Forex traders must design a decision-making system based on a series of factors that have proven to work over any given period. Since technology had facilitated the collection of data as well as processing it easily, there’s enough knowledge to find trading methods effective in the FX market. The list could be endless but a short classification should be focused on four different critical aspects.
Traders wanting to develop a trading career should pay close attention to these factors, given their proven effectiveness and influence on the overall trading performance.
1. Technical factors
The forex market is mainly flow driven, which means market participants are buying and selling based on the past performance of the price. Professional traders know how to analyze the price action and to do that, they rely on technical analysis. Whether it is for day trading, swing trading, or any other approach, technical analysis is very important simply because both institutions and retail traders use it. Support/resistance levels, indicators like moving indicators, oscillators, Fibonacci levels, or customized indicators, all have the goal of generating trading signals.
In combination with the technical analysis, a professional forex trader should pay attention to fundamental factors. GDP change, inflation figures, unemployment, industrial activity, manufacturing, and others will influence the currency market when they’ll fluctuate by a wide margin. It’s important to note that the market will move only when the actual figures will be far from the forecast. That happens because the market had not yet priced in the economic release. At the same time, those involved in forex trading should always be patient until the economic figures are released, see how the market digests them, and only then look for trading opportunities.
3. Market sentiment
Mixing technical analysis + fundamentals will help traders have a broad image over the market sentiment. There could be many ways to categorize this aspect. Markets could be bullish, bearish, ranging, risk-on, risk-off. Managing to spot the kind of environment at any given point will be a key element to determine the right trading direction (buy or sell). To increase effectiveness, traders should find opportunities in the dominant market direction, and only by understanding the sentiment, this will be an easier task.
4. Monetary policy
Although some might argue this is part of the fundamental analysis, monetary policy should be discussed separately, given the unprecedented conditions in 2020. Central banks all around the world had never been so aggressive with their monetary policy tools, which in turn influences the FX market. After several years of low volatility, currencies had been brought to life by the coronavirus pandemic, which means central banks will continue to flood markets with liquidity. Understanding monetary policy is key for effective trading. There’s no need for a finance degree since the web is full of information about how the banking system work, what influence does any monetary policy has, and many other relevant topics. As long as the monetary policy will be the “only game in town for markets”, there no point in avoiding this crucial market-moving factor.
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