Forex Trading,Some Points to Take in Consideration

Here are some important points you need to take in consideration while creating your trading system.

1. Always be skeptical about your own ideas, focus only on results. Sometimes is easy to track trading opportunities, what is hard is to capitalize on them and make money from them. The performance of any trading system should be measured with actual trading (either demo or an account with limited funds).

2. Sometimes you lose even when you have followed your system to the rules. Losses are part of the game, there is no possible way to avoid them, and we need to learn to lose. So if you have followed your system 100% and took a loss, celebrate it! The only way to stay ahead of the game is by rigorously following your system.

3. Sometimes while trading large positions you can lose control of your emotions. Don't be overly aggressive with the market and follow a well planned money management technique. It should tell you what you are going to risk on your next trade.

4. Try to understand why your system works, this way you will develop the required confidence in yourself and your system.

5. There will always be some “indicator” that could have kept you out of a losing trade. But remember your system is not designed to win all your trades, but to win most of them.

6. When you finally created your system, describe it in simple and logical terms. If a 15 year old kid is not able to understand it, then something is wrong with it.

7. Use only 2-3 indicators: one indicator to identify the trend and one or two indicators or variables for entries and exits. The more indicators you use, the more complicated your system becomes. Most of the time “the simpler the system the better performance it will have”. Also use non-correlated indicators, do not choose two indicators that are supposed to measure the same market condition.

8. Test your system over large data samples (over 50 trades) and in various market conditions, this way you can see under what conditions your system works better.

9. If you decide to trade several currency pairs, try non-correlated pairs. For instance, if you trade long the Euro and long The Pound, your are likely to get the same result on both of them, elevating your risk if the market goes against you.

10. News trading? Determine whether you are going to keep your trades open during important news announcements. If you are trading for the short term you are likely to keep tight stops, and an important news announcement might hit your stop loss level.

11. While you are in a trade, open your mind to every possibility, sometimes you don't see or ignore evidence against your trade.

Forex Trading Systems Creating a Trading System

It is very important to have a system that perfectly fits your personality, otherwise you will find it difficult to follow and it will be hard to generate consistent results. Nevertheless, how do we know if the system we are trading is the right for me? On the last section of this lesson, we will find out the proper steps that need to be followed in order to make sure our system fits us.

Most traders have problems with the system they are using because they did not develop it. A system that works for one trader does not mean that it will work for all traders. The system creator “created it” based on his personality and unique circumstances (trading capital, risk profile, etc).

If this is your case, you need to follow the same rules and re-create and tweak the system until it fits your needs as a trader and personality.

In order to create a successful system you need to take care of the following steps:

1. Types of systems

2. Trading styles

3. Choose the concept of trading

4. System Conceptualization

5. Testing and live trading

Forex Trading Systems- Introduction

By now, you should know that it is important to trade based on a trading system; otherwise, it will be very hard to generate consistent profits from the Forex market. Trading systems tell you where to get in and out the market.

When you devise a system, you look for certain moves and what indicators, patterns or price behavior caught that move, then you create a set of rules; when these rules are present in the future they signal a trade.

Most systems are based on price patterns or technical indicator readings (technical patterns). However, we must not forget something: patterns (whether chart or technical patterns) are never the same, they are only similar. In order for two patterns to be the same exact pattern the same traders need to be involved on both patterns, and not only this, they have to be in the same mood so they behave in the exact same way. We know this is almost impossible since there are just too many variables that need to be accounted for. Take for instance, how many traders are waiting in the sidelines? How many traders will get out of the market sooner than they have planned? How many of them will take partial profits? And so on...

This tells us that there are no certainties about the outcome of every single signal. Even though we don't know the outcome of any individual trade, the outcome of a set of trades is predictable; we also know that if we follow rigorously our system we will be ahead of the game in the long run. When our system signals one trade it only tells you that there is a higher probability that the market will go in the intended direction, probabilities will play their part.

