News and Fundamental Analysis
When it comes to trading, whether it be Forex, Stocks or Daffodils, most traders have a plan that they base their own particular trading method on. With Forex trading, the majority of small retail traders like you and I, would probably use some sort of technical analysis, which is basically trading off the charts, using whatever indicators, patterns or set ups you choose. Or you may even just wing it and trade without anything on the charts. Still a method for some I guess.
Then there are traders that will ignore the charts and trade off and around major news releases, which is basically the fundamental side of trading. I have already touched on this above, but I’ll go over it again. There are traders that use this as their sole method of trading the forex market. Here we are trading based on a theory on how you think the market will react to a particular news item like an Interest Rate cut or something similar. Or you may have some long term thoughts on the Japanese economy where you may decide to buy or sell the yen against another currency. There is some sort of news released every day that will affect some currency in some way. The trick is to work out which way the news will affect the currencies you are trading.
The problem with the news releases is that although they are just about all set at a certain time, if you are not aware of them, they can catch you out. For example, the biggest news release is the Non-Farm Employment Change (use to be called NFP) figure which is released at 8.30am New York time on the first Friday of every month.
Depending on the numbers that come out, this baby can move the market 100+ pips in a heartbeat, and if you are on the wrong side of it, lookout! Within 2 minutes, the market may have moved 200+ pips. It does happen! Imagine how you would feel if you just left the room to go to the bathroom without a stop in place, only to return 2 minutes later to find your trade so far in the red, you feel sick. Having said that, it could have also gone in your favour, but do you want to take that chance?
What is my point here? Be aware of the NEWS!
Now the good news is that there are plenty of free news calendars available on the internet, but the one I use can be found at Forex Factory. It is very simple to use as you can modify it to suit your own requirements. For example if you only traded the EUR/USD and you were only concerned about news that had a medium or high impact on those currencies only, then you can set up the filter to show these news events only.
At the beginning of my trading day, I will open this site first and check for news releases that may affect the pairs I am trading. I will write these down in my journal, and if it is something big, I’ll normally set an alarm to warn me about 10 minutes prior. This will then put me in a position to either tighten up stops on open trades, close them or not enter a trade until the news release has past. It is crucial that you are aware of these news releases, especially if you are a short term trader, and make sure you have a plan in place if you are trading through them.
What is Technical Analysis?
I’ve covered Fundamental Trading (news events), so now it is time to get into the other common way of trading, and that is called Technical Analysis. Most of this trading is done off the charts, hence the expression ‘chartists’ or ‘technical analysis’ etc. This is the way I trade, and it is the way a lot of others trade also.
Earlier I discussed how most Forex brokers offer a charