Ways to analyse the market

When we are trading, we never enter the market blindly. No successful trader has ever made a living out of trading based on gut instinct.

We must analyse the market, the currencies and their countries in order to best predict how the market will behave and where the price will move.

There are two main types of analysis when it comes to trading, these are; fundamental and technical. Let’s break each one down.

What is fundamental analysis?

Fundamental analysts are concerned with the macroeconomic forces that can influence a country and its currency value.

The three main areas that fundamental analysts will look towards are the political, economic and social factors that influence the currency they are looking to trade.

To put things simple, if a country’s economic indicators are looking good, such as low unemployment rates, growing GDP, and low inflation rates, then their currency should strengthen. On the other hand, if these things aren’t looking so good then that could point towards a slightly bleaker future for that currency and it should weaken.

Naturally, fundamental analysis is more commonly used in traders that open long-term trades, such as position trades. Swing traders should also be mindful of the fundamentals as any significant news could heavily impact their open positions.

Here are some of the key areas that fundamental analysts pay close attention to:

  • Interest rate changes
  • Inflation rate
  • GDP
  • Retail sales
  • CPI (Consumer price index)
  • Unemployment rates
  • Political stability and key election dates

What is technical analysis?

Technical analysts focus on how historical price movements and previous market behaviours may help to predict where the market will move next.

This is the main type of analysis that scalpers, day traders and swing traders use, and therefore it is the main form of analysis that we will cover in this course.

There are a vast variety number of technical indicators to pick from, each of which uses historical data obtained from the market to try and determine where the market will move next.

History does tend to repeat itself, so using data obtained from this analysis can prove very profitable to those who implement it wisely.

The vast majority of the technical analysis is done by computers and the algorithms that can be found in trading and charting software. The skill is not in obtaining the data, but more in how that data is used.

Here are some of the top trading indicators that are most commonly used in the forex markets:

Technical vs fundamental analysis

It seems that there is always debate over which type of analysis will produce the best trading results. You will often hear technical traders saying that fundamental analysis is unnecessary as all of the information is already factored into the price.

On the other hand, you will get fundamental analysts claiming that none of the technical indicators work and that trading based on technical analysis is futile.

As always, the truth lies somewhere in between.

There are a lot of technical indicators that are not worth their salt, in fact, the majority of them are quite useless.

However, there are some indicators that give extremely valuable information that provides a great insight into the market dynamics and allow us to make high probability trades. We will be covering these key indicators in this course.

Similarly, it is never a bad thing to have an eye on the fundamentals. It definitely pays to be aware of key dates and how each country’s economy is performing and its current political situation.

The more information you have, the better.

For the sake of scalping, day trading, and swing trading, it is recommended to focus upon the technical analysis and supplement that with a solid understanding of the fundamentals.

There is no need to become an expert economist, but a rudimentary knowledge of what is going on with the currencies and their nations will go a long way.

Trading styles

There are three (or possibly four) main trading methods for you to choose from when you are looking to enter a position. These are scalping, day trading, swing trading, and position trading.

For the sake, of course, we will be looking at the first three methods just mentioned. This is because position trading involves holding a position for months and possibly even years – it’s a buy and hold method that doesn’t really qualify as active trading.

With that being said, let’s break down the three individual methods and explain what each one entails.

Scalping

Scalping is a highly active and fast-paced trading style. The idea of scalping is to take 10’s or 100’s of small profits each day, aiming to take advantage of tiny market movements.

Typically, a scalper will be in and out of the market within a few seconds up to a maximum of a few minutes.

It is for this reason that a scalper will predominantly be looking at the charts on very low time frames, such as the 1 minute, 5 minute, and the 15 minute. Some traders even prefer to go lower than that.

To be a successful scalper you must be able to react quickly to market movements and have a high level of discipline. You must know when to take your profit and know when to cut your losses.

One small blip can ruin a whole day of successful scalping, which can be very frustrating. If you can maintain high levels of focus and can concentrate for long periods of time without getting distracted, then scalping may be a good option for you.

Screen time: High

Number of trades per day: 25+

Timeframes: M1, M5, M15

Day trading

As the name suggests, day trading is the opening and closing of trades within the same day. Day traders normally scan the market for a trade, set up a position, enter it, and then close it all on the same day.