So we know two important things:

• We don't know in advance the outcome of any signal
• If we follow our system rigorously, we will be ahead of the game

What is interesting is that we do not need to know what is going to happen next in order to make money in the Forex market, we only need to make sure we have a well-developed system and follow it rigorously.

However, before we apply this knowledge we need to develop our own system. In this lesson we will show you how to effectively develop a system the fits your personality.

The following topics are covered in this lesson:

Creating a Trading System - 

                                                     Important information about trading systems.

Types of Trading Systems - 

                                                           There are two types of trading systems; we will review their advantages and disadvantages. 

Trading Styles -  

                            Review of the trading styles you might adopt to develop your trading system. 

Trading Concepts -

                                     Not all trading concepts are for every trader, choose the one the better fits you. 

Trading System Conceptualization -

                                                                         After choosing our trading style and concept, we need to begin our system conceptualization. 

Testing and Live Trading - 

                                                       Once we created our system we need to test it and see if it really fits our personality, a few tips to do an effective testing. 

 Some Points to take in Consideration - 

                                                                          Before taking any action please take these important points into consideration.

Forex Trading Mistakes - Not Being Aware of Humane Nature

 So far, we have learned that trading should be undertaken similarly to any other business. There are losses as in any other business (like inventories not sold), but at the same time, it is also important to understand that trading itself is like no other endeavor. Some attitudes that could have given great results in any other task in life could have disastrous effects when it comes to trading. Some of them are listed below.

Fight! Till the End

Since we were kids, we are all taught to fight as hard as we could and do everything in our hands to achieve the desired results or get what we want.

When it comes to trading, the results could be far different. This is commonly named in the trading environment as “marrying one position”. Once you enter a position, you are convinced that it is a winner. Just as you got in, the trade goes against you and you might think “it has got to go somewhere first”. As it keeps going against you, you are still convinced that the trade is going to be a winner. Then you will probably think “operators or money makers are trying to scare us”. As your trade keeps going against you will keep telling yourself “hold it, hold it”. Then you realize the trade has gone too far. This makes it hard to take the loss, and you will probably say “I will wait to get break even, it probably wasn’t a good trade after all”. And the next thing you know is boom! Margin call....

The best thing to do in order to avoid this happening to us is to follow our trading system. Remember, the first time you violate your rules, could also be the last time you trade.

Trial and Error

This is a common practice in many tasks of life. And often it is the only way to get the desired results. Like in the scientific arena in some of the most important findings, scientists actually weren’t looking for what they found. It was the result of trial and error.

In the trading environment, doing this in a real account, will lead you to wipe out your trading funds. You cannot start trading your real account trying different indicators, patterns or systems to see if it gives you the results you are looking for, or if the system fits you.

You need to find what systems/indicators suit you before and not after you start trading your real account.

100%

Since kids, we were taught that we should try as hard as we could to achieve an A or an A+ (100 or 90%) on our grades. Getting those results was proof that we understood any given subject. And of course some of us got a little present as an incentive to keep trying hard.

In the trading environment, this could give us the wrong idea that having a system that is right 70% of the time is an average system, when in fact is an excellent system.

This kind of thinking could lead us to an eternal search for more accurate systems (the aforementioned Holy Grail).

FACT - These kinds of attitudes might make perfect sense in any other endeavor but they complicate our trading careers. For this reason, we need to open our minds to every possibility, even if it doesn't make sense in other areas.

Success in Forex = Learning + Practicing + Update Knowledge

Forex Trading, Not Having a System

 Some traders make trading decisions without any methodology or system. Imagine yourself on a trip in which you intend to drive to the west coast. If you don't study the route to take, where to rest, or you don't even know what cities or villages you are going to pass by, you will probably end up in the east coast, or on the north border, but most importantly you won’t know in the middle of your adventure if you are on the right path. On the other hand, if you know the route to take, villages and cities you are going to pass by, you will know you did something wrong should you drive into an unknown village. At this point, you will review your route, turn around and get on the right route.

The same goes for trading, if you do not use a system or methodology you won’t know what you are doing wrong until it is too late and your trading account is in great danger.

You cannot get into a trade because you think or believe the price is going to go up or down. You need a plan of action, a trading plan that will get you in and will guide you through each trade.

Imagine a trader at the end of the month; her trading account is up, the best month ever. Then she decides to go back and review all the trades made during that month. When looking at the trades she realizes there is no possible way to replicate those results because all of them were entered without any system what so ever, in a word, randomly. In other words, she got lucky. The same goes when everything goes wrong, she will not be able to discover what she is doing wrong because she is not following any system.

The most important thing about having a system is that all the rules that govern it were made when there was no money at risk. This way you are sure that every decision taken based on the system is in your best interests. These decisions are not clouded by psychological factors (fear, greed, hope, etc.) that are present when real money is at risk.

FACT - You need a system or methodology.

This will help you realize whether what you are doing is right or wrong. It will also guide you through each trade. We all make mistakes occasionally, but recognizing them gives you a chance to study, learn from and work past them. Remember, the only way to get consistent results is by strictly following your trading system.

Success in Forex = Learning + Practicing + Update Knowledge

How To Be Successful Forex Trader-Looking For Easy Money

Unfortunately, most people are attracted to the Forex market for this reason.

All because of the publicity of:

• Some brokers showing or rather trying to show how easy is to trade and make money almost instantly in the Forex market
• Signals providers offering the best signals that will make you rich instantly and reach the financial freedom every trader is looking for by showing you the secrets of the big dogs.

Is it easy to trade?

Yes, it is true, everyone can do it, putting on a trade is only one click away.

Is it easy to make money?

Yes, I will have to agree with this one again, it is easy to make money. No knowledge of even what a constitutes a currency is required to make a winning trade. What they don't tell you though, is that it is even easier to lose a trade (because of the spread).

What is important here is that you cannot earn a living trading that way. In order to make a living trading the Forex market, you need to be consistent, and believe me, this is no easy task. To be a consistent profitable trader means that over several periods of time a trader makes money. Just 5% of all traders achieve this goal. Therefore, it is possible, but in no way easy.

Is it possible that a signal provider could make a trader rich? I don't think so. There are no certainties in this business; in fact, no one (signal providers) will ever care if you lose money. The only person responsible for losing money following someone else’s advice, will be you. Because you are the one who is actually executing the trades.

There are no short cuts; no one will ever make you rich but yourself. How do we achieve this? Working hard, this is the only way you can succeed as a trader.

Besides, what would you get by following someone else's advice? Nothing, following blindly someone else's advice would not give you the knowledge, the experience and nothing else good at all. Because you do not know the reasons behind any trade, you don't even know if the signals come from a system. You might make some money if the signals are good. But let me ask you another question… Do you intend to rely on one signal provider for the rest of your life? I don't think so.

So at the end, you will lose precious knowledge and experience that you could have gained by trading on your own, and most importantly, you will have lost time.

And what about the big dogs’ secrets?

Again, there are no secrets, the only truthful secret is that there are no secrets, but please keep this between you and us J 

FACT - There is no easy way to become a consistent profitable trader. There are no shortcuts, and the only way to get there is through hard work, self-discipline, patience, understanding the market, experience, taking only calculated risks, and more characteristics that we will learn throughout the course.

Technical Analysis, technical indicators,Momentum (MOM)

This indicator compares the price of any given instrument to the price over a selected number of preceding periods.

This represents the rate of change over the chosen periods. In other words, it lets you see where is the price located relative to the historical data selected.

Momentum Usage

Usage No 1 - Trend indication. When the momentum reading is above 100 and rising, it indicates a strong move up. When the reading is below the 100 level and falling further, it indicates a strong downtrend.

[Chart 21]

It’s important to remember that we need to choose larger periods to use this indicator as a trend indication.

Usage No 2 - Overbought/oversold conditions. When the indicator reaches extreme levels and bounces back from these levels - the signals are given.

[Chart 22]

The problem with using momentum to forecast overbought and overbought conditions is that there are no pre-defined values for the indicator to be overbought or oversold. They are relative to previous indicator action.

