Forex Trading Course Walkthrough Talking Points:
- This is the third of a ten-part series in which we walk through articles from DailyFX Education.
- The aim of this series is simplicity while covering some of the more important aspects of the FX market along with traders’ strategies and approaches.
- If you would like to access the full suite of educational articles offered by DailyFX, you can get started at this link: DailyFX Forex for Beginners
In our last lesson, we began to open the door into the field of analysis by investigating the comparison between technical and fundamental analysis. The carry trade was looked at as an example of a fundamental-based strategy that also has some technical application.
Interest rates are a big driver for FX prices. Perhaps more accurately stated, ‘interest rate expectations’ are what market participants keenly follow, focusing on the word play of Central Bankers or the deviation of a single data point in estimating what potential changes may pop up in the future.
For this lesson, we’re going to delve deeper into our introduction of analysis, first by highlighting three different forms of FX analysis.
Perhaps one item that gets lost in the debate around forms of analysis is the fact that they’re not necessarily competitive with each other. Many traders employ both fundamental and technical analysis, and sentiment analysis can be incorporated, as well.
One way of looking at matters: Fundamental analysis focuses on the inputs that invariably get priced-in to the equation, and this helps to shape the future. Technical analysis, on the other hand, merely looks at the chart (the past) to postulate what may happen in the future.
Something that doesn’t get mentioned enough is the importance of risk management when employing all of this analysis. Analysis is great in that it can offer insight, but it will never enable a perfect prediction. The future always harbors uncertainty. And this is really where technical analysis can shine, in allowing a trader to harness their future projections to the real world of ‘what’s happened’ in the effort of imparting strategy.
One of the key aspects of technical analysis is support and resistance. These are levels or zones on the chart where prices have a tendency to stop or stall. This is where risk management can come in, because if a trader wants to buy a potential uptrend and if they wait for price to be at support, they have a strong level to use for stop placement. If the trade doesn’t work out, the loss can be mitigated. On the other hand, if it does work out, traders can focus on potential reward at least as large as the risk they put up to enter the trade. Key to this technique is a solid system for identifying support and resistance on a chart.
Real World Application
To take this to the next step, practice setting up trades on a demo account by identifying a market that’s currently trading at or near support or resistance. Look to place stops on the other side of the support or resistance level so that if there’s a breach, the trade can be exited quickly.
Attempt to set up five trades from the daily chart, with stops attached and placed appropriately on the other side of support/resistance.
— Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX