Patterns often repeat themselves, and a good technical trader will be able to learn from history and their own experiences. In some ways, they are making an educated guess about the price movement.
They make these educated guesses by method of technical indicators, Forex trading tools that offer suggestions or insight about market trends. There are a great number of these indicators and range in variety. There is no real consensus about which indicator is best, so technical Forex analysis is ultimately decided by individual traders (their preferences and their strategies).
Nevertheless, there are some very common technical indicators, such as the Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD).
A technical trader uses these methods to determine buy and sell points on the chart, and keep a close watch on any opportunities that may arise. Many also use Expert Advisors (EA) in order to help make these orders when the buy and sell points are reached. This can make the process more efficient.
A fundamental trader focuses on finding the true intrinsic value of a currency or stock. When using fundamental Forex analysis, a trader is considering a variety of factors that can offer insight into the true value of what is being traded. These factors include: the economic, financial, qualitative and quantitative reasons for what an objects value is.
For example, if a country A’s unemployment levels were rising, this may be taken as a sign that the economy is worsening. Country B on the other hand had an increase in its GDP, this may be taken as a sign that the economy was improving and investors would wish to buy into the market.
If that were the case, the currency level would be expected to fall as demand for that currency would decrease compared to country B’s currency. This would be a basic breakdown of how a fundamental trader makes their decisions.
Ultimately, the goal for a fundamental analysis trader is to calculate an estimated true value for a security/currency, then to open a position based on that decision. Many consider this to be an opposite method to technical analysis.
Although price movement should theoretically reflect the market information available, this is not true in practice. Traders often form their own opinions on the market and can also base their decisions on those opinions (regardless of whether that opinion is founded on technical or fundamental analysis).
As such, due to these opinions, the market is also affected and can move based on these thoughts and views. This is what creates the ‘sentiment’ of the market.
Therefore, a sentiment trader bases their decisions on what they feel is the current ‘sentiment’ of the market. There is no set method to do so and is often left up to an individual to make their own decisions based on their feelings. Methods to gain insight into the current climate of a market’s sentiment may be: reading news, watching the news, studying the political and economic climates of the world, talking to people and thinking about how events may affect all these factors.
Ultimately, there is no right method. The best traders use Technical, Fundamental and Sentiment Analyses and incorporates them into their own personal strategies.
Forex Trading Systems:
A trading system in Forex is a set of specific rules, parameters and guidelines that determine a trader’s entry/exit points which are known as signals. These signals are often marked on a trading chart and are the points at which trades are opened (often automatically).
A trader chooses their own trading system, which include a number of methods. Some popular systems are moving averages, stochastic, oscillators and relative strength.
Some popular trading platforms have a number of these kinds of ‘indicators’ or can be downloaded and installed to help a trader with their personal strategy. Traders using trading systems tend to spend most of their time managing and mitigating risk.
There are a number of advantages that a trader can enjoy from using Forex trading systems. Firstly, it removes emotion from the trades. Secondly, it can save time and increase efficiency. Finally, it’s easier to let an automated system perform the trades for you (especially for beginner traders).
Despite the advantages, there are some drawbacks to consider when using trading systems for Forex. Number one, some trading systems are quite complex and difficult to understand or use properly. Number two, a trader needs to be able to make realistic assumptions in order to properly utilise systems (ie. they are required to make impartial, educated decisions).
Finally, development of a personal trading system can be difficult and time-consuming.
Forex Trading Platforms:
There are a number of trading platforms available on the market today. Some brokers even have their own proprietary trading platforms (developed by themselves).
When selecting a trading platform, there are a number factors to consider. Firstly, what features are offered through the platform by your Forex broker? Even if the trading platform can offer a service, doesn’t mean that your Forex broker is offering the service.
Secondly, the design and layout of how the trading platform should be considered. Is the layout intuitive and suitable for your preference (ie. the Graphical User Interface, GUI)? Furthermore, can you efficiently and easily navigate throughout the features and platform windows? Often familiarity with a platform will come with time, but testing and getting an initial impression of an interface can be important in the decision.
Finally, the cost of the platform may be considered. Many platforms are offered free by brokers. However there are some designed platforms with extra features that are offered at a price (or have a requirement to fulfil). Ultimately, testing out demo accounts with a number of trading platforms would be the optimal way of deciding which platform is right for you.