Analyzing the forex market

Proper analysis of factors of influence is one of the keys for success in trading. Two well-known analysis techniques are the technical and the fundamental analysis. Both techniques are applied on daily basis by sophisticated investors and institutions. Both techniques have the same target: to analyze an instrument or security to decide the action to take, but they use different approaches to arrive to one decision.

1. Fundamental Analysis
Fundamental trading strategies consist of macro, micro and firm-specific strategic assessments of where a currency, share or commodity should be trading based on virtually any criteria but the price action itself.

These criteria often include the economic condition of the country that the currency represents, monetary policy, and other "fundamental" elements or firm and industry specific criteria for shares and supply and demand situation and market events for commodities.

Fundamental analysis alone is often difficult to use when dealing with currencies, shares, commodities and other products. This is because fundamental analysis does not provide for specific entry and exit points, and therefore makes it difficult to control risk. On the other hand, fundamental analysis is based on realistic and empirical information (rational data) but beeing subjected to the subjective interpretation of the investors. That's reason why a combination with technical analysis is recommended.

2. Technical Analysis
Technical Analysis is probably the most common and famous means of making trading decisions and analyzing forex, equity and commodities markets.

Technical analysis differs from fundamental analysis in that technical analysis is applied only to the price action of the market, ignoring fundamental factors. As fundamental data can often provide only a long-term or "delayed" forecast of market movements based on empirical data, technical analysis has become the primary tool with which to successfully trade shorter-term price movements, and to set stop loss and profit targets.

Technical analysis consists primarily of a variety of technical studies, each of which can be interpreted to generate buy and sell signals or to predict market direction. One of the most popular uses of technical analysis, apart from technical studies, is in deriving "support" and "resistance" levels. The concept here is that the market will tend to trade above its support levels and trade below its resistance levels. If a support or resistance level is broken, the market is then expected to follow through in that direction. These levels are determined by analyzing the chart and assessing where the market has encountered unbroken support or resistance in the past.

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AB

Controlling the risk of your Forex trading positions

Controlling risk is one of the most important factors of successful trading. While it is emotionally more appealing to focus on the upside of trading, every trader should know precisely how much he is willing to lose on each trade before cutting losses or ceasing trading and re-evaluating his strategy.

Trading financial instruments implies risks and depending on the instrument there could be also instrument-specific risks, that should be monitored or managed. Risk will essentially be controlled in three ways: 1) by exiting losing trades before losses exceed the pre-determined maximum tolerance (or "cutting losses"), 2) by limiting the "leverage" or position size you trade for a given account size, and 3) by keeping a good diversification of the structure of the investment portfolio.

1. Cutting Losses
Almost all successful trading strategies include a disciplined procedure for cutting losses. When a trader is down on a positions, many emotions often come into play, making it difficult to cut losses at the right level. The best practice is to decide where losses will be cut before a trade is even initiated. This will assure the trader of the maximum amount he can expect to lose on the trade.

The other key element of risk control is overall account risk. In other words, a trader should know before he begins his trading endeavor how much of his account he is willing to lose before ceasing trading and re-evaluating his strategy. If you open an account with $10,000, are you willing to lose all $10,000? $5,000? As with risk control on individual trades, the most important discipline is to decide on a level and stick with it.

2. Determining Position Size
Before beginning any trading program, an assessment should be made of the maximum account loss that is likely to occur over time, per position . For example, assume you have determined that your worse case loss on any trade is 30 pips. That translates into approximately $300 per $100,000 position size.

Further assume that the $100,000 position size is equal to one lot or contract. Five consecutive losing trades would result in a loss of $1,500 (5 x $300); a difficult period but not to be unexpected over the long run. For a $10,000 account trading one lot/contract, this translates into a 15% loss. Therefore, even though it may be possible to trade 5 lots/contracts or more with a $10,000 account, this analysis suggests that the resulting "drawdown" would be too great (75% or more of the account value would be wiped out).

3. Diversification
In order to reduce overall risk of an investment portfolio the diversification of the assets shall be improved. There are three strategies to reach this target: 1) spreading the portfolio among multiple investment vehicles, 2) varying the risk of securites by diversifying into different investment strategies, 3) varying securities by industry and/or geography.

special contribution of: Fibosignals.com