Usage No 3 - Divergence trading. This indicator is also used to find points of divergence between the indicator and the price action.

[Chart 23]

Here is once more the same chart used with STC and RSI, the divergence is also present with momentum. From the three indicators used, in the MOM and RSI the divergence is clearer.

Technical Analysis, Technical Indicator,Moving Average Convergence-Divergence (MACD)

The MACD charts the difference between two exponential moving averages (a longer period EMA subtracted to a short period MA). The most common settings applied to MACD are 26 periods EMA and a 12 period EMA.

The MACD is positive when the EMA(12) is above the EMA(26) indicating that the rate of change of the shorter period MA is higher than the longer period MA and this indicates positive momentum. On the other hand, it is negative when the EMA(12) is below the EMA(26), the rate of change of the shorter period MA is lower than the longer period MA indicating negative momentum. These values are then plotted in a histogram.

MACD Usage

Usage No. 1 - As an oscillator indicating overbought/oversold conditions.

An overbought condition indicates that the instrument has been bought all the way up, and a probable short term reversal is very likely to happen. An oversold condition indicates that bears have been selling an instrument all the way down at a certain point that it is very likely that buyers start taking command of prices attracted by cheap prices (short-term reversal).

[Chart 7]

Every time the MACD gets overbought or oversold the market tends to change direction. But what is considered overbought or oversold with the MACD? Good question... it is relative to the previous highs or lows as there are not “set levels” for the MACD to be considered overbought or oversold. This is one of the weak points if the MACD for this usage.

Although this MACD usage is not very common, there are still traders that use the MACD in this way.

Usage No. 2 - Centerline crossover. When the MACD crosses from negative territory to positive territory, it is called a bullish crossover and indicates positive momentum. On the other hand, when the MACD crosses from positive territory to negative territory it is called a bearish crossover ant it indicates negative momentum.

[Chart 8]

When the histogram crosses from the negative territory to the positive territory it means that the market is gaining positive momentum signaling a long trade.

Usage No 3 - Divergence trading. A divergence occurs when the price behavior differs from the indicator behavior. Theoretically, when the price reaches new highs, the indicator should also reach new highs and the opposite is also true for a bear market. Therefore, when the price makes new highs and the indicator fails to do the same, or when the indicator reaches new highs and the price fails to do the same, a divergence is present. The same is true when the indicator reaches new lows and the price fails to do so or when the price reaches new lows and the indicator fails to do the same.

[Chart 9]

The second low created by the market is clearly at lower levels than the first low. The MACD fails to make a similar low and creates a higher low instead.

This creates a divergence signaling the market isn’t as bearish as it used to be.

Combination of MACD Signals

Please take a look at the following chart and try to determine what we are using to generate the signal (yellow triangle).

[Chart 10]

In this chart we used the divergence signal coupled with the centerline crossover signal as a confirmation. Once the market created the divergence we need the MACD to cross below zero to confirm the signal. Of course we could add the support line break out also (blue horizontal line).

Technical Analysis, Technical Indicator, Moving Averages (MA)

MA’s measure the average price of the previous n-periods. For instance, a MA(5) measures the average price of the last 5 bars. However, as the name implies, the average changes as when a new period is added the last period is dropped. So it is always the MA of the last 5 periods.

As in any other indicator, the period selected is a critical element. The shorter the period the more sensitive the MA is to price movements and is less consistent, and the larger the period chosen, the more consistent it is, but at the same time less sensitive to price fluctuations.

The moving average explained above is called simple moving average (SMA). However, there are also other popular types of moving averages: exponential moving average (EMA) and weighted moving average (WMA). The only difference between the SMA and the other two approaches is the weight assigned to each period. EMA´s and WMA´s assign more weight to the periods that are closer to the current price, while in SMA all periods are equally weighted.

[Chart 1]

Let’s concentrate on the yellow box. The green line is a 10 period exponential moving average (EMA) while the red one is a 10 period simple moving average (SMA). At the beginning of the yellow box there is a small period of consolidation where moving averages are pretty close to each other, there is nothing to be noticed. But once the market starts moving, you will see the EMA(10) lifts up first, then the SMA(10). This is because the EMA gives more weight to periods closer to the market action than SMA’s. This means that EMA’s will always be closer to the current market action than SMA.

