How and why do forex prices move? The answer may sound obvious but most traders get the reasons wrong and lose. If you understand the following 3 points, then you will understand more above currency movement and get a head start in your quest for currency trading success.
So how do prices move?
Well of course they move in reaction to all the supply and demand political factors such as: interest rates, government policy, economic health and a whole host of others and these are facts but prices are also influenced by people.
Now all the people who look at the facts see them and have opinions that differ and take positions.
The important point is:
They all draw different conclusions from the facts they see and this causes prices to go in a different direction to where the bulk of traders think they will!
A simple equation is:
Supply and demand factors + Human opinion (investor psychology) = market movement.
So you need not only to take into account the supply and demand fundamentals but also make a judgment on how other people are going to judge the facts and how they see them and then work out which way prices are going to.
This is why forex trading is hard and 95% of traders fail to win.
So how do you do it and make your forex trading strategy a success?
Here are some tips.
1. Use forex technical analysis as a basis for your forex trading strategy.
Technical analysis and looking at forex charts gives you a distinct edge in that it takes into account both the fundamentals and investor psychology.
Technical analysis simply assumes that all known fundamentals will immediately show up in the market price (and in today’s world of instant communications this is truer than ever before) but it also takes into account human psychology which always pushes prices to far in either direction.
These price spikes are easy to spot on forex charts and repeat ( as human nature is constant ) and can be traded for profit.
If you are trading forex NEVER do the following:
1. Trade fundamental news stories volatility is high and your playing catch up as the news is instantly discounted.
2. Never mix fundamentals and technical analysis as there separate disciplines.
3. While technical analysis is a great way to trade, be aware its an odds game and NOT a science.
Humans are unpredictable and while you can get the odds in your favour nothing is certain.
Ignore people who try and sell you scientific theories or tools such as cycles, Elliot wave or Fibonacci based systems – they don’t work.
If prices could be predicted with scientific accuracy we would all know the price in advance and there would be no market. Its different opinions that cause prices to move.
Trading The Odds For Big Profits
So you are playing the odds and with a simple forex trading system based upon technical analysis you can make a lot of money. One final point:
If trading via forex technical analysis and using forex charts, keep in mind you need to use valid data – this means trading the longer term trends.
Avoid day trading as the time period is to short and the data is meaningless and you will lose.
If you understand the above points you will know how and why prices move and be able to trade them for profit and avoid the mistakes of the losing majority.
How to devise a forex trading system for profit based upon technical analysis will be covered in part 2 of this article series.
Source by Kelly Price