Overview of Forex Currency Pairs
However, if you want to succeed with Forex trading – currency pairs notwithstanding – you will find that you need to have a good grasp of technical analysis. Some Forex traders suggest that beginners learn to master one currency pair before attempting to trade another and this is a wise course of action because it will allow to learn how the currency pair in question reacts to different news reports. However, the fundamentals of technical analysis will be the same, no matter what pair you are trading.
Technical Analysis and Market Psychology
Technical analysis simply refers to studying price charts to attempt to predict the general direction in which the market will move so that you can make profitable trades. Of course, while technical analysis involves many indicators, mathematical formulas and graphs, it is science combined with a little luck. If the market were easy to predict based only on formulas and it reacted the way we expected it to every time then everyone would be a successful trader. However, you will often find that you can make a profitable trade today and tomorrow, under the exact same market conditions and with the exact same readings on your indicators, your trade could be a losing one.
The market is not simply about mathematics because the market is made up of people. People buy and people sell, which is why the market tends to move according to trader psychology. For example, if many traders feel that a country’s economy is improving they will take a long position in that currency and even if the data does not back their prediction, the value of that currency will still increase. This is why it is a good idea for you to stick to Forex trading currency pairs you understand from a fundamental point of view.
Forex Trading: Currency Trends
You will often hear the phrase “the trend is your friend,” and nothing is truer when it comes to Forex trading. Currency pairs move up, down or sideways and by identifying the trend you will be in a better position to determine whether you should go long or short.
Depending on your trading style, whether you are a long term trader, a swing trader or prefer to day trade, you will be identifying trends based on the general time frame you are trading. For example, a day trader, namely someone who enters and exits positions on the same day, might start off on a day chart to determine the overall trend of the currency but also drop to the hourly chart to see if the trend is consistent. However, this is only to gain an overall picture as day traders will use 30 minute, 15 minute or 5 minute charts to determine their entry and exit points.
Forex trading currency trends can also be used to determine support and resistance levels. A support level is the price below which a currency pair hasn’t dropped for a certain period of time. Resistance levels are the exact opposite and are equivalent to a price that a currency pair hasn’t managed to breakout from for a certain period of time. You will find that currencies tend to trade within certain channels and they don’t move in a linear fashion. So, even if the overall trend is heading up, it is not a smooth climb but rather a choppy one with the currency pair going up and down within a channel formed from support and resistance levels.
The advantage to plotting this channel is that when the price hits the resistance level it is considered a good time to buy and when it touches the resistance level it is time to sell as that is the highest price you are likely to get for that trade. Of course, since price doesn’t always behave logically, it could break out from the resistance level, but just as easily it could be a false break out where the price is simply testing the resistance level.
While there is much more to be covered on Forex trading currency pairs and trends, this is a small introduction to trends. It may seem complicated but once you learn to plot your trend lines and read the charts, you will find that there are certain chart patterns that will allow you to better predict whether or not you can expect the trend to continue or a reversal is on the horizon. The better you become at analyzing the charts, the easier it will be for you to make a profit.