Posted by forex at 2:52 AM
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1. Look at the fundamentals of a currency. In the stock market, you trade companies. In the Forex market, your trade countries. Looking at the economic, government, business and social factors that are prevalent in a country to determine the value of its currency is called fundamental analysis. This obviously entails sifting through a lot of data. However, there are a few key economic indicators that you can look at that have a large influence on a currency's value.
2. Look at the Gross National Product (GNP). The Gross National Product is one of the most important indicators of economic activity within a country. It is a culmination of all the services provided and the goods produced within the economic boundaries of a country. The components that make up GNP are consumer spending, government spending, investments and net exports. Although there are no hard and fast numbers that you can use to determine the strength of an economy, what you can look at is whether there is growth or not. You want to see consistent growth in three of the last four quarters.
3. Look at the Interest rates. As a rule, if a country has been raising interest rates, then the currency will strengthen as investors begin to move their assets to that country because of higher rates of return. However, this is not always the case, and interest rates must be looked at as just one factor in a bigger picture.
4. Look at the trade balance and budget. You want to find a country that saves more than it spends and has a trade surplus rather than a trade deficit. The bigger the budget and trade deficit that a country has, the faster its currency will decline. This is because the currency is losing intrinsic value.
5. Look at the employment situation. A country with a high unemployment rate means that there is less money to spend on goods and services. This can lead to lower interest rates, which generally affects the currency negatively. Look for countries that have low unemployment rates and increasing payrolls.
6. Use technical analysis. This is way of looking at the market by using indicators based on price action. It is best to use this in conjunction with fundamental analysis. Fundamental analysis will tell you why a currency should be moving up or down. Technical analysis will tell you when it is about to.
7. Use higher time frames to determine the trend of the market. In other words, if you use one-hour charts to decide when to enter or exit the markets, then look at the daily charts to decide the trend. If you use daily charts to analyze the market with, then use the weekly charts for trend analysis.
8. Draw a trend line by connecting the last three tops and the last three bottoms with a straight line. This will create a channel between the two lines. Look at the chart from a few feet away and decide if it is sloping up or down. This will give you the direction of the trend to trade in.
9. Get an entry signal. Once you have figured out which way the market is headed on the larger time frame, it gets easier to understand the big picture. Go back to your lower time frames and use this to time your entries into the market. You can use a simple moving-average cross-over system. A moving average is the average price of the market over the last X number of days. So you can take a nine-day moving average and plot it on the chart with an 18-day moving average. When the nine-day crosses above the 18-day moving average, this is a buy signal. When it crosses below, this is a sell signal.
10. Combine both fundamental and technical analysis and you have a complete system. The fundamentals will tell you what to trade and why you are trading them. The technicals will tell you when to trade them.