What moves currency prices? - Sounds an easy enough question but most currency traders have no idea and that's why 95% lose. Let's look at the equation for market movement and see how and why prices really move.
A simple equation for currency market movement is:
Supply and Demand Fundamentals + Investor Perception = Price
SIMPLE BUT ...
This equation is simple but its also deceptive - lets look at the equation in more detail.
Prices move in line with the long term fundamentals and that's why the longer term trends last for months or years because they reflect the health of the economy - the fundamentals.
The facts are there for us all to see but we all see the facts in our own way not logically or as group, but blurred by our greed, fear and opinions which we hold.
If you try and trade news stories you will lose as what may seem obvious to trade is already old news and discounted in the market price. In today's world of instant communications the facts are available in a split second at the click of a mouse.
Will Rogers once said " I only believe what I read in the papers" he was joking of course but its surprising how many people trade they see on the net TV or radio and are surprised when they lose!
If you could make money by trading the news a lot of traders would be rich and their not they lose.
It's a common investment fact that markets collapse when the fundamentals are most bullish and rally when their most bearish.
This is human psychology at work where prices have been pushed to far away from the fundamentals by the emotions of greed and fear.
You therefore need to see both sides of the equation we covered earlier.
This is where forex charts can help.
If you trade off forex charts you see the reality of price and only have to follow and act upon it. The fundamentals.
Forex technical analysis simply assumes that they will show up instantly in price action so you don't need to guess their impact - you can see it.
Investor Psychology
Forex charts also tell you how humans perceive the fundamentals as well.
All short term price spikes are due to human psychology and they don't last long and are quick and easy to spot on a forex chart.
While forex traders make mistakes about news and trading it, they also don't see the limitations of technical analysis and its strengths.
They assume that as human nature is constant, chart patterns can be predicted in advance with scientific accuracy - They can't.
If you try and predict with forex charts you will lose your equity quickly - on the other hand, if you get confirmation and trade with the odds you will win.
What is confirmation?
This means following moves AFTER they have occurred. Sure, you miss the start of the move but you can't catch that anyway, so don't try.
If you get just get a major chunk of the trend (60 - 70%) you will build big gains over the longer term. The forex markets are hard to trade but you can trade them and the rewards are massive for traders who trade them correctly.
If you use forex charts and simply follow and act on the confirmation of price changes without listening to opinions or trying to predict, then the equation we have looked at can make you a lot of money.
It sounds simple and in essence it is, but you need to get the right forex education, find the best technical tools and trade when high odds trades present themselves with confidence and discipline.
If you do the above you are well on your way to currency trading success and making big FX profits.
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Article Source: http://EzineArticles.com/?expert=Kelly_Price
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