Forex Basics: When To Open A Position Part Ii

FOREX BASICS: When to open a position part II

Going with the flow of the market

The most basic idea in the financial markets is still to buy low and sell high. In order to be a successful trader you have to get a feel for the market, opening AND closing a position at the right moment. You don't have to be able to pick tops and bottoms, somewhere in the middle will do just fine. What this in essence means is you have to go with the flow of the market.

This might seem easier than it is, because you're not standing at a square filled with people where you can see how many people are buying because they've all raised their hands. Rather, like you, hundreds of thousands of traders are behind their computers at home or at their office, placing orders without you seeing what they are. But you're not totally blind either, because everybody (at least everybody that's trying to make money instead of loosing it) has access to the same information you have.

Your job is to take positions based on how you think others will interpret the available information. The goal is to side with the winners, in other words the biggest group, because often they decide what direction the price will take (of course some people are more important than others, because they have more money, but we'll get back to that later on). If everybody is buying Euros and selling dollars, the price of the EUR/USD will go up, and vice versa. There is no room for criticism because the market is always right, even when it shouldn't have. So never be that person that screams at his computer because the market should have done this or that, because the market does what it does and that's the end of it. If your position gets closed on you it's nobodies 'fault', except maybe your own.



Fundamental analysis & Technical analysis

In general there are two major 'schools' when it comes to trying to predict the movements of the markets: that of fundamental analysis and of technical analysis.

Fundamental analysis
This is both the study of the global economy and the interpretation of important events in economies, politics and the international arena. It's not only about the news, but also about the underlying values of a currency. How healthy is the currency's economy? What is it's level of competitiveness compared to the economies of other countries? What is the unemployment rate, the GDP (Gross Domestic Product) growth? What kind of economy is it? Service orientated, manufacturing orientated, and/or does it have a lot of commodities, etc.

The point is you can use fundamental analysis both for the (very) long term -thus looking at how a currency should do compared to another, as well as for the (very) short term, following important economic news about a currency's economy. A lot of short term traders actually trade on the economic news that's coming out daily. You can read more about that trading strategy in our forums.

Later on we'll go deeper into the art of fundamental analysis, talking about a number of important economic events and how to interpret them.

Technical analysis
This is nowadays viewed as the most prominent of the two methods, although everybody also agrees that successful traders generally mix the two in determining their strategy.

Technical analysis doesn't concern itself with actual events, it just looks at the history of the prices, searching for clues as to what those prices might do next.

Factors like Open, High, Low, Close of a particular price are readily available in the open market that forex is, and they can be very easily charted.
The magic word is 'Trend'. What is the trend? Where are we going? What is the pattern? Is it a reversal pattern with double top, is there a double bottom, a head-and-shoulders top perhaps? Or maybe a continuation pattern with a flag, or a symmetrical triangle? This is not the place to go deeper into these magical terms (the aim of this article is to get to know, not to marry and have babies), but suffice it to say that it's important to have some knowledge of what technical analysis is all about. This is not just because it might help you pick your own trades, but it also gives you information about when other traders might step in or out.

Technical analysis seems very difficult and esoteric at first, but a lot of it actually is fairly logical and easy to grasp. The story of one trader is that before he opened a position he always printed out a chart with the prices over a past period of time of the stock he was considering. He then put that print out up on the wall and stepped back. If he could see a rising pattern on the chart from the other end of the room, he'd buy it. Yes, that too is technical analysis. :)



TIP: Don't get in bed exclusively with either school. Check both the actual events as well as candlestick charts and some technical indicators (that we will talk about later on), so you get the best from both worlds.