Which one to use?

We prefer to use EMA since they give more value to more recent price fluctuations, and reflect what is happening at any given time with more accuracy. However, there are traders that prefer to use SMA.

Usage of Moving Averages

Usage No. 1 - As stated before, MA´s are trend following indicators. They smooth out price fluctuations and make it easier to identify a trend. There are several ways in which this indicator can be used to identify the trend:

1 - Location of the MA in relation to price action. If the MA is above the price, it indicates a downtrend is in place. If the moving average is below the price then it is considered an uptrend.

2 - With the slope of the MA. When the MA is sloping up, the market is considered to be in an uptrend. When it is sloping down the market is considered to be in a downtrend. When there is no slope (close to a flat line), then the market is trendless or sideways

[Chart 2]

The chart above shows both ways to identify a trend. When the price breaks the EMA(21), a significant change in trend could be imminent (or at least a retracement or consolidation period). Also the slope of the EMA(21) keeps good track of the trend. There are also periods of indecision (when the market breaks the MA back and forth). During these periods, the EMA(21) could lead us to take false conclusions about the market condition [when the EMA(21) is almost flat.]

For this reason it is always advised to use a second MA. This allows us to keep track of the location of one MA relative to the other. When the short period MA is above the longer period MA the trend is considered an uptrend, and when the short period moving average is below the larger period MA, the trend is considered to be a downtrend.

[Chart 3]

In this case we added an EMA(75) [red line]. When the EMA(21) [green line] is above the EMA(75) [red line] the trend is considered an uptrend (which is the case for the chart above). On the other hand, when the EMA(21) is below the EMA(75) then the trend is considered to be a downtrend.

Usage No. 2 - MA as support and resistance. Some MA’s are used to establish levels of support and resistance. The most common periods used in MA for this kind of usage are: 50, 100, 200, 144, 89, and 34.

[Chart 4]

In this chart we used an EMA(144) [notice it is the same chart we used for the other MA’s examples]. As you can see this moving average is a very powerful price level in the chart. Almost all the time, something happens when the price action approaches to this EMA, either it bounces off from it or makes a wild break out. This EMA(144) is significant on all charts and all time frames, we personally use it a lot as a very important level of support and resistance.

Usage No. 3 - Moving averages as cross-over signals. Perhaps the most common and easy trading system is this one. It consists in plotting a short period moving average and a larger period moving average. When the short period moving average crosses above the large period moving average, it signals a buy signal. When the short period MA crosses down the larger period moving average, it indicates a sell signal.

[Chart 5]

In the chart above we used an EMA(21) as the short period MA (red line) and an EMA(34) as the longer period MA (green line). There are a total of 5 cross-over signals: 3 buy and 2 sell signals. The three buy signals are generated when the short period MA crosses above the long period MA while the 2 short signals are generated when the short period MA crosses below the long period MA.

Combination of Moving Averages Signals

During trending conditions these types of systems work very well, getting you in the market early and letting you catch most of the move. But during consolidation periods, a moving average crossover gives many false signals.

For this reason is important to determine ahead of time the trend on each trading possibility. If there is an existing trend, then we use a system that works during trending conditions, if there is no trend, then we use a system that works under ranging conditions.

Let’s try to filter signals on the crossover above with a longer period moving average that will be of use to us as trend identification.

[Chart 5]

What we are trying to accomplish with this new large period MA is to filter out signals against the trend. We are using the new EMA(75) as a trend identification – position of the market in relation to the MA. According to this new rule, most of the time the market stays above the EMA(75) indicating an uptrend. What we are going to do now is to validate all long signals and ignore all short signals as they are against the direction of the trend and we know this system works best during trending conditions taking trades in direction of the trend. So we filter out all short signals and go ahead only with long signals. This produces better results than taking every single signal.

