In forex trading, as far as predicting price goes, nothing is a certainty and anyone claiming otherwise has never traded the markets or is selling a pot of gold at the end of a rainbow.
Predicting price direction is based on probabilities. Either the price has a higher probability of going in your favor or it does not.
Identifying the areas on a chart that offer the highest probability for a successful trade is the skill. From a technical perspective, start with what is happening NOW, what is the current trading environment?
Look at the higher time frames first to establish the trading environment on monthly, weekly and daily charts. What is the big picture?
Following this and based on your trading style (intraday, swing or position) move to lower timeframes to identify entries (intraday (30 min/hourly), swing (4 hourly, daily), position (daily, weekly).
Let us look at each one in detail:
A. Trend Trading
Entries for trend trades can be Breakouts (above or below key price levels) or price Pull Backs in the direction of the overall trend. A typical trend trader tends to look for much bigger moves over days, weeks, or months. Big trend happens only about 20% of the time but when they do it can mean big rewards if you can deal with the false breakouts of key levels and trend pullbacks that turn into temporary or permanent reversals.
Targeting a shorter-term trend (a swing) in the direction of the overall trend is a common approach used by many traders.
B. Mean Reversion Trading
Identifying the average price of an instrument and buying or selling when price moves or indicates it is moving back towards this average is called mean reversion trading or range trading. Ranges can vary in size and last from minutes to months. This is the nature of the market.
C. Reversal Trading (Counter Trend)
Picking the end of a trend (selling a top (on an uptrend) or buying a bottom (on a down trend) is an approach that is used by a lower percentage of traders. It is a tricky game identifying these tops and bottom and not for the faint hearted. Many professionals adapt their approach to the constant changing market environment that they are faced with.
Mastering one approach and only waiting for those conditions to present themselves is wise thing to do if you are just starting out. As you gain experience, knowledge, and confidence you can start to adapt to the market and introduce innovative approaches.
Making sense of price movements is key. Learning how price reacts to support/resistance zones, round numbers, Fibonacci levels, trend lines, moving averages and candlestick formations is a start. Add to this an understanding of the impact of economic releases, correlations, individual currency analysis and market sentiment and you are starting to think like a pro. Alternatively, you could ignore these factors and focus purely on technical analysis.
There is no right or wrong approach to trading or specific tools that will guarantee consistent profits. Remember, it’s a game of probabilities, so give yourself the best shot by following a process that puts the odds in your favor.
Top 3 trading tips
Learn (and understand) the tools of the trade
To become good at any discipline you must understand the tools of the trade. Likewise, with trading, you must nail the basics of charts, graphs and using trading platforms such as MT4. Whether it’s currencies, stock markets, or commodities (I.e oil or gold) understanding data and technical analysis is paramount to becoming a good trader. Download several trading platforms and tools to test. Since you are a beginner, you won’t have a well-developed trading style yet.
Being able to recognize a trending market what tools work best within a specific market is key to your trading success.
Once you understand what technical analysis is, you’ll soon find that anyone can learn how to use it in the right direction, education and support.
Choose a trading style that suits your needs
Unless you’re with an investment firm or financial broker, it could be daunting to enter the stock market if you have a full-time job. Fortunately, you can find a trading style that suits your needs.
If you don’t have enough time during the day you can conduct a “swing trading” style; reviewing charts and data during the evenings to identify trades and leave them open for a few days. To make the most of this style you should aim to perform 3-5 trades a week.
A second style called, “day trading”, requires a lot more time and research as you would be opening and closing trades on the same day. If you have some time in the mornings (before 8:00 am GMT) you could potentially conduct trading too.
These styles are more suited to those who are beginners and are yet to make the shift to full-time trading. Once you become familiar with trading and realize the huge potential to become profitable, you could become a “day trader”.
Day trading requires your time and isn’t ideal for those with limited time to spare. The process requires a trader to track the markets and spot opportunities throughout trading hours. It’s also important to note that day trading is a job and requires you to be diligent, focused and objective.
Understand how economic and political news affects markets
Whether it’s an impending hurricane set to hit wheatfields or a medical breakthrough, keeping up to date with world events will give you a critical edge in making trades. Major economic news in the USA such as high employment figures due to the ongoing pandemic will see the dollar plunge. Similarly, if workers are forced to work from home, industries such as eCommerce and office communication apps (Read: Zoom Inc), will provide opportunities for shrewd investors.
If you plan to trade currencies, understanding a specific country’s political and economical situation will give you the best information you need to make informed trades.
When used in conjunction with technical analysis, you will move from beginner to pro in no time.