Market Conditions and Opportunities to Buy or Sell
When to Buy or Sell
The forex market is the biggest financial market in the world and comprises millions of participants around the world. It is no surprise that there are hundreds of unique ways to trade forex. It all comes down to how you want to trade and what risks you are willing to take.
This article will dive straight into how to prepare yourself for trading as well as how to get started with your trading.
What to Trade?
The first question on many traders mind is, what should I trade? When you are first starting off it could be a very overwhelming feeling to find a specific instrument to trade. You are faced with 30 or more forex pairs and you are not quite sure where to start. As a beginner trader it is important to start with a good forex pair. What is a good forex pair? A good forex pair is one which has high liquidity, low spreads and a generous daily range. Some examples include; EURUSD, USDJPY, USDCHF, AUDUSD. Just because these are viewed as ‘good forex pairs’ doesn’t mean you should quickly press the buy or sell button. Before trading you must do your research. You must fully understand the forex pair by reading thoroughly about any news that pertains to this forex pair and how that can affect the price.
Should I Buy or Sell?
This is a great question. Unfortunately there is no correct answer. Whether you buy or sell will depend on your view on the appreciation or depreciation of the forex pair. Do you think this forex pair will get stronger or weaker?
To come to a conclusion you will generally use either fundamental or technical analysis. Once you have done your research and have made a conclusion, you can cross check with further analysis to strengthen your case. If you are able to gather enough information and analysis to convince yourself that this currency will either become stronger or weaker the idea of whether you should buy or sell will become very clear.
What Moves Forex Pairs?
Here are some important aspects to consider when you are determining if a forex pair will appreciate or depreciate.
Technical analysis is one of the most used techniques when analysing forex pair prices. Support and resistance as well as trend and chart patterns are some of the famous methods traders use when it comes to extrapolating future price movements. In addition to that you will always want to follow political events. Any government's behavior can easily move the value of its currency. For example if you were to have a president impeached, the value of the currency is likely to decrease. Finally you have fundamental aspects that play an important role in what moves prices. Traders must always keep an eye on unemployment numbers, GDP, interest rates, etc. These economic factors can easily illustrate the health of any given country and in turn the health of its currency.
When to Trade?
To conclude this article we will add up everything we have learned above and see if we can apply it to a real life situation. To start we will choose a currency pair. Let’s pick EURUSD since it is a ‘good’ pair to trade. You will start to read all the news about both currencies and see if anything stands out. After analysing the pair you have come across the following chart. Your knowledge of technical analysis alongside support and resistance will lead you to generate a trade idea. In this case it is clearly a sell sign.
After you have noticed the resistance at the third instance it is time to investigate more. Due to your understanding of the pair and the news surrounding it, in addition to the strong presence of a resistance you will know it is time to sell. Notice how the price continued to fall after each touch of the resistance line. Here you would profit as the price goes down after the third instance.
Similarly, on a more fundamental framework, you could choose to trade USDCHF due to some economic factors. You have come across some news that the US Fed is looking to raise interest rates. As an expert in fundamental analysis, you understand that higher interest rates will encourage foreign investors. Increased interest by foreign investors means higher demand for US Dollars. Higher demand in the US Dollar only means one thing, the value of the US Dollar will increase. Spotting this in advance, you decide to buy USDCHF.
Hindsight is 2020. Before entering any trade you must understand the concept of risk management. In a separate article we will cover everything you need to know about risk management. However, for the purpose of this article, you should only trade after you have understood your risk management procedures.
For more information on what to trade and when to trade it please feel free to reach out to us. We would be more than happy to discuss with you. Also we encourage you to download our Forex Beginners User Guide.