Remember also that the signals given by a MA crossover are very sensitive to the number of periods chosen for the MA´s. If short periods of MA´s are chosen, then the system is going to get you in the market early but also will give you many false signals. On the other hand, if larger periods are chosen, the system will get you in the market later, (giving up some profits) but will give you more accurate signals.

Technical Analysis, Introduction To technical indicators

In this , we will review the most important technical indicators used to trade the Forex market.

Technical indicators are no more than a series of data points plotted in a chart that are derived from a mathematical formula applied to the price of any given instrument. In other words, indicators are just a different way in which price movements can be represented over specified periods of time (they offer us a different perspective).

Some technical indicators are used to confirm price action (lagging indicators), others are used to predict price action while some others are used as an alert or warning of a possible break on price action.

A) Lagging indicators - These indicators follow the price action, in other words they confirm what the price just did. The signals that come out of this type of technical indicators usually happen after the change in price begins. These types of indicators are also called trend-following indicators and work best during trending markets, where they allow traders to catch most of the move. During trendless conditions (sideways or ranging market) these types of indicators give many false signals.

B) Leading indicators - These indicators try to predict future price movements. They give signals before the actual price movement begins. These kinds of indicators work best during consolidation periods or trendless markets. During trending conditions, only signals in direction of the existing trend are advised to be taken. During up-trending conditions, leading indicators help us identify oversold conditions (price has falling enough and it is ready to continue its trend). During downtrending conditions, they help us identify overbought conditions (price has rallied enough, and now it is ready to continue its trend).

When using leading indicators it is also advisable to wait for the actual price movements before taking the indicator signal.

Most important lagging indicators: Moving Averages (MA) and Moving Average Convergence-Divergence (MACD).*

Most important leading indicators: Relative Strength Index (RSI), Stochastics, Commodity Channel Index (CCI) and Momentum.*

*Some of these indicators can be used both as a lagging indicator and as a leading indicator.

Sensitivity vs. Consistency

                                       Before going through all the indicators it is important to understand the relationship between these two concepts. Every indicator represents price movements over a chosen period. Each indicator gives you the option to decide on how many periods you want to go back over to do the calculation. If we shorten the period, we will get more and earlier signals, but at the same time, the percentage of false signals will also increase. If we increase the number of periods, false signals will decrease, but the signal will get us in a trade later, giving up some profits.

It is up to the trader to select the approach that best suits his or her trading personality, trading style and objectives.

Then  we will cover the following topics:

1- Moving Averages - 

                               In this section, we will review moving averages, what they tell you, common uses, etc.

2-Moving Average Convergence-Divergence (MACD) –

                                            MACD is a popular indicator that can be used in several ways to our benefit. 

3-Commodity Channel Index (CCI) – 

                                             The CCI is an indicators that quickly reacts to the price action. 

4-Relative Strength Index (RSI) –  

                                            This indicator measures the ration of bull and bear candlesticks, the information is then plotted and can tell us several market conditions. 

5-Stochastics (STC) –  

                               We will review the best overbought/oversold indicator. 

6-Momentum (MOM) – 

                                            Trying to measure the strength/momentum of the market can help us take better decision. 

7- Bollinger Bands (BB) – 

                                          This volatility indicator developed by Bollinger shows us how far the market could go during “normal conditions”. 

8- Average Directional Index (ADX) –  

                                               The ADX is an indicator that measures the strength of the trend in any market. 

9-Fibonacci Retracements – 

                                             Once the market has retraced, the Fibonacci retracements can help us determine where could the retracement could end. 

10-Pivot Points (PP) –  

                                PP is a popular technique that shows us the sentiment of the market and other useful information. 

11- Important Considerations about Technical Indicators –  

                                What’s inside indicators, how should we use them? Do they generate accurate signals? 

12-Time-Frames –  

                               The combination of time-frames is critical to have good results.

Some Thought on News and Event Trading

News and event trading has become a very popular trading style in these days. The reason behind it lies in the huge profit potential made in just a few minutes - with no effort at all.

