When buying stocks and bonds, the goal is to profit from dividend and interest income and appreciation in value. The goal in the forex market, where we buy and sell currencies which are traded in pairs, is to try to profit from the appreciation or depreciation of one currency versus the other. Knowing when to buy or sell a currency may appear daunting for those unfamiliar with the forex market but there are some basic guidelines forex traders use to spot trading opportunities.
The majority of traders use fundamental or technical analysis or a combination of the two to spot a trading opportunity. Fundamental analysis consists of global events, political developments, economic data and central bank monetary policy. The technical part is about forecasting based on market price action. It uses many methods to interpret the patterns in the charts and to identify market direction.
An economic calendar is usually at the beginning of fundamental analysis. Currency markets tend to make price moves in reaction to economic reports as they are the main barometer of a country’s economic health.Forex trading platforms like easy-forex provide economic calendars which include regularly scheduled economic releases from all the major developed economies and help to determine the importance of these economic reports and potential impact on the currency markets. Currency price moves can be easily affected by political instabilities and changes in central bank monetary policies, which are looked at be fundamental analysis.
For the past four years, price movement in most financial markets including stocks, bonds and currencies, have been greatly influenced by risk sentiment. When risk aversion rises, traders may liquidate positions in riskier assets and shift funds to less risky assets, seeking safe haven in currencies like the US dollar (USD), Swiss franc (CHF), Japanese yen (JPY) and gold. The downgrade of the US debt rating and the EU crisis helped propel gold to a record high last year.
On the other hand, when risk aversion collapses, there will be more demand for riskier assets and higher yielding currencies like the Canadian, Australian and Kiwi dollars. Keeping track of economic and global news that contribute to risk sentiment is one of the best ways to start determining whether to buy or sell a currency.
A recent example of this type of dynamic is the euro currency selling at a 16 month low versus the USD in reaction to concern about the EU debt crisis. Economic and regional news that shows escalation in the EU debt crisis may spark additional selling pressure of the euro. Positive news that dampens fears about the crisis may encourage buying of the currency.
Technical analysis usually starts with identification of chart patterns. There are many tools that are used to interpret chart patterns. Currency trading platforms like easy-forex provide free chart packages that can help spot technical buy and sell opportunities based on market price action.
Forex markets often move in identifiable long-term trends. Despite what many would consider negative economic fundamentals in Japan that include weak growth, low interest rates and a rising budget deficit, the JPY has been in a strong uptrend against the USD rising to an 11 year high in 2011. JPY is supported by safe haven demand and risk aversion. Technical analysis can be used to spot a trading opportunity and help gauge if the trend for the USD/JPY will continue.
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