Learning how to trade currency is not an overly difficult task, although to do it successfully does require the prospective trader to invest some time and energy in understanding the basic principles.
In short, the key to trading currencies successfully is to take a long term view and adopt a methodology which can predict the movement of the markets with a degree of reliability. This can be achieved through a combination of fundamental and technical analyses of currency and its related influences.
Fundamental Analysis of Currency Trading
The basis of a fundamental analysis of a particular currency is to examine the broader economic parameters which have a bearing on currency value.
The extent to which a particular currency is in demand (or not) will depend on a number of factors including:
- the overall condition of the economy where the currency resides
- the prevailing savings and loan interest rates
- the level of unemployment
- the current trade deficit of the country in question, and
- the state of the balance of payments.
Thanks to high speed communications and the Internet, changes in any of the above fundamental data (and more) can be instantaneously transmitted to currency markets around the world resulting in immediate price adjustments.
While fundamental analysis is an important tool for currency traders because it provides a broad foundation of market data, it is primarily reactive in nature. This means it can be difficult for a trader to take a proactive stance with regard to immediate and forthcoming currency movements.
As a result, those who know how to trade currency successfully also use a complementary approach, known as a technical analysis of the markets.
Technical Analysis of Currency Trading
Whilst the fundamental approach relies on current economic data from a variety of sources, a technical analysis considers only the historical performance of a currency’s price.
The reasoning behind this approach is that the price of a currency at any time has already factored in all the relevant known data which influences currency pricing. As the price of a currency fluctuates it is mirroring the actual economic data at the time.
There is a further interesting aspect of this technical analysis approach to currency trading – in an indirect way it provides an insight into human psychology and its influence on markets.
While human nature stays reasonably steady over long time periods, the market pricing patterns adjust in an ongoing manner driven by movements in trading psychology, or trading mindset. It stands to reason that the various market swings, trends and rhythms will sooner or later repeat.
In summary then, a technical analysis takes into account both the economic fundamentals of the day and the thinking of the market players. You may observe that a market fundamentalist focuses on what makes the market shift, while the technician is concerned with the result of the shift.
All of this can be condensed into a neat equation which says:
A market price adjustment =
known fundamentals of the market + human trading psychology.
Long Term versus Short Term Currency Trading
Perhaps the most important tip for trading currency successfully is to identify and take advantage of long term trends in the market, some of which can last for years. These are the ones that deliver the best returns and you only have to look at any historical chart of currency prices to see them.
It is the currency trader who does the technical analysis who is best equipped to exploit these trends as they develop. The currency trading business is one where success comes to those who take a long term view simply because currencies always have, and always will, reflect the underlying well being of the economy they represent.
The economic cycles of growth and contraction can continue for many months, if not years, so it is the currency trader who identifies, locks in and holds a long term position who will make the big profits.
To your currency trading success.