Intro to forex trading – trading psychology, fundamental and technical analysis and more
What is forex trading?
Simply put, forex trading refers to speculation on the movement of the exchange rates between two currencies or in this case a currency pair, such as the EUR/USD. Forex traders have the opportunity to profit from the constant movements in the exchange rates of these currency pairs by buying or selling when these are rising or falling respectively.
Who trades forex?
Learning about the participants in the forex market is essential to understand the market’s inner workings and how supply/demand and the investors’ sentiment can affect a trading session.
At the very top of the forex market food chain, you have the interbank market which is a network of premier banks. These banks facilitate a large chunk of the daily forex trading volume which amounts to hundreds of billions of dollars.
Some of these banks include the HSBC, JPMorgan and Barclays and if you are wondering who sets the exchange rates you need look no further. According to the supply and demand for each currency, the interbank market will determine the appropriate exchange rate which are then used by the rest of the market participants for trading.
Next up, commercial companies that take part in global trade, for example importing parts from manufacturers in foreign countries who need to be paid in their local currency. This is the case for tech companies like Apple who have their products manufactured abroad.
Governments and central banks also participate in the forex market. In fact, their ongoing mission to control the economy and inflation by means of expanding or contracting supply or hiking/cutting interest rates. This has tremendous impact on the exchange rates of currencies and the forex market eagerly waits for announcements from central banks regarding their future monetary policy.
Last, but not least, retail forex traders and investors or the speculators as we explained before are also an important part of the forex market food chain as speculation comprises 90% of the total trading volume.
What is fundamental analysis?
Identifying opportunities in the forex market can sometimes be an arduous process because there are so many factors that affect the performance of a country’s economy. Fundamental analysis involves researching the various economic news and geopolitical events that may have an impact on the financial strength of a country on the global stage.
Fundamental analysis relies on the concept that a currency’s performance mirrors the well-being of a country’s economy as a whole and how that is perceived by the public sphere. This is because if the outlook for a country is positive, foreign investors will look to buy its currency which will have as a result the appreciation of its value. As demand grows, it fuels further economic growth.
Fundamental traders usually watch out for indicators such as employment data, changes to interest rates from central banks and the trade balance to determine if a currency is going to rise or fall, but since fundamental analysis looks at the bigger picture, it’s more beneficial for traders who try to predict big trends over a longer period of time.
While fundamentals are great for a macroeconomic view of the market, technical analysis lends itself perfectly for identifying near-term opportunities by analyzing historical price data and employing technical indicators which can be applied directly on the chart and reveal future moves and trends.
As we mentioned before, it’s commonly accepted that a country’s currency reflects its economic health. Therefore, technical analysts believe that by looking at the price chart, they get all the information they need regarding the market direction.
While technical analysis may look a bit complicated, some would argue that it’s much simpler than fundamental analysis and the learning curve is much softer without needing years of experience to be successful.
If you follow technical analysis, you will quickly realize that there are patterns that repeat themselves time and again which is how traders who abide by technical analysis decide if a trade is worth taking, which direction they will trade and when to enter/exit the market.
Both fundamental and technical analysis are proven forms of market analysis and they have been used by traders for decades with various degrees of success.
Forex trading psychology
Regardless of which approach you take to develop your trade ideas; the most important aspect of trading forex starts from the trader himself. Two different traders may be employing the same trading method, the same indicators and the same broker but have entirely different results merely due to their psychology during trading.
Admittedly, it’s quite easy to be overcome by emotions while you trade and closing out of positions because of fear of them not working out or even going overboard on a trade without much data to back it up is a common pitfall for traders regardless of experience.
The majority of retail traders don’t have an accurate understanding of forex trading which is why they end up blowing out their accounts in a few short trades. High expectations, greed and the pressure to make as much money as possible in the shortest amount of time is usually the downfall of forex trader. This is why mastering your psychology while trading is such a crucial factor in your success as a trader.
The best way to maintain consistency in your results and survive the market is to develop a trading mindset which consists, in equal parts, of thorough risk management, accountability and a more-is-less approach.
The trading platform provides you the tools to manage your risk with every trade in the forms of stop loss orders which can automatically close a position as soon as the price reaches a level that proves that you were wrong in your speculation. If you don’t determine which that level is before you even place a trade, then you are doing it wrong.
Also, taking the time to find one or two trades that are actually worth taking instead of trying to catch every opportunity is going to save you from unnecessary losses and even reduce the amount you have to pay in trading fees.