You don’t need to have the same laser focus and concentration that a scalper would, however, it does still require discipline.

Typically, day trading is best suited to those of us who don’t like to keep our trading positions open overnight. If you prefer to get a good night’s sleep without worrying about what your trade is doing, then day trading is probably your best bet.

This is the reason why day trading is so popular – you can open your positions, make a profit, close your laptop down, and the job is done.

Screen time: Medium

Number of trades per day: 0-5

Timeframes: M30, H1, H4

Swing trading

Last but not least, we have swing trading. This is very similar to day trading however the positions are kept open overnight and can be held anywhere between two to six days – sometimes even a few weeks.

As this is a more hands-off approach, it is best suited for people who don’t want to be staring at a screen all-day yet don’t mind having open positions.

The markets tend to fluctuate quite a lot, so swing positions may be at a loss for days at a time before finally turning into profit. This requires a certain mental toughness and the discipline to stick with your trade and to trust your own analysis.

This is a very popular form of trading as it does not require a lot of time to manage, however, it does leave traders at risk during the weekends and during market closes, which upon reopening can produce volatile and abrupt market movements.

Screen time: Low

Number of trades per day: 0-3

What timeframes: H1, H4, D1, WK

When can you trade Forex?

Unlike Wall Street, the Forex markets are open 24 hours a day, 5 days a week. This provides traders with a huge window of potential trading time to work with, which can be both a blessing and a curse.

Many new traders get hooked to the screen, morning, noon, and night searching for every small edge they can find and entering hundreds of positions each and every day.

While this can be a profitable strategy, it is highly unlikely that it can remain profitable over the long run as you will inevitably run into trading burnout.

As always in life, quality over quantity.

With that being said, the main appeal of forex is its availability and accessibility on a global scale.

No matter where you are in the world you will likely be able to trade the foreign exchange during sociable hours – something which cannot always be said for the other international markets.

Opening hours

The major trading centres for forex around the globe are London, New York, Tokyo, and Sydney. The diversity of these geographical locations is what makes forex a 24-hour market.

Each of the four regions have their own official hours. It is important to be aware of these as it can affect the volume traded and the volatility of the currency associated with that nation’s currency.

Let’s take a look at these four trading centres and their opening times. All times are in GMT (Greenwich Mean Time).

  • London – 08:00 – 17:00
  • New York – 13:00 – 22:00
  • Sydney – 22:00 – 07:00          
  • Tokyo – 00:00 – 09:00

NOTE: These times vary throughout the year based on daylight savings times.

Forex trading sessions

As you can see from the times above, there are overlaps between the opening hours which is what leads to forex’s 24-hour market. However, not all of the 24 hours in the day are made equal when it comes to forex.

When it comes to trading, it is important to take note of volatility. This what traders thrive off as it means the price is moving around aggressively and thus there are more opportunities to take advantage of.

Each of these opening hours signifies the start of a new trading session. During these official hours, trading the currency associated with each region brings increased volatility and bigger price movements.

Here are the currencies associated with each trading session.

  • UK & Europe – British Pound (GBP), Euro (EUR), Swiss Franc (CHF)
  • US & Canada – US Dollar (USD), Candian Dollar (CAD)
  • Australasia – Australian Dollar (AUD), New Zealand Dollar (NZD)
  • Japan – Japanese Yen (JPY)

When is the best time to trade Forex?

Forex prime time is typically thought to be between 13:00-17:00.

This is considered to be the best time of the day trade the foreign markets as this is when five of the major currencies are all being actively traded simultaneously – GBP, EUR, CHF, USD, and CAD.

When there is more activity there is more volatility which provides a greater number of profitable trading opportunities that we can take advantage of.

TIP: The first hour of each new trading session usually brings the highest volatility as traders will be scrambling to react to out of hours events.

Currency Types

When we talk about currencies, we can break them down into three main categories; Major, Minor and the Exotics.

Let’s look at some examples in each category and dive a little deeper into what each category means.

Majors

As we have defined several times in this course so far, there are seven major currencies in Forex. For clarity, these are:

  • USD
  • GBP
  • EUR
  • JPY
  • AUD
  • CAD
  • CHF

Some people also include New Zealand Dollar (NZD) in this list, too.

