Forex Geography: Introduction
Trading on currency exchange markets is, in essence, fairly simple. It is basically the buying or selling of a currency, followed by the opposite action after closing a trade. However, deciding when to enter and exit a trade can give most traders a real headache.
Generally, there are several ways to make trade decisions.
To rise the probability of success, it is necessary to take into account technical analysis, fundamental analysis and preferably also statistical data, eventually the orders allocated in the market if the trader has access to them.
Many traders (especially intraday traders) underestimate the importance of fundamental analysis. It is important to realize that market movement is caused by such a large number of subjects that they are impossible to determine and to achieve the best position possible, it is necessary to consider the market in several different ways.
When I write about fundamental analysis, I don’t mean searching for the actual market value or discounting revenue. What I mean is searching and observing the information on the given instrument – a currency or economy in this case. In my opinion, it is ideal to create your own view on the market sentiment.
Sentiment represents the splitting of market participants into a group of those who see currency positively and those who see its future less optimistically. If both the participant groups are the same size, the price will not move up or down significantly.
However, if one of the groups outweighs the other, the price will move according to the group’s sentiment. Provided that the majority stake of the subjects on currency markets is represented by fundamental traders, the sentiment can be seen as the reflection of their view on the market and a certain direction of the price development.
The question is, how to find out what the current market sentiment is?
We have to realize that each currency moves depend on the production economy, which issued it. The power of the currency should then be the reflection of the given economy.
To be well prepared for currency trading, we need to know the economies of the given countries and the factors, which influence them. A great method of doing so is following all the information available concerning the given instrument.
Knowing the macroeconomic data, political situation and the speeches of the representatives of eminent institutions. If we assess each piece of information, see whether it is positive or negative for the given currency, and add all the data together, we’ll soon have a clear image of what sentiment is prevailing in the market.
For example, if we are trading the currency pair GBPJPY, we should know the situation in the United Kingdom as well as Japan. It is also important to, at least marginally, follow a few of the world’s most significant economies; for example, that of the USA, European Union, China, etc.
Fundamental analysis alone can be very challenging, but you don’t have to be an expert on every currency and follow the economic indicators and news from all countries. Even large financial institutions have traders who specialize in one or just a few currencies.
I recommend choosing only a couple of currencies to trade and dedicating all your focus to them, at least at the beginning. Once fundamental analysis becomes a routine task, you can expand your business scope. Remember that the only path to a long-term success in the market is experience. The same goes for fundamental analysis. First, it is necessary to gain experience, and only later it can help you with your market decision making.
The series of articles Forex Geography should introduce to the traders the characteristics of individual countries and suggest what is important to watch in each respective country to maintain a basic overview of the economic events that can influence the currency markets. One by one, we will cover the most significant economies with the currencies traded by our clients.
About the Author
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