If, like many people who are looking for ways to earn extra money or work from home, you’ve come across forex, then you’re probably wondering how it is that traders can predict whether currency prices are going to move up or down. In reality, this isn’t an easy thing to do; if it was, everyone would be able to profit from forex. The things that tell people how to trade are called signals or indicators, and finding and understanding them is the key to forex success, whether you are trading spot forex or spreadbetting.
There are roughly two different schools of thought when it comes to getting signals; technical and fundamental analysis. They are used in different ways, and different traders will focus varying amounts of time on studying them.
- Fundamental Analysis – Some might say that this is the harder of the two to be successful at, because the signals aren’t quite so definite, and are very much open to interpretation. Fundamental analysis covers any kind of economic or news related developments and announcements. They can have the biggest impact on how currency prices are going to change. As an example, it might be announced in the news that a country’s credit rating has been cut – this may well have a very negative impact on the currency price, and you could expect it to slide accordingly. Of course, difficulties can arise because all currencies are weighed against each other. If you’re looking at the GBP/USD pair, and both suffer negative events, you have to weigh them up and work out what’s likely to happen.
- Technical Analysis – This type of analysis looks more complex, but in reality, can be a lot easier because you are looking for definite, visible signals. They may not always prove correct in the end, but you do know whether you’re looking at the right thing or not. Technical indicators come in the form of patterns on a chart that tracks a currency pair price. There are all kinds of parameters which produce a signal. For instance, you might track a 100 day moving average, and a 200 day moving average. When the line of the 100 day average moves above the 200 day one, you might then think that the currency is on the rise. Many signals also refer to levels of support and resistance. These are values that the currency generally does not drop below or rise above.
Learning how to find, and the best way of interpreting signals, is what you might refer to as the ‘secret’ to forex trading. The only way of learning this is to constantly research the information available to you, through trial and error on the markets, and through sources of information on the internet. When you find and understand signals and indicators, you can incorporate them into your strategy, and you look for them to influence your trades. There is no gambling in forex; it’s all about interpretation and speculation.