As you know from earlier in the course, we only trade forex using currency pairs.

A major currency pair is any of the major currencies paired with the US Dollar. For example, GBP/USD, EUR/USD or USD/JPY

As USD cannot be paired with itself, we only have six major currency pairs, or seven if you include the NZD.

You will find that all of these pairs benefit from near-constant liquidity due to their high levels of trade with the U.S. A lot of the money you will see on the market will be from importers and exporters as well as speculators and investors.

Minors

Minors are any two of the major currencies listed above (that are NOT USD) paired with each other.  For example, GBP/EUR or GBP/JPY.

Here is where the liquidity starts to drop off, but you can still find substantially liquid and busy markets in the minors. Look for countries that regularly trade with each other for the most liquid markets. Minors such as GBP/EUR, AUD/JPY and GBP/CAD.

There will be others with far less liquidity as the countries may have no real trading relationship.

Exotics

As you may have guessed, exotics are any of the currencies that aren’t listed above. The Exotic currencies are always traded in a pair with Major currency.

Typically, most of the exotic pairs have low volume, a large spread and can be extremely volatile due to their lack of market depth – but that is the very reason why a lot of people enjoy trading them.

However, there are still plenty of Exotics that are widely traded and have high trading volumes. These are usually the larger economies that do plenty of international trade.

Here are some of the most popular Exotic currencies:

  • Norwegian Krone (NOK)
  • Brazilian Real (BRL)
  • Mexican Peso (MXN)
  • Singapore Dollar (SGD)
  • Indian Rupee (INR)
  • Chinese Yuan (CNY)
  • Turkish Lira (TRY)
  • South Korean Won (KRW)
  • South African Rand (ZAR)
  • Danish Krone (DKK)

Forex may be the only place where you would get away with calling Norway and Denmark exotic!

 

Currency correlations

When trading forex, it is vital that we are aware of something called currency correlation. This is the relationship between two or more currency pairs, and how when one pair moves it usually signifies a move in the other currency pair.

However, it does NOT always mean that the correlated currency pair will move in the same direction.

We have three types of currency correction, these are:

Perfect positive currency correlation

This signifies that every time the currency pair moves, the second pair will move in the SAME direction 100% of the time.

Perfect negative currency correlation

This signifies that every time the currency pair moves, the second pair will move in the OPPOSITE direction 100% of the time.

Zero currency correlation

This signifies that there is NO correlation between the two currency pairs and that the movements between them are totally random.

What does this mean for our trading?

  • More knowledge means that we have a higher likelihood of being able to develop more profitable trading strategies as a result.
  • In Forex, it is entirely plausible to trade positions that effectively cancel each other out. If two currency pairs have a negative correlation with one another, then their moves will directly counteract one another, and it will leave you at a loss.
  • Can be used to show how much risk we are exposed to. If we have several currency pairs trading at the same time and they all have high positive correlations, then we will be overexposed and often doubling or even tripling our risk.
  • You can effectively hedge and manage your existing positions.

Currency Pairs that typically have a positive correlation (SAME direction)

  • EUR/USD and GBP/USD
  • EUR/USD and AUD/USD
  • USD/CHF and USD/JPY

Currency Pairs that typically have a negative correlation (OPPOSITE direction)

  • EUR/USD and USD/CHF
  • GBP/USD and USD/JPY
  • GBP/USD and USD/CHF

NOTE: Currency correlations change. Do not take these for gospel. It’s important to be vigilant when trading, never assume that these numbers will remain the same forever.

Correlated Commodities

One important thing to bear in mind is how certain currencies can be heavily correlated with commodities.

Some country’s economies rely heavily on exports of a certain commodity, so if they particular industry takes a hit then you can pretty safely assume that the currency will follow in the same direction, and vice versa.

Two famous examples of this are:

  • AUD and Gold
  • CAD and Crude Oil

Knowing which currency is tied with what commodity can give traders an advantage and can help you understand why the market moves the way that it does.

Understanding currency

Trading is all about information. The more of it you have, the more informed your decision is on where the market is going to move and thus the higher the likelihood that your trade will be a successful one.

