The Basics of Currency Trading: Part 3
Most people who join Forex ask themselves one question, how hard can it be? Price can only move in two directions, right? So if I’m wrong the first time all I have to do is enter in the opposite direction. However, it’s never that simple. I know of many an account blown away by such mentality.
You buy or go long (as we call it) expecting price to go up, only to see the price start going down. You then exit your long and short, which means selling the pair, to mitigate losses. Once you sell, price starts moving upwards and this cycle could repeat itself until you have zero in your account. It sounds fictional but you will be surprised at how often this happens.
However, it is possible to score big money by predicting price movement. I do not like to call it ‘prediction’ but in the real sense of the word, it is because once you enter a trade you do not know for sure where price will go, you are in essence anticipating the future.
I like to call it ‘following the price.’ Price has to indicate movement towards a certain direction before you can trade confidently in that direction. Many new traders like to pick tops and bottoms which invariably lead to blown accounts. Picking a top is trying to sell when price has moved up in anticipation that it will go down and picking a bottom is the vice versa.
There are two ways to analyze the markets in order to trade in them effectively. The first and most common technique is called Technical analysis. Technical analysis is based purely on price action where all a trader does is analyze past market behavior in order to try and predict what will happen in the future.
Technical analysts believe that history repeats itself and thus a move that happened some time back will most likely happen again under the same circumstances. They also believe that all economic information that might affect the price is immediately reflected in the price, therefore it ultimately becomes meaningless for them to trade using any such information.
On the other hand, there is fundamental analysis which involves studying economic data to tell where price might be heading. Today, there is a financial crisis in Europe occasioned by all the Euro zone nations with heavy debt burdens, led by Greece.
A fundamental trader will obviously be looking to sell the Euro and Buy the US Dollar because economic news suggests that the euro should continue losing value against its major competitors. They will continue this trend until the news from the zone starts improving.
Regardless of these two techniques, the best way to make money in the currency market is to get the right education. Take your time to learn these markets and at the end of the day you will be happy that you did. There are hundreds of free sites that you can learn from and a simple Google search of ‘Forex education’ should help you a lot.
Now to the question on everyone’s mind; ‘How much do Forex traders make?’ Most Forex traders lose money. So the question really should be, ‘how much can I lose trading Forex?’
Over 75% of new Forex traders lose money with 10% breaking even, 5% making some money and the other 5% crunching serious money. Here, I’m talking about retail traders and not institutional traders. In part 4 of this sequence I’ll break down what you need, to be in the top 5%.