When deciding whether or not to enter or exit a position in the Forex market, there are 2 basic types of analysis to choose from. One is fundamental and the other is technical. Investors who base decisions on fundamental analysis will look at interest rates and the overall economic performance of the nations in the currency pair when deciding when to sell and buy positions. Forex technical investors will look to trade based on price performance and chart patterns, so which is best?
The use of fundamental analysis, such as the latest GDP figures may seem like a very logical approach when deciding when to buy or sell a position in the Forex market. After all, we all know that stock prices are affected by economic data so it would stand to reason that the same would hold true for the Forex. However, the Forex market has no central exchange with set hours, so trading continues 24 hours per day except when shut down between Friday and Sunday and this makes a big difference between profitability and loss for small investors.
The average investor is a very, very, very small fish in a gigantic ocean full of larger investors. By the time economic data and current events filter down to the small investor, all of the big players have already moved their currency and taken advantage of the information. Day trading is a very dangerous game in the Forex because the market is so fluid, and investors are highly leveraged, so using fundamental analysis can be a very risky strategy.
Forex technical trading, however, involves the use of historical data to interpret present pricing trends and predict the future. The moving average is the most common technical statistic used by Forex investors. Presented in a graph or chart format, the moving average helps investors see the price movements of a currency pair for a given period of time. For instance, a 10-day moving average shows an investor the daily open, daily close, high, low, and overall direction of a currency pair for a 10-day period of time. It is called a moving average and favored by investors because it helps smooth out the noise of the price movements so an overall trend can be determined.
Technical trading involves entering or exiting a position based upon predetermined points by the investor. For instance, some investors may favor a 50-day moving average (the larger the sample, the smoother the lines and the easier it will be to see a pattern) and will only buy once the price moves above a certain point on the chart. Other variations on this statistic include, the Simple Moving Average, which is based on the closing price, and the Exponential Moving Average, which assigns more weight to recent prices, while lowering the importance of days in the past.
In the end, the technical Forex traders are trying to identify trends and then capitalize upon them. The goal is to find the currency pair with the greatest pip movement and lowest volatility. Technical analysis helps investors determine the emergence of new trends in currency pairs so that they can profit from them but no strategy will work with 100% accuracy because at the end of the day, the market is going to fluctuate based on many factors, which can change quickly, and often times move in larger price swings than expected.
What Are The Top Traded Forex Currencies? – https://www.mastersofmoney.com/whatarethetoptradedforexcurrencies/
Risk disclosure: *All investments involve risk. Before making any financial or investment decisions, we highly advise that you seek the advice of a properly licensed and trained investment professional.