There is a whole lot of information out there about trading on the Foreign Exchange or the Forex. In the most recent years we have seen a dramatic surge in interest in the Forex. Many people are realizing the benefit of having the Forex open 24 hours each day 6 day each week. The best thing that any prospective Forex trader can do is research. Find out what the Forex is about, find out what indicators to watch and most importantly find out what trading techniques to use to make a profit.
Let’s talk about the foreign exchange itself. The Foreign Exchange is the network on which one form of currency is exchanged for another. The Forex started evolving in the 1970s when countries all over the world gradually switched to a floating exchange rate on their respective currencies. The Forex market continues to grow. According to figures reported in 2007 the daily turnover amount on the Forex totaled over US$3.2 trillion. According to a poll from Euromoney, the Forex market has expanded 41% from 2007 to 2008. There is plenty of money changing hands and unlike stocks the only limit is availability of someone wanting to trade in your currency. In fact many experts suggest using US Dollars as the foundation for your trading account because most currencies have a direct conversion value compared to the US Dollar.
When taking advantage of all that money changing hands there are several indicators a Forex trader needs to watch. Entire books have been written on Forex indicators so we will only discuss these indicators and give a brief description. These indicators include the Relative Strength Index (RSI), the Stochastic oscillator, the Moving Average Convergence Divergence (MACD), the number theory, the Gann numbers, waves gaps and trends.
The RSI measures the ratio of up-moves to down-moves and then normalizes the calculation so the index is expressed in a range of 0-100. If the RSI is 70 or greater, the instrument has risen beyond market expectations. If the RSI is 30 or less, the instrument has fallen below market expectations.
The Stochastic oscillator is used to indicate overbought/oversold conditions on a scale of 0-100%. The stochastic lines are drawn on a price chart for a specific instrument. Divergence between these lines and the price action of the underlying instrument gives a powerful trading signal.
The MACD is the difference between two exponential moving averages and the signal or trigger line. If the MACD and the trigger line cross, it is assumed that a change in the trend is likely.
Number theory revolves around Fibonacci numbers. The Fibonacci sequence (1, 1, 2, 3, 5, 8, 13, 21, 34…) is constructed by adding the first two numbers to arrive at the third. The ratio of any number to the next larger number is 62% which is a popular Fibonacci retracement number. The inverse of 62%, which is 38%, is also used as a Fibonacci retracement number.
Gann numbers are established based on angles in charts to determine support and resistance areas and to predict times of future trend changes. These Gann lines are also displayed on price charts.
Waves are a theory based on repetitive wave patterns and the Fibonacci sequence. The ideal wave pattern consists of 5 advancing waves followed by three declining waves.
Gaps are spaces left on the price chart where no trading has taken place. An up gap is formed when the lowest price on a trading day is higher than the highest price on the preceding day. A down gap is when the highest price is lower than the lowest price of the previous day.
Trends refer to the direction of prices. Rising peaks and troughs indicate an up-trend. Falling peaks and troughs indicate a down-trend. The breaking of a trend line generally indicates a trend reversal.
While there are many resources that help show a Forex trader the indicators, very few of them can actually reduce the risk of trading on the Forex. The Forex is a volatile market place and it subject to many different forces some of which are known and some are unknown. An individual traders success lies in the ability of the trader to read and interpret the signals correctly and decide when is the appropriate time to buy and sell different currency instruments. Finding out as much information as possible about each of the indicators and analysis techniques will make the most successful traders.