The forex market is undoubtedly the world’s largest and most liquid market. Why is that so? The reason is really very simple. In the forex market the volume of transactions traded is more than ten times larger than the combined daily turnover of the world’s stock exchanges. Added to this is the fact that each time a particular currency comes under focus, more and more people try to speculate on that currency and those people may eventually join the forex bandwagon. All this adds more to the volume and liquidity of forex markets.
To be a winner in such a market you need to have foresight, skill, and discipline and a lot more. You need to be nimble, and have a bit of luck too. Even more importantly, you need to have a method or a strategy. All this is possible only if you think differently in forex trading. That indeed is the key to forex trading. It could make the difference between doing a winning trade or end up loosing your trade.
By now we have looked into several of the parameters of technical analysis namely charts, Bollinger Bands, Elliot wave analysis, MACD and so on. Most of this analysis is based on past price action data. Obviously your profits are not going to come from past price action. On the contrary your profits would come only from future price action. So once you have done a technical analysis you need to justify your own decision in making a market entry. In other words you have to correctly interpret the analysis you have done.
If the technical indicators signify an uptrend or downtrend you have got to simply look beyond that signal. Try to find out how the prices were really moving so that you get an insight on the intrinsic strength and weakness of that trend. Once you know that, you automatically get an insight on the psychology of the market participants namely their fears, doubts or even their concerns. After all, it is the market participants that create the price action. Once you know their psychology you would also know what creates that price trend or what really causes the technical indicators to move in the way they did. In short, you ought to recognize the technical indicators for what they are. At best technical and for that matter fundamental analysis are to be used only for a useful approximation of the market. You got to really look beyond the indicators and get to understand the market psyche as a whole. If you want to improve your trading skills you need to look instinctively beyond the indicators, the patterns that develop, and see what the currency price movement was all about. For example you need to decipher the outcome of a situation wherein the market momentum were either increasing or decreasing; you need to decipher the outcome when the volatility of price movement was changing; you need to decipher the possible outcome when the momentum of a current price move was greater or less than the preceding swing.
In the earlier paragraph we talked about peeping into the thought process and psychology of the people who are possibly long or short in a particular trade with you. I agree a lot of this call for imagination. But if you could figure out when these guys would be looking to take in the profits and exit the market, and at what point these guys are likely to put stops on their trade, then you could to a large extent predict future price action.
You also got to look at the psychology of the people who are not already in the market, but waiting an opportune moment to enter a trade. Some of these guys could be adept forex traders. At what point are they likely to enter the market? You got to figure it out. Some of these guys could be even novices and it’s possible they would be entering the market recklessly simply out of fear that a particular trend was likely to wean off soon. So whether it is an adept forex trader or a novice, the psychology of all these people sitting in the sidelines will have a drastic effect on future market movement. If you can figure this out, you are well on your way to devising a winning forex strategy.
To summarize, always look beyond technical indicators and patterns. In doing so analyze price action and figure out the speed, momentum, and volatility of currency price movements. Your ability to correlate this information with your trading strategy will determine the extent to which you could lower the risk of your entry to the currency market. It could also determine your ability to garner the maximum profits.