Learn Forex Trading Online - An Introduction to Fundamental Analysis

It is often said that information is the key to successful Forex trading but, while accurate and up-to-date information is indeed essential for currency trading, it is the analysis of this information which is the real key. There are two main forms of analysis used in Forex trading - fundamental analysis and technical analysis - and here we examine just what is meant by fundamental analysis.

In its simplest form, fundamental analysis examines both political and economic conditions which might affect currency prices and Forex traders who use fundamental analysis rely on news reports for information about a whole range of things including economic policy, growth rates, inflation and rates of unemployment.

In essence, fundamental analysis provides an overview of currency movements and a broad picture of economic conditions that might well affect the value of a specific currency. With this picture in mind, Forex trader will then normally move on to use technical analysis to then plot entry and exit points into the market and to supplement the information gained from fundamental analysis.

The Forex market is much like any other market and is affected by the forces of supply and demand and these, in turn, are affected by economic conditions. Two of the most important economic factors affecting supply and demand are the strength of the economy and interest rates and the strength of the economy is affected by the gross domestic product (GDP), foreign investment and the economy's trade balance.

A whole variety of economic indicators are released by governments and other sources and are generally considered to be reliable measures of economic health which are followed by all sectors of the investment market. The majority of economic indicators are released monthly but some are issued more frequently, usually weekly.

Two of the most important fundamental indicators are international trade figures and interest rates, but other extremely useful indicators include the consumer price index (CPI), producer price index (PPI), purchasing manager's index (PMI), durable goods orders and retail sales.

Interest rates are an especially important indictor as they can have either a strengthening or weakening effect on a particular currency. High interest rates might, for example, attract foreign investment and strengthen the local currency, while stock market investors frequently react to increases in interest rates by selling in the belief that higher borrowing costs will have an adverse affect on many companies. Large-scale selling by stock investors can often result in a downturn in the stock market and the national economy.

International trade indicators are also extremely important to the Forex trader. A deficit on the trade balance, with imports exceeding exports, is usually seen as an unfavorable indicator as money flowing out of the country to purchase foreign goods may well have a devaluing effect on the currency. However, fundamental analysis will also indicate market expectations and these will often dictate whether or not a trade deficit is unfavorable. It may be the case, for example, that a county frequently operates with a trade deficit and that this has already been factored into the price of its currency. In general, trade deficits will only affect currency prices in cases where they are higher than the market would normally expect to see.

Each country will have its own set of economic indicators (there are currently some twenty-eight major indicators used in the United States) and these have a strong influence on financial markets. For this reason, Forex traders need to be aware of them and to study them carefully when preparing their trading strategies.

Fortunately, for those traders working on the Internet, many website today carry an abundance of up-to-date information, but it is up to individual Forex traders to take this information and apply the principles of fundamental analysis to it before making their trading decisions.

Forex Trading Strategy - the Secret of Timing

Once you’ve identified a trading opportunity, the next step is to decide EXACTLY when to buy - and this is where many traders go wrong.

Here we explain how to incorporate better market timing into your FOREX strategy - so that you can make bigger profits.

Most traders time their entry levels incorrectly, so here’s the right way to do it:

Using Support and Resistance Correctly

A basic wisdom of market timing is "buy low, sell high" - well, the reality is, if you try this in FOREX trading, you’ll end up losing money. First, let’s define what support and resistance means

A support level is a historical price that traders come in, and buy to "support the market" – and the more times it’s tested, the more valid the support will be.

Conversely, a resistance level is a level on the charts that "resisted prices from moving higher"- again the more times it’s tested, the more significant it becomes.

Why Buy Low and Sell High doesn’t Work

"Buy low, sell high" is accepted wisdom by the majority of traders - but this logic is fundamentally flawed - use it in FOREX trading, and you’re asking for trouble. Why? - If you wait for a pullback, you’re going to miss some of the biggest moves.

Think about it - what if a currency starts to trend and doesn’t pullback? (How often have you seen this?) If you’re waiting for a pullback that never comes, you’ll never get in on the trade – and you’ll miss a major opportunity.

You Need to Feel Uncomfortable

When Trading in the FOREX market, you should usually feel uncomfortable (and that’s why most traders don’t make these trades) - as no one likes to buy or sell after the market has started trending - but doing this will make you money.

The fact is, the more comfortable you feel when entering a trade at support, the less likely the trade will be a big winner.

During any given year, most of the big moves in currencies, take place from new MARKET HIGHS with NO pullback.

