How to Perfect Your Flow Of Forex Information
The world of forex is a very broad, complex place. There are numerous strategies, currency pairs, and analysts out there for the forex trader to wade through. The amount of information available can be intimidating, making it very difficult for a trader to separate what is actually beneficial to their trading. The individual's style of trading largely dictates the importance of different pieces of information. A forex scalper is going to place a higher value on immediate circumstances than a trader who functions off of daily or 4 hour charts.
The quote by Mitchell Kapor is pretty spot on. Getting forex information can be much the same.
The best way to find out what is best for you and your trading approach is to analyse the components over a fair amount of time.
Select Your Currency Pairs
Selecting what pairs to trade is an important decision. Each currency pair has its own nuances, requiring time and experience to really understand. No amount of book learning can make up for actual screen time with a currency pair, particularly if fundamental analysis plays a major role in your trading decisions.
The most commonly traded pair is the EURUSD, comprising an estimated 70-80% of all forex trades. The EURUSD is a popular pair to scalp because of its low pip spread and volatile nature. It is also a popular long-term pair because it ties into two such large economies that are not as questionable as some others. China has a major economy but there are many allegations of value manipulation. The Chinese Renminbi can be a good choice for traders that feel comfortable in their fundamental analysis of China's government.
Any of the Majors or Commodity Dollars are a solid choice for a narrow approach. There is a lot of available news on the United States and its economic events, making it easy to find information to base long-term decisions on.
A trader that wants to trade many pairs needs to be wary of overlap. There are many pairs that are correlative or inversely correlative. The EURUSD and USDCHF are an example of inversely correlative pairs. Quite often, a movement and signal that appears on the EURUSD will appear in opposite on the USDCHF; meaning, if you flip the USDCHF over, it will closely match the EURUSD.
Identifying the relationships of the pairs you choose to trade is highly important, otherwise you may be doubling your risk without a reasonable chance of gain. There is no reason to go long on EURUSD and short on USDCHF if the market presents the opportunity. It is far better to take the trade that has the clearer signal. Placing a long trade on both pairs is effectively hedging against yourself.
There is great benefit to be found in specializing in trading a handful of pairs. It is far easier to learn the economies and government policies of a few countries to assist in your decision-making. A broad choice may be better if your approach is more technical than fundamental. Price Action traders are largely technical traders with a strategy that can be applied to any pair.
An intermediate trader may still be working to build the profitability of the trading strategy they picked up on, or developed, themselves. Any trading strategy is only as good as the money management practices of the trader.
There are several strategies where the trader can have a negative win percentage but be profitable thanks to sound money management. The return boils down to having a solid plan of action on how much to risk, what kind of return to aim for, and effective implementation of the strategy.
All too often, traders take a viable strategy and reduce its effectiveness by adding in excessive, unnecessary criteria. The scope of the strategy gets too wide and begins to incorporate elements that are not relevant to the core concepts that make the strategy work.
This is a huge problem with the deluge of forex information available on the internet. It's easy to convince yourself that your strategy is not sound, particularly if you start asking people in forex communities for insight. There are many ways to trade forex; and they are as individual as the people that participate.
That is why it is so important to stay as true to the strategy as possible. Many of the things you read about forex trading will not be applicable to your particular strategy. It is better to narrow your focus, work on your knowledge of the components that make your strategy work, and test it for at least a few months.
It is worthwhile to find a community of traders that use the same or similar strategy to the one you want to employ. That provides additional minds and experience you can tap to help weed out the ineffective methodology in your trading.
You can visit just about any finance website and find analysis from their professionals. Economics is a difficult field in general. Ideas and analysis can follow certain predictive behaviours, but it's not uncommon for those behaviours to be bucked by random circumstances in the world. Investor fear can cause price movements that have no relevant basis other than the fact that X news story prompted said investors to take a particular action.
No matter how sound the technical or fundamental analysis, human nature can have a significant effect on market movements. That is not to infer that analysis does not have its place and use. It is another component of forex trading that should only be as wide as it needs to be.
Is it useful to listen to five different analysts? Not really. If you dig hard enough, you can find analysts who are claiming potential bullish and bearish movements for the same currency in the same time frames. More is not necessarily better. More is a greater opportunity for confusion and mixed signals.
If you can, find an analyst or two who look at the market in a way that makes sense for your strategy. Fundamental trader? Look for analysts that primarily look at fundamental factors. Heavy on technical analysis? There are analysts that take that route too.
The idea is to hone your own skill-set instead of needing an analyst to interpret what is presenting itself on the charts. Do your analysis first and then look at what the professional is saying about an important announcement or movement. That gives you the opportunity to add more tools to your own toolbox.
That brings us to an important question, "how do I know that this analyst knows what they're talking about? Isn't it better to compare?" The only way you can really tell is by looking at their long-term record. As for comparison; you can never really know without long-term monitoring either. Two can be saying "probably Bullish", two can be saying "probably Bearish". There's no way to tell who will be right, furthermore, most will not come right out and say "this is what is going to happen". Loose language is used because you can never truly know with 100% certainty.
Anyone that does claim to know with 100% certainty is a time traveller, a fool, or a liar.