One of the key distinguishing factors between rich and poor foreign exchange traders is the way in which they understand and interpret price action. Price action is the ultimate leading indicator within the foreign exchange trading world. In this article we look at the trail of clues that price action leaves as it traipses over your currency charts, and how you can determine which way it’s off to next.
Foreign Exchange Price Movement Tips
1. Price Action Can Be Reasonably Understood – But There Is NO Scientific Formula. Remember that foreign exchange trading is NOT a science. For all the trading systems, indicators and techniques that we employ to give us a march on trends and price action, there is no surefire scientific system that works 100% of the time. This fact is just the child of pure logic – if there were a way of predicting price action with total accuracy, there would be no market to speak of. We would all know price direction in advance, and we would all be millionaires before long.
2. Foreign Exchange Prices Do Conform To Certain High Probability Patterns. If the above fact has discouraged you, the news is slightly better with this point. Good foreign exchange traders CAN make a good and consistent profit by trading high probability price patterns. These high odds patterns occur often and always within the trading world, and part of successful trading is in being able to spot them as they do the rounds on your charts. Good trading is all about using the synergy of reliable odds over the long term to build on your trading equity.
3. Fun With Fundamentals. While traders typically employ charting and technical analysis methods to pick out high odds trading scenarios, it’s actually fundamental factors that actually will move the foreign exchange up or down. The following are some of the more major fundamental factors that will impact upon the price:
- News and indicators on the health of the economy, such as GDP and employment numbers.
- Interest rates expectations and announcements.
- Trade and balance deficits.
- Government changes and policy announcements such as taxation.
Because foreign exchange prices are quoted in pairs, the strength of a currency is always judged relative to its counterpart currency.
4. Markets Are Highly Efficient In Accounting For Fundamentals. After reading the above, you would be forgiven for thinking that you could become rich by trading according to news events. For example, a raising of the base rate should lead to a strengthening of the domestic currency – however, since markets are so efficient, the effect of that rate rise would already be reflected within the charts by the time you tried to trade it. This is exactly why many traders don’t try and position themselves based on news feeds.
5. Sentiment & Psychology – The Market Driver. The markets often pulse on the way that market participants conceive them. Market sentiment is an absolutely huge market driver. Even when a currency pair is patently overbought or oversold (as depicted by indicators such as the Stochastic or Relative Strength Index), it can continue surging when driven by sentiment.
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