Saturday, August 27, 2011

Tips for New Forex Traders

With around 3 trillion US dollars worth of currencies traded daily, the Forex market is the largest financial market in the world. It is an extremely exciting business to be in as it provides a simple way for both the traders and investors to build up profits rapidly. Nevertheless, for those new to the Forex market, it is crucial to know exactly what you are getting yourself into. You should not deal in the Forex market if you are clueless as to what the Forex market entails. Despite having said this, we still countless novice traders repeating the same mistakes over and over again. Some of these common errors that the make include:

• Not embracing the correct outlook toward trading in the Forex market.

• Not having the right attitude

• Unable to differentiate the significances of the different currencies traded.

• Having poor management of their trading as well as implementation of their trading strategy.

Outlook:

Many novices fail to appreciate the importance of having the correct outlook toward trading in the Forex market. This is actually about making the proper preparations before beginning to trade in the Forex market. First of all, a novice trader must coordinate his personal goals and mindset so that he can connect with the market as well as with the tools used in Forex trading.

For example, the Forex trader need to think about the time frame with which he is most at ease with when it comes to trading. Using short time frame charts like a 5 minute chart will imply that you should be at ease with market position without risk of overnight exposure. On the other hand, if you prefer to trade with weekly charts, this would imply that you are acceptable to the risk of overnight exposure. It would also mean that you can deal with the fact you will not be trading for several days.

The Right Attitude:

The right attitude would entail having the following traits in one’s mindset like:

• Discipline

• Objectivity

• Patience

• Having realistic expectations

Able to discern the significance between the various currencies traded:

Not all currency pairs are created equal. Each currency pair is being traded for different fundamental reasons. Simultaneously, different market participants go for different currency pairs. The way a bank will trade differs significantly from the way a Hedge fund conducts its business. A speculator will also have a different trading philosophy form that of retail Forex traders. Therefore, in order to capitalize on any opportunities, you need to be able to appreciate these different motivations of the market participants.

Proper management and strategy implementation:

Although no Forex trading strategy is 100% foolproof, this does not mean you can forgo having one while trading in Forex. It still provides a roadmap for you to measure your progress in making your trading decisions. Even though you will incur some losses along the way, at the very least your can see what is the ratio of profits to losses when you implement a particular trading strategy.

Conclusion:

With the countless number of trading techniques that are available today, it is difficult to say which is better and which is no good. What is important for you as a trader is that you must feel comfortable with the trading strategy that you adopted. As the Oracle of Omaha Warren Buffet, use to say there are only two rules in investment. The foremost rule is “Never lose money” while the second rule is “Always remember the first rule”.

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Forex- Fundamental Analysis

Forex fundamental analysis is about identifying and measuring the factors that affect the fundamental worth of financial instruments. These can be economic or political climate of a country as well as the fundamental issues that will influence the supply and demand of a product or services. For example, a decrease in the supply of a product without any change in the demand of a product will result in an increase in the market price. In contrast, any increase on the supply side will have the opposite result that is a decrease in the market price.

In the context of Forex trading, a fundamentalist will study the supply and demand of a country’s currency, its merchandise trade (products & services), its government policies, the way the country is managed. He will also analyze the past and forecasted performances of the country’s economy and the future plans of the country, both economic and political. For the short term, all economic indicators need to be looked at.

Using the data obtained, the fundamentalist will then construct financial models to help predict both the current and forecasted value of a specific currency against its corresponding pair. The underlying idea is that any unparalleled increase in the supply will lower the value of the currency. On the contrary, any unparalleled increase in the demand will push the value of the currency up. Once the fundamentalist is able to discern this estimate from the financial models constructed, he will be able to predict if the currency rate is likely to fall or increase.

Some of the data that fundamentalist trader relies on comes from the economic calendar. Other factors that a fundamentalist will rely on are speeches of the US Federal Reserve chairman, Secretary of the Treasury and those who are prominent in the financial sectors. In addition to speeches, fundamental analysis also relies on interest rates. Normally, interest rates increase will cause the currency value to increase as well as more investors start to park their assets in that country’s currency. Other important economic data that will be studied will include the unemployment rates, the Gross Domestic Product growth rate, figures of retail sales and consumer price index. A high GDP growth rate will indicate a robust economy which in turn implies higher interest rates. Higher consumer price index will mean higher rates of inflation. This will naturally result in interest rates rising meaning that the value of the country’s currency will go up.

The trade balance figures and country budget are also important data that need to be studied. Countries with a high trade deficit will normally indicate a weak currency. One of the main drawbacks of fundamental analysis is that it is difficult to accurately assess interaction between the variables. Thus, a lot of the forecasted estimates are based on the fundamentalist’s experiences. Furthermore, the Forex market has the tendency to be self fulfilling making the analysis obsolete at times. Lastly, depending on the timing, the market usually takes some time to adjust itself to the changing economic factors.

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Forex Technical Analysis

With Forex technical analysis, one tries to predict future price movements by analyzing historical market data. The majority of Forex traders use technical analysis to try to get an overall view of their investment’s price movements. Occasionally even a fundamentalist trader relies on technical analysis to get a better picture of a currency trend. With technical analysis, one can discern if the market is one a downswing, upswing or just moving sideways.

Technical analysis works by relying on a few assumptions:

• That all the fundamentals of the market are echoed in the price data. The underlying reasons for the price movements are not essential in technical analysis.

• The Forex market moves in repetitive patterns. These patterns are known as trends and are used as signals to govern a technical analyst investment strategy. The objective of technical analysis is to actually predict future trend by analyzing past trends.

• Because prices in the Forex market moves in predictable ways, Technical analysts do not believe that price fluctuations are random. Thus, once a trend has been established, it will continue for a certain period.

Using the technical indicators available under technical analysis, Forex traders are able to find suitable entry and exit points for their trades. Some of these technical indicators are reflected in price charts, volume charts and moving averages. Each type of technical serves a specific purpose like identifying trends or determining the strength or continuity of a trend. Technical analysis is actually more objective than fundamental analysis as it removes the emotional aspect of trading. Traders using technical analysis are generally more disciplined as they rely solely on the technical charts to form their investment decisions. Entry and exit points of a trade are determined and planned according to what the charts tells us.

The types of charts used by a technical analyst comprises of:

Bar chart

This is one of the most frequently used charts to show the price movements. Every bar indicates a time frame that can indicate one minute or several years. If the time frame is long enough, a pattern will emerged just by looking at the bar chart.

Candlestick chart

Candlestick charts are another type of chart that is commonly used by technical analysts. It is more complicated than a bar chart in so far each candlestick will depict the “high”, “low”, “opening” and “closing” price for the time frame that it represent. It provides more depth than a bar chart.

Point and figure chart

Point and figure charts are like bar charts only that the Xs and Os on the charts are for indicating adjustment in the price direction. These charts do not utilize time scale to relate to a specific day with a specific price action.

Apart from charts, there are also several frequently used technical indicators by the technical analysts. They include:

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