Take for instance the first Friday of the month, when the non-farm payrolls report is released. The price of the EUR/USD can move around 150 pips in less than 10 minutes. That is US$1,500 (trade based in only one standard lot).

What traders fail to realize are all the risks involved in such practices. What if those 150 pips go against you? Even with a stop loss order, sometimes your broker won’t be able to honor it, because the price gaps (values between prices are not printed). In these cases, your broker won’t take the loss, so he will give you the closest printed price, meaning 70, 100, or 150 pips against you. That amount of pips could mean a margin call or a huge loss. In how much time again? …10 minutes.

The important thing here is that your job as a trader is to make sure you are going to be able to trade the next day, week, and years to come. Taking these kinds of risks won’t help much.

Other traders instead of using market orders to get in the market use stop and limit orders. But the same happens there, it is too risky, the market could again gap and your broker won’t be able to honor your stop. Traders that use this kind of strategy are taking uncalculated risks, risks that could cost them their trading account, and probably their trading careers.

Also, price movements are not always steady in one direction. It could go up and trigger some orders just to go back to the other extreme, then trigger the other side orders and then come back to where it all started.

The truth is, there is no possible way to forecast price movements in such circumstances. As we already know, the price moves based on traders and investors expectations. This is the combination of all traders perceptions on where price should be. To possibly know where the price is heading we need to ask every single trader and investor around the world what their intentions are during such announcements (something impossible to do). To go a little further, sometimes as the news report comes out, nothing happens, or worse, the price goes against the fundamentals.

Take for instance a day of interest rate announcement. It is rumored that there will be an interest rate cut. In this case, the currency will go short before the actual decision. Once the interest cut is announced, it is possible that the currency will be bought back, as all traders that could have shorted the currency, had already been short days or weeks ago. So there is no one else to short the currency. In this case, the price could be pushed up, against the fundamentals.

The point I want to make here is, trading itself is risky, and there are risks that you just cannot avoid, like the possibility to lose one trade. There are however some other risks that traders must avoid, as in event trading. The more you control your risks, the better results you will have. Take care of your risks; your profits will take care of themselves.

We consider trading the news announcements to be very risky.

Is there a system based solely on fundamental trading?

I am sure there is. But as with every system, it should have rules and setups that have to be present in order to get in the market, as well as money management controls etc.

Fundamental Analysis

There are basically two ways to approach the markets: technical and fundamental analysis.

Technical Analysis: studies the past behavior of price of any given instrument as an attempt to forecast its future behavior. 

Fundamental Analysis: the focus of which is to study the economic, social and political forces that drive the supply and demand of currencies.

Which one is the best approach?

There has been an ongoing debate on which approach is better. Sometimes technicals nail it down, but for some others the fundamentals do it. The truth is, there is no clear answer to this question. And I would say that the answer lies within each one of us. That is, use the one that fits you, the one that works better for you.

If you are a short term trader, you will probably prefer the technical approach, since it concentrates on price behavior. On the other hand, fundamental changes take longer to be visible in the charts so it will be better to adopt a fundamental approach.

Today, many traders and investors use both approaches, so they can have a clearer picture of any given situation.

In this lesson we will go through Fundamental Analysis.

The topics covered in this section are:

1- What Moves the Forex Market: We will try to explain what makes currency pairs fluctuate; we will see several theories about how currency pairs are valued.

2- Fundamentals by Country: A list of the important news announcements for each country (majors), how important they are to the market, effects they produce on some currency pairs etc.

3- Other Economic Indicators: In this section we will review other (not so important) economic indicators that under some circumstances can have a larger than usual impact to the Forex market.

4-Other Fundamental Factors that Influence the FX Market: We will explain the role of political and social crisis, and the statements of important people in the FX Market.

5- Gold and Oil and their Relationship to the Forex Market: Getting to know how each of these two commodities are related to the Forex market can help you make better decisions.

6- Common Practices Used by Fundamentalists: We will mention some practices used fairly often by fundamental traders.

7- Some Thought on News and Event Trading: “Trading the news” has become a very popular style of trading in the last few years; we will analyze its advantages and disadvantages.