Currency pairs are simple to trade but don’t make the mistake of thinking that they are easy to make money with. There are many websites that tell you differently. They make you think that you just have to sign up for an account, start trading and …voila, become a successful trader. Well, life is not that easy.
Like in many other areas, you need a solid knowledge before you get started. Hopefully you’ll get some of it here in this guide. Be aware, though, that just reading this guide will not automatically make you an instant millionaire. You’ll learn some facts and strategies about Forex trading, but in order to make the most out of this guide and become the trader you want to be, you’ll have to adapt the ideas that you’re about to learn to what you already know.
For starters you need to learn how to read the charts. Charts are your main weapon in winning the Forex wars – …well, maybe I’m a bit melodramatic here. But seriously, charts are a vital resource for a serious FX trader, actually any valid strategy involves reading and analyzing charts.
Basically, the charts allow you to predict the future course of a currency by finding patterns in its past price movements, and after all this what we need to win a Forex trade.
Don’t be intimidated by the charts, actually they are not that hard to read and understand. Strategies that are based on reading and analyzing charts are part of the technical analysis area.
Technical analysis follows a straightforward set of rules freely available on scores of websites. Happily, the simplest rules in charting tend to be the most reliable. In a later chapter we will go over several strategies that you can apply in your trades.
The most basic form of technical analysis would be to look for support and resistance levels that markets have struggled to break through in the past. Charts in this way works best in moderately volatile markets. Technical analysis is also useful in identifying trends.
Another simple way of using charts is to look at moving averages, such as the average price over 10 days. The idea is that this gives you a better representation of what the price is doing over a longer period of time.
Another simple pattern is based on the so-called relative strength index (RSI). This highlights situations where a market is overbought or oversold and warns of a potential reversal in the trend. The RSI is the total points gained on up days, divided by the total points lost and gained, multiplied by 100.