Trading Foreign Currency

Foreign currency trading is essential for foreign trade. After the USA went off the gold standard in 1971, the US dollar and other currencies have floated on the open market. Forex markets evolved around the world in order to facilitate the purchase or sale of one currency for another. The main sites of foreign currency trading are the London, New York, and Tokyo Forex markets. Each is open every business day of the year during business hours. Because these markets are scattered across the globe, day trading Forex is possible around the clock on business days. The bulk of Forex trading is done by those whose business requires the conversion of one currency to another. However, speculators in the Forex markets provide liquidity while trading foreign currency in search of profits.

The Fundamentals

The eventual price of one currency compared to another has to do with the strength of the two economies, balance of trade issues, employment, monetary policy, and national politics. These are the fundamentals. Although currency speculation may take prices higher and lower on a short term basis, fundamental analysis of Forex pairs is essential for a trader to understand the range in which a currency will trade. Depending on the strategy that one wishes to follow in foreign currency trading either fundamentals or technical aspects of Forex trading will be more important.

Market Sentiment and Technical Analysis

Technical analysis of Forex pairs is the key to short term profits in trading foreign currency. Prices move up and down during the day, week, and month. The secret to technical trading is that price patterns repeat themselves. The underlying fundamentals may vary but the market has tendencies that are not only repetitive but predictive as well. Speculators engage in profitable currency trading by use of technical analysis tools such as Japanese candlesticks, visual signals superimposed on the Forex price chart. For a technical analysis tool to be useful it must be accurate, easy to read, and timely. The point of technical analysis is that the first section of a given price pattern predicts the remaining portion. The most profitable technical signals are reversal signals which tell a trader that a bull market will turn into a bear market or a bear market will turn up and become a bull market. The point of technical analysis, as well as fundamental analysis, is to recognize opportunity when it arises. Smart Forex traders learn to trade only when fundamental and technical signs are clear. Smart traders typically trade less in trading foreign currency and have a much higher profit to loss ratio than traders who cannot keep their hands off the market, so to speak.

Keeping Track of Trades

No one ever makes money on every trade. No strategy is perfect for trading foreign currency. As such smart traders keep track of their trades and study them, both the winners and losers. It is by this sort of results based and process based audits of Forex trades, that traders improve their performance, and their profits in foreign currency trading.