Forex trading is the hot rage now. You see it everywhere. But, unfortunately, it's a few clever marketers who are reaping in all the gains selling inadequate software robots and bad advice to a naive public. Despite this fact there is great potential for large profits in this capital market.
Here's how success in these markets is garnered.
Forex operates in pairs of currencies. For instance the EUR/USD pair involves currency transactions between the Euro zone and the United States. Since the Euro currency is the first quoted in the pair trader make money buying the pair if the Euro increases in value. They make money selling the pair if it decreases in value.
Place Your Bets: Up or Down!
What everybody is trying to do is figure out the probability that the Euro (or any other heavily traded G7 currency) will go up or down. That's the entire nature of the game. It's simply placing a bet that an exchange rate (a 4 digit number) will go up or down. But, instead of crowding around a crap table in Las Vegas everybody crowds around their home computer screen.
Focus On Fundamentals First!
Most Forex traders are unskilled and uneducated in the nature of exchange rates. This makes them very poor at forecasting market movements. Forecasting Forex is done through either technical or fundamental analysis. Fundamental analysis of Forex entails 3 key factors; the relative interest rates between two countries in a Forex trading pair (theory of interest rate parity); the relative rates of inflation between those same two countries (purchasing power parity); and the levels of trade between them (exports and imports). These factors show up when you look at a weekly or monthly Forex chart.
Everything else is irrelevant to your forecast; GDP, GNP, unemployment, fiscal concerns, sovereign debt, etc.
Drill Down With Technicals!
Fundamental analysis gives you an idea of the direction the Forex pair should go much the same as a tidal report gives a surfer an understanding of when the big waves are most likely to occur (but no guarantee). After that a successfully trader watches for moves in the direction that fundamentals indicate will offer the best probability but times entry and exit through technical analysis.
The best basic technical tools are a simple long term trend line on a weekly or monthly chart combined with a moving average cross over on a daily chart.
Put It All Together With Stops and Internal Financing!
After that the trader is wise to add mini lots but should not do so until at least $500 profits have accrued in their Forex account. Sizeable fortunes can be accrued over time by using trailing stops, prudent forecasting, and scaling up of your position size through internal financing.
I have tested every robot on the market and found that they simply do not work. In fact I am very pleased so many people are mindlessly handing their trading over to robots because it makes my job of taking their money much easier.
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