In-depth Analysis

Simple Tools for Trading FX

FX trading and trading, in general, is a contest between you, the trader, and your competition. That’s the rest of the market, everybody apart from you, whether they are fellow retail traders, professional clients, banks or hedge funds. 

A trader does well in this contest if they can develop and apply an advantage or trading edge, and do that consistently. 

By virtue of the size of the FX markets, which turnover more than US$6.0 trillion per day and the use of leverage, you only need to have that edge or advantage over just a tiny fraction of the market to make money and grow your trading capital.

Building an edge can take time and money, however, and when you start trading you are likely to have more of one than the other. 

So hang onto your cash and invest in the commodity that you have the most of, and that’s time.

Use that time to become better informed, better prepared and better setup than the competition.

Because you can be sure that there are plenty of would-be traders out there who won’t invest the time and effort, and as a consequence, you should be able to beat or get ahead of them.

When traders are new it’s often hard for them to see a way into the markets, or a starting point if you prefer. That’s not surprising when FX markets are open 24 hours per day 5 days per week without any regular trading breaks.  

However, the first of the free tools, we are going to look at today is the perfect entry into the markets and it provides traders with a framework or schedule for their trading and that is the economic calendar.  

FX markets are often driven by changes in sentiment and by new information and the economic calendar provides both of these. New data is released to a regular timetable, that is highlighted well in advance and that means you can plan ahead. 

Here is a calendar from Trading Economics that shows us the high-impact (most important) data releases for the week of the 13th of June, I have filtered the calendar to show only high-impact economic events over the week ahead. 

For most of them, there is a forecast figure and the calendar contains some details about the previous release. 

Surprises and deviations in economic data, from what’s gone before, affect FX prices. And the larger the surprise or deviation from forecasts and prior data, then the bigger the price move can be.

So get to know and understand the data points, what’s happened in the past and what’s forecast to happen this time around.

By studying the calendar we can plan our trading week, for example, if we are based in Europe we probably won’t be awake for overnight data releases out of Asia but data from the Eurozone the UK and the USA should fit nicely into our trading day.

Paying attention to the calendar is a great way to plan and prepare for your trading week but you will also need to interpret data releases and the market reaction to them. Understanding economic fundamentals and trawling through data releases with a fine toothcomb would be one way to do that. 

However, in truth, it’s usually experienced traders with long-term time horizons who do this. 

The rest of us need something a bit more immediate, which provides us with information about what the market thinks of a data release as it happens.

Well, such a mechanism is in place, and just like the economic calendar it’s both freely available and free to use, that mechanism is the price chart.

Charts capture and display information about price change as well as trader and market sentiment. The chart below from is a plot of EUR USD or Euro Dollar the most actively traded currency pair. 

This is a short-term chart of 60-minute bars or periods. The price line is drawn in black and I have added 5 and 20-period moving averages to the plot, in green and brown respectively. 

The moving average lines create an indicator or tool which can show us which way the price of EUR USD is heading. 

We can see this by observing how the faster-moving green line (the 5-period MA) reacts with the slower-moving brown line (the 20-period MA). 

So for example, where the 5-period MA line crosses down through the 20-period line from above we get a sell signal. 

But we also generate a sell signal when the 5-period line tries to cross up through and above the 20-period line, from below, but fails to do so. 

Buy signals would be generated if the 5-period line successfully crosses up through the 20-period line from below and moves higher.

Drawing watching and becoming familiar with simple charts such as these can provide you with an instant trading edge because you will recognise when a buy or sell signal looks genuine and you will be able to act on that information ahead of the competition. 

Finally, familiarise yourself with the price action and price history in the instruments you trade. Get to know where the session highs and session lows are situated, but also be aware of weekly highs and lows. And the price points where there has been either support or resistance. 

I.E points in the chart/price action at which the price has failed to break below and bounced away from, in the case of support. Or in the case of resistance, areas in the chart which the price has not been able to move above, and has fallen back from. 

When prices break through support or resistance levels they are entering into new territory, creating potential breakouts or larger price moves. Which are exactly the kind of opportunities that traders should be on the lookout for. 

These are simple tools that are free to use and which will cost you nothing but your time but gaining familiarity with them should make you a better trader. 


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