It’s worth taking a bit of time to go over the main forex country profiles so you can understand how they may react to news and events that occur while you are trading.

Here is a quick overview of the main currencies nations/regions and what to look out for.

United Kingdom

Central Bank – The Bank of England

Currency – Great British Pound (GBP)

London is the biggest Forex trading centre in the world and accounts for around 35% of the worldwide trading volume – impressive stuff. That suggests that the market will be most active during UK trading hours, which are between 08:00-17:00 GMT.

One thing to keep an eye on is the interest rates set by the Bank of England. As London is such a huge global centre for trading, these rate fluctuations and monetary policy changes can send huge shockwaves through the whole market.

United States of America

Central Bank – The Federal Reserve

Currency – U.S Dollar (USD)

 The USD is part of an estimated 87% of all currency trades.

That is truly staggering when you consider that the foreign exchange market accounts for $5 trillion of trading volume, per day.

New York is the main trading centre in the USA and is the second-largest in the world after London. It is for this reason that you should always pay close attention to the New York session and be aware of what is going on in the US news – if you are trading the US Dollar.

Aside from looking for interest rate changes and monetary policy updates, one thing to pay attention to is the New York Stock Exchange (NYSE). This is heavily correlated to the price of the US Dollar.

The Eurozone

Central Bank – European Central Bank

Currency – Euro (EUR)

At the time of writing, the Euro is the official currency for 19 out of 28 EU member countries. This makes the Euro one of the biggest and most widely used currencies in the world.

Even now there are still many countries seeking membership to the EU and wanting to use the Euro as their main currency. One of the main benefits of the Euro is that the European Central Bank (ECB) must balance the needs of all of the member nations.

This avoids problems arising from the individual political instability of nations and makes it less likely that the Euro will be manipulated or deliberately inflated for the gain of one particular country.

It is for this reason that the Euro is typically less volatile than some currencies, but not always.

Switzerland

Central Bank – Swiss National Bank

Currency – Swiss Franc (CHF)

Despite it being located right in the middle of Europe, Switzerland is not a part of the European Union. A country notorious for its neutrality, Switzerland is one of the richest countries in the world.

As you would expect, their main trade is with their fellow European countries, namely Germany, France, and the U.K. They also do considerable trade with the USA.

Watch for the price of gold – a quarter of Switzerland’s cash is backed with gold reserves, so the prices are heavily correlated with the price of gold (XAU/USD).

Canada

Central Bank – Bank of Canada

Currency – Canadian Dollar (CAD)

Canada is reported to have the 10th largest economy in the world, which is not bad for a country of 38 million people. As you would expect, the US and Canada have strong ties, with Canada exporting 70% of their goods to their neighbour.

Canada is a massive exporter of crude oil, so as you would expect, the CAD’s movements is heavily tied to any price changes or events in the crude oil industry. Keep an eye on this, especially if you are trading USD/CAD.

Australia

Central Bank – Reserve Bank of Australia

Currency – Australian Dollar (AUD)

The AUD offers one of the highest interest rates out of all the main currencies. It is for this reason than the AUD is often used as part of currency carry trades, which is where traders try to take advantage of interest rate differences between currencies.

The main premise of a currency carry trade is to sell a currency with a low-interest rate and then use those same funds to buy a currency, such as the AUD, that has a higher interest rate. This is usually done with leverage.

The AUD is a typically stable currency, with the central bank aiming to keep inflation at 2%. The AUD is heavily tied to gold as it is one of the biggest exporters of gold in the world.

Japan

Central Bank – Bank of Japan

Currency – Japanese Yen (JPY) 

A true powerhouse, Japan is ranked at number three out of the world’s largest economies.

As the Yen is known to offer typically low-interest rates, it is often used in currency carry trades. This makes it especially important to pay attention to the Bank of Japan’s monetary policies and interest rate updates.

There is plenty of volumes traded on the Yen, so you will never be short of liquidity. In fact, the USD/JPY is the 2nd most traded currency pair in the world.

It would be best to keep in mind how China’s economy is performing as China is one of Japan’s largest trading partners.

What is a currency pair?