If you base your FOREX Trading strategy around waiting for a warm comfy entry, at key support, you’re going to miss the biggest and most profitable trades – so step away from the losing majority of traders.

Your FOREX trading strategy should give you a different mindset - most traders "buy low and sell high" - so you should "buy high and sell higher" – i.e. you should be doing the opposite of what the crowd are doing.

Don’t worry - most traders lose money, and their FOREX Trading strategy is based on the flawed logic we have just discussed - so not doing what they do makes total sense. Therefore, look for breakouts through support and resistance - and sell and buy respectively.

Its Tough Mentally - But it Makes Money!

Sure, it’s hard to do - the majority don’t agree with you - and no one likes to go against the majority. However, it’s the right thing to do, to make your FOREX trading successful. Think about what we’ve just said, and you’ll see it makes logical sense.

Has this Happened to You?

How many times do traders buy into support, and the market breaks support, stops them out and continues to decline. On the other hand, another common scenario is, price never get to support - it simply goes higher - and the trader misses the chance to get in on the trend.

This type of trading is tough mentally - that’s why 90% of traders don’t do it - they want to be comfortable - well being comfortable is great, but you’ll lose money.

Breakouts work, and if you use them in your FOREX Trading strategy, you won’t be comfortable on entry - but you’ll make money - and that will more than compensate.

The way to succeed in FOREX trading is to do what the losing majority don’t do - then you can join the elite 10% of traders who make the big profits - try it and see!

Forex Trading - the Secret to Making Profits From the Big Moves

In FOREX trading, it’s a fact that many traders simply can’t let their profits run - they enter trades correctly, but only ever, bank marginal profits.

"Let your profits run" is accepted market wisdom - but how do you do it in practice? How do you maximize your profits?

Many FOREX traders get in on a good opportunity, and take a marginal profit, or are stopped out - they then watch in frustration as the trade piles up $20,000, $50,000, or more - and they’re not in the market! This happens all the time, so lets look at how you can let your FOREX trading profits run.

Statistical Significance

When FOREX Trading, letting your profits run, is the only way you can cover the cost of your losses - and most traders don’t understand its significance.

What constitutes a large winner in FOREX trading? - You need to make ten times or more than your average losing trade. If you lose $500, you need to make $5000 - but how do you do this?

The only way to make money in FOREX trading is by letting your profits run - and this isn’t as easy as it sounds. You need to let your profits run with a NO profit objective. Of course, this is hard to do - and most traders don’t do it (and that’s why they lose).

There are two reasons why traders lose money in the FOREX market – one’s mental, and the other’s physical:

A Mental Dilemma

Why is it so hard to hold on to winning trades?

The emotion of fear comes into play here - the bigger the profit becomes, the more a trader wants to take it - before they lose it.

Watching a trade you are making money in, dip back is hard. Most traders simply say, any profit is better than no profit – so they take a small profit and feel happy. However, the profit isn’t big enough - and their losing trades wipe them out sooner or later.

Traders want to snatch ANY profit - in case it gets away - but this is totally wrong.

Physical Reality

The large trends simply do not come around that often.

By using an open profit objective, and a lagging exit, most of your FOREX trades will lose you money.

Trying to avoid losses by snatching profits, or running stops to close, will see you lose money in the long run, when you trade the FOREX markets.

The huge trends don’t come that often - so you need to catch them.

If you want to catch the big winners, then you need to see the majority of the trades that you enter, that are in profit, reverse - and stop you out at a loss

Because FOREX Trading offers traders fantastic long-term trends - that go on for months, or years - if you can get in on them, and hold them - you’re all set for huge profits.

Use Lagging Exits

A lagging exit is where you wait for confirmation of a trend change - before banking your profit.

Many traders try to anticipate a trend change - only to take profits early, and miss the major move - don’t fall into this trap!

Here are two exit strategies that will keep you in the trend for as long possible:

1. To exit a trade, use the 40-day moving average. If positioned long in an up trend - wait for a close below this level - and exit the position. In a downtrend, exit a short on a close above this level.

2. If long from a new 20 day high - hold position until prices make a new 10-day price low. If short from a 4 week low - hold short until prices make a new 10-day high.

These two lagging exit strategies will ensure that you are in the big trending moves, for as long as possible. In FOREX Trading, if you want to run the big winners, then you must use a lagging exit. If you do this, then you will stay with the big moves - and pile up huge gains – rather that get stopped out early.