Forex Fundamental Signals

• Interest rate projections. Interest rate changes are one of the most important determinants of short-term movements in exchange rates. All things being equal, a currency with a high-interest rate would tend to appreciate against low-interest rate currency. This is because currency pairs carrying a higher interest rate tend to attract more capital investment in comparison to those with a lower interest rate.

• Economic statistics. The market knows in advance when various statistics will be reported and economists put considerable effort into predicting these figures. When the figures are released, dealers are ready to pounce. If the figure is significantly different from estimations, currencies could move significantly in a short amount of time.

• Central bank intervention. Central banks are prominent players in the currency markets. Occasionally they enter the market to move exchange rates in a particular direction. Central bank intervention is most successful when done on a coordinated basis. For example, if the US Federal Reserve, the European Central Bank and the Bank of England are all buying US dollars, it is unlikely that traders will short the US dollar. Although over the long-term, it is difficult and expensive for central banks to stand in the way of secular trends.

Forex Technical Analysis

Forex technical analysis involves studying price data over time to predict future price movements. Common strategies include traditional charting patterns, moving averages, stochastics, point and figure charts, Elliot Wave Theory, and Fibonacci retracements. Our article on advanced technical analysis provides more details on these theories, all of which can be useful when learning to trade the forex market.

Forex traders can utilize many of the same Western technical analysis techniques used in other markets, such as trading patterns like wedges, triangles, channels, double tops and bottoms, and head and shoulders. Additionally, forex traders can apply Eastern technical analysis techniques, such as identifying patterns on candlestick charts, which are particularly useful for short-term trading and identifying key turning points. Popular forex candlestick patterns used for analysis include dojis, hammers, hanging man, morning and evening stars, and engulfing candles.

Forex Technical Indicators

• Simple Moving Average (SMA): An SMA is one of the oldest and most widely used trading indicators. Traders often use SMAs to gauge price trends or signal changes in price behavior.

• Relative Strength Index (RSI): Traders use RSI to determine a market’s direction by assessing whether momentum is accelerating or decelerating. It also helps evaluate if a currency is overbought or oversold, potentially indicating a market reversal.

• Fibonacci Retracements: Fibonacci trends assist traders in identifying future support and resistance levels based on past price action.

• Stochastic Indicator: This indicator focuses on price momentum and aims to predict trend reversals by identifying when an asset is overbought or oversold.

• Moving Average Convergence Divergence (MACD): The MACD helps determine the strength and momentum of a trend, which is useful for trend-trading currencies.

• Bollinger Bands: Bollinger Bands use an SMA with a spread of two standard deviations above and below. The band width addresses volatility, and a currency's price can be considered overbought or oversold as it approaches the bands.

• Elliott Wave: Elliott Wave theory does not predict specific outcomes but provides probabilities of trade opportunities. Analyzing Elliott's 'waves' offers insights into price trend dynamics, helping understand a currency’s price movement.

Many forex traders find that using a combination of these analysis techniques is particularly helpful, as the more indicators that align to suggest a potential trade, the higher the confidence level.

How to Read a Forex Quote

An exchange rate measures one currency’s value against another. For example, if the EUR/USD is 1.35, it means 1 EUR will buy you 1.35 USD.

When trading forex, the base currency is always quoted first. In the EUR/USD pair, the Euro is the base currency, and the US dollar is the secondary currency (also known as the quote or counter currency).

For instance, in the AUD/USD pair, the Australian dollar (AUD) is the base currency, and the US dollar (USD) is the counter currency.

How to Start Forex Trading

1.Develop a Trading Plan

Successful forex traders operate with a pre-set method, including specific rules to manage the emotional stress inherent in speculative trading.

Adhering to your pre-set rules is crucial for success. This helps protect you from making impulsive decisions driven by emotions, which can contradict your trading plan. Traders who stick to their plan are better equipped to resist emotional temptations in speculative markets. Following a trading plan can also help reduce stress, maintain objectivity, and facilitate learning from mistakes when trading forex.

When designing a forex trading plan, ensure it addresses the following:

• Are you comfortable holding trades overnight?