Okay, time to bust some jargon and take it down to the basics. When you look at the tickers on any Forex website or brokerage, you will see currencies in pairs.

They look like this:

Starttrading.com - Currency Pair

Let’s take GBP/USD from this example. As we can see – GBP/USD is trading at 1.31152. In simpler terms, all that this is telling us is how much of the second currency we can buy with the first currency.

In this instance, £1 will buy you $1.311.

Now let’s say that the market strengthens due to some good news coming out about UK employment statistics. The pound strengthens. The rate now goes up to 1.36.

This means £1 will now buy you $1.36 – simple stuff!

The first currency in the pair is referred to as the QUOTE currency, with the second being the BASE currency.

Understanding the market

What moves the price and why?

Being the largest financial market in the world, Forex presents many opportunities for traders looking to make profits on the price fluctuations that occur each day. This is done by simply selling your currency for higher than your buy price if you are buying, and vice versa if you are selling.

The key to success in trading is consistency. It is vital that traders can routinely forecast market movements with high accuracy and post winning trades whilst keeping losses to a minimum. 

This plays down to one major factor, market understanding. If we know how and why the market moves, then we can more easily predict these movements and eventually profit from them.

Supply and demand

Like all markets, forex is at the mercy of simple supply and demand economics. If there are more people buying a currency then there are selling, then that currency is in demand and the price should rise.

Conversely, if there are more people selling than there are buying, then the currency has a lower demand and the price should fall.

Note: This is with the assumption that supply remains the same throughout.

Let’s break this down even further.

What is driving demand?

Demand for a currency can be driven by the perceived prospects for the currency’s nation as a whole. This is, of course, an extremely complicated set of factors that are very hard to break down, however, there are two main areas of focus.

One of them being the political landscape of the country at present and the other being the conditions of their economy.

In general, if these factors are considered to be positive, then demand will increase. If they are negative, then demand will fall. There are many factors that can come into play here, and some currencies are more sensitive to political news while others to economic.

As a very general rule of thumb, the most popular currencies with the highest trading volumes are more sensitive to economic data than the political landscape. This is due to the fact that the nations of these currencies are usually quite stable and would not be too affected by political news. Of course, this is not always the case.

What causes currencies to fluctuate?

As we touched upon, there are many things that may cause the market to fluctuate. Here are the main areas that

Interest Rate Changes

One of the biggest factors affecting the forex market is interest rate changes that are made by the central banks, specifically the eight global central banks. When these banks change their interest rates, it can lead to sudden and very volatile price changes.

Generally, central banks will raise their interest rates in an attempt to stifle the inflation of their currency. On the other hand, they will normally cut rates to try and stimulate their economy and by encouraging banks to lend.

If an interest rate in one currency is higher than in another, then that usually generates demand. The higher the interest rate, the higher the rate of return is and the higher the profit.

Economic and Political News

As mentioned earlier, the economic and political news can be huge factors in driving demand.

Some of the main factors influencing price include; the consumer price index (CPI), retail sales, quantitative easing, gross domestic product (GDP), and employment rates.

These are all big indicators to the health of a countries economy and its stability.

Trader/Market Sentiment

When it all boils down to it, it is really the institutional investors and traders that will move the price most heavily. Sometimes, all the political and economic news can suggest that the market will move in one direction yet the price does the opposite.

While this is unlikely, it is by no means rare.

As we will touch upon heavily in this course, there are many technical indicators that present buy and sell signals that a lot of traders will be reacting to. This creates massive intraday trading opportunities for short term scalps and profitable day trading positions.

In these short term instances, the political and economic landscape of the currency’s country does not hold as much weight – in other words, the macroeconomics become less important. When we look at shorter time frames, it is better to have one eye on the fundamentals while paying closer attention to the market trends, support and resistance, moving averages and other technical indicators that can help determine the future price movements.

As this course goes on, we will go into much greater detail on these topics and will discuss technical analysis in Units 3 and 4.

What is Forex?

For those of you who are complete newbies to Forex trading and are trying to learn the ropes, it can often be an overwhelming and daunting world, but it doesn’t have to be.

To put it very simply, Forex, otherwise known as foreign exchange (FX), is simply the practice of exchanging one currency for another.

