You Don’t Need to Be Afraid of This Trading Strategy
I know forex trading might sound scary. It tends to frighten people off. But, if you know what you’re doing, it can be a great asset.
I covered the basics with you yesterday but there’s a lot more to cover if you want to learn forex trading. And knowing all types of trading styles is key to becoming a better overall trader.
While it’s possible to jump in and begin executing trades right away, I caution you to wait. While I love trading penny stocks and other investments, I learned before I acted. The good news is, you can still make money while you’re learning.
Researching and learning the basics (like reading this issue) will make you a more informed trader.
You’ll be less likely to lose your cool (and your shirt) to poor investment choices.
Watching the market is an important part of the process. Look for patterns throughout each trading day and pay attention to how investors respond. If you can follow a forex expert’s trades, do so.
Finding a mentor can also help you become more successful at forex trading. There’s no substitute for personalized advice.
Finally, make sure you’re only investing small amounts, especially in the beginning — and especially when using low margins with leverage. Only use 1% of your total investment account at a time, at least until you’re more accomplished.
Forex Trading Strategies
Lots of factors can influence forex trading — perhaps more than the stock market. That makes sense since it’s a far more liquid market with more volume.
It’s also a global marketplace in which you’re basing trades on pairs. You have to know the factors that influence the Australian dollar, for instance, as well as the Chinese renminbi, if those are the pairs you’re trading.
Believe it or not, economic climates in countries outside the ones in which you’re trading can also have an impact.
Consider the fact that each country trades goods and services with many others. When trading deals fall through, tariffs rise, or other changes in the market take place, the forex market gets affected.
That’s why I’m going to focus on fundamental analysis as well as technical indicators. They’re both equally important in forex trading.
Let’s look at some of the key factors you need to understand to become good at forex trading.
Fundamental Analysis & Fundamentals Trading Strategies
Fundamentals or fundamental analysis refers to indicators based on economic shifts.
In the stock market, you use fundamental analysis to evaluate a company’s profit margins, P&Ls, debt, liquidity, and other information. The same goes for forex trading.
The difference is that you’re evaluating an entire country — two countries, actually — as well as the global marketplace.
Wars and conflict, for instance, can have an impact on forex trading. Military costs can add up quickly when a country needs to defend its borders or engage in combat on foreign soil. Those costs influence the foreign exchange rates.
You can also look at factors like the country’s unemployment rate. When the unemployment rate increases, the currency value tends to decrease. Citizens are depending more on social services to get by, and there’s less activity in the business sector.
There’s something called sentiment analysis, which refers to how you feel about a given position in the marketplace. For instance, you might think that the Australian dollar is about to lose value, while everyone else seems to take a bearish outlook.
It’s your job to determine whether your sentiment analysis has roots in facts and data. If it doesn’t, you’re trading based on emotion, so you need to step away.
Spend time looking at fundamental analysis to figure out why your sentiment analysis differs from everyone else’s.
Technical Analysis & Technical Indicators
You’ve heard the phrase “history repeats itself,” right? It’s often true.
If you’ve taken a three-mile run every morning for 30 days, you’ll likely continue that pattern over the subsequent 30 days.
You can also see this trend in politics. We expect name-calling, ad hominem attacks, factual errors, and posturing during political elections, and politicians never let us down. The cycle repeats every four years during the presidential elections.
This is the foundation upon which technical analysis rests. It’s actually a lot more complicated, but the basic takeaway is that technical traders believe that historical trends will repeat themselves in the future.
Consequently, they base their trading decisions — in whole or in part — on reading charts.
It isn’t that technical traders ignore fundamentals. On the contrary, they take the position that the fundamentals are reflected in historical graphs.
For instance, if the U.S. dollar has increased in value every time the unemployment rate dips below a certain percentage over the last 10 years, a technical trader might use that indicator to buy U.S. currency to take advantage of the bounce.
By looking at the charts and comparing them, they can find patterns on which to base future forex trades.
You would think, based on these facts, that five forex traders could look at the same set of charts and reach the same conclusions. That’s actually not what happens.
Every trader bases his or her trades on specific indicators and patterns. You’ll develop your own system of evaluating charts, and it might be completely different from mine.
There’s nothing wrong with that as long as your system doesn’t put you in successive losing positions. In that case, you need to reevaluate.
Let’s have a look at some examples of those charts and patterns.
I’ll introduce you to them tomorrow along with some other terminology you should be familiar with.
Editor, Penny Stock Millionaires