• Do you prefer to trade during the day or night?

• How much are you willing to risk per trade?

• What is your profit target?

• Where will you place your stop-losses?

2. Develop a Risk Management System

One of the most common mistakes FX traders make is not adhering to a risk management plan. The inherent volatility in currency markets can strongly influence a trader’s emotions, leading to a lack of objectivity and poor decision-making.

When learning to trade forex, it's crucial to develop a systematic trading approach that includes a detailed risk management system. This system should clearly define profits and, especially, losses, with stop-loss orders in place.

When reviewing your risk management system, consider the following:

• How do you minimize risk in your strategy?

• What are your risk/reward ratios for each trade?

• Are your stop-loss orders placed at appropriate levels?

For more information on risk management tools, see our guide on money and risk management in trading.

3. Understand the Market and the Currencies You Trade

In forex trading, there are both winners and losers. Successful forex traders tilt the odds in their favor by continuously expanding their knowledge of the forex market. Understanding the market's dynamics and the currencies you trade can significantly enhance your chances of success. However, mastering this level of understanding may take years due to the intricacies of the forex market and individual currencies.

Before executing a forex trade, consider the following:

• What fundamental factors are influencing the currency pair?

• When are significant economic indicators scheduled for release? Check our FX economic calendar for the latest updates on economic and financial indicators.

• What are the inherent characteristics of the underlying time zones?

4. Get Involved in Forex Trading

As you embark on learning forex trading, ensure you have grasped the fundamental principles outlined in this article. This includes having a robust trading plan encompassing money and risk management strategies, as well as a comprehensive understanding of the currency pairs you trade. It's advisable to begin by practicing on a demo trading account to evaluate the success of your strategies and acquaint yourself with our trading platform.

For those seeking further guidance on mastering FX trading, additional resources can be found in our forex trading for beginners article.

Forex Trading Platform

Our desktop trading platform, Next Generation, offers access to forex trading across 300+ major, minor, and exotic currency pairs, marking the highest number available in the industry. Designed for both professionals and beginners, our forex trading platform provides a wide array of price projection tools, technical indicators, and drawing tools to assist you in crafting your own effective trading strategy. Explore more about our award-winning platform by familiarizing yourself with our charting features.

Forex Trading Application

Our Next Generation platform extends to mobile and tablet devices through our forex trading app. Available for both Android and iOS users, our mobile trading application offers various benefits, including chart forums and social trading spaces. This allows you to engage in forex trading on-the-go, anytime and anywhere.

Is Forex Trading Profitable?

While forex trading can be profitable, it's important to note that all traders will incur losses on some trades. Even the most skilled and experienced traders never achieve a 100% success rate. Successful forex trading isn't solely determined by a high percentage of winning trades. Even if you win 90% of your trades, substantial losses from the remaining 10% can significantly impact your overall capital. These losses may stem from lack of experience, planning, discipline, or failure to implement proper risk management tools like stop-loss orders.

When engaging in forex trading, it's unrealistic to expect to win every trade or generate significant profits with each win. Forex trading should not be viewed as a 'get-rich-quick' scheme. Instead, it requires the nurturing and refinement of a trading strategy to enhance overall performance.

What Can Hinder Profitability?

• Position size: Opening trades that are either too large, risking excessive capital, or too small to yield meaningful returns.

• Lack of market awareness.

• Absence of a well-defined trading strategy, increasing the risk of losses.

• Failure to stay updated with economic news, leading to unexpected volatility and drastic price changes.

• Lack of confidence in both fundamental and technical analysis.

• Abandoning a trading plan, which can result in a scattered approach to trading and higher risk of losses.

• Choice of forex pairs: Major pairs tend to have less volatility and higher liquidity, while exotic pairs may involve currencies from less developed, less stable countries.

Summary

Relying on unprepared, unresearched, or strategy-free trades to be profitable adds additional risk to an already volatile environment. When trading, it's essential to have a well-developed strategy in place and implement risk management tools like stop-losses to mitigate significant losses. Practice your trading skills using a demo account on our Next Generation trading platform.