Have you ever been on a trip abroad and had to swap your Dollars (USD) for Euro (EUR)? Or how about exchanging your British Pounds (GBP) for Australian Dollars (AUD)? If you answered yes, then guess what?

You’ve already had your first experience as a Forex trader, although it’s pretty likely that you didn’t make any money in this trade.

The Forex market that you are here to learn how to trade is made up of a huge decentralized trading network that allows you to trade currencies from all over the world. And when we say huge, we mean enormous.

The Forex market has a daily trading volume of just over $5 trillion USD. This is pretty staggering when you compare it with the stock exchange market that has around $250 billion USD of daily trading volume.

This makes Forex the largest and most liquid trading market in the entire world, so the opportunity to make profits are aplenty! One of the main reasons why it is so popular is due to it being open for business 24 hours a day, 5 days a week.

Don’t worry you don’t have to be glued to your screen all day. The market is closed over the weekend which gives you time to take some rest, reflect on your past trades and step away from the charts for a little while.

Who trades Forex?

Central banks are a very big player in this space as they must try to regulate and control the price fluctuations of their own currency.

The central bank’s decision making, such as their interest rate policies, can bring huge price swings and fluctuations in the market. Their main aim is to stabilize inflation and to stimulate their own economy via the Forex markets and their currencies market value.

Commercial and investment banks are also huge players in foreign exchange. They have their own trading desks where they try to capitalize on price fluctuations and they also hedge their own portfolios.

Corporations are also heavily involved in Forex markets. When they conduct business on a global scale, companies will typically import and export with countries using different currencies than their own.

This means that when they pay for goods and services they must use foreign exchange to do so.

And then there is the retail trader. Psst, that’s us!

There are many different strategies that individual investors employ when trading Forex, but the main objective is typically to gain a profit by correctly forecasting market movements and price fluctuations.

Something to bear in mind – there is a big difference between who trades Forex and who successfully trades Forex, this is particularly true for retail traders. With the aid of this course, we will hopefully be turning you into the latter.

Why trade Forex?

Forex is the biggest trading market in the world in terms of daily trading volume – and by some distance, too. Being the largest market in the world, there is almost always liquidity on a wide range of currency pairs, giving traders almost limitless opportunities to profit.

This liquidity means that you can trade with confidence, knowing that you will always be able to buy and sell your chosen currency pair with ease.

This high liquidity also means it is much harder for market prices to be manipulated and it also benefits traders with very low transaction costs.

The other reason Forex is so popular is that you can trade it 24 hours a day, 5 days a week. It’s one of the most openly available markets in the world.

This allows traders the opportunity to fit their trading around their full time or part-time jobs, unlike the stock exchange where their working hours would likely overlap.

Combining all of these factors together, it gives people the opportunity to make money from wherever they are in the world. It can help people to secure their financial freedom and gives them opportunities that they would not normally have access to.

As long as you have the drive, the will, and the determination, anybody can become successful in the Forex markets – and with the help of this course, we can take you there.

Introduction

Welcome to the starttrading.com forex mastery fast track program, designed for people of all ages and experience levels to learn how to trade forex in a fun and interactive way.

If you want to develop a deeper understanding of the forex markets and learn from industry experts how you can earn an income from trading the currency markets, then you have come to the right place. You will develop all the necessary skills and strategies you need to help you trade the forex markets consistently and successfully and learn how to create another source of income for yourself.

In this course, we will guide you through the basics, all the way to advanced understanding. So that you can finally hit the markets yourself – fully equipped with the tools you need to succeed and secure your own financial freedom.

However, it is important to keep in mind that this is not a get rich quick scheme! In fact, it is quite the opposite. In order to be a successful forex trader, you must have the right skills, but you must also have the right mindset and a whole lot of discipline.

This is not for the faint-hearted, so bring your A-game and aim for consistency if you want to make it as a forex trader. We recommend that you open up a free $2,500 practice trading account for the purpose of this course so that you can supplement the theory with some first-hand trading experience, risk-free.

Sign up for your free $2,500 practice trading account here.

You can also go to tradingview.com and open up a free account and have a play around with the interface and get familiar with the indicators we will be discussing in this course, but more on that later!

So, without further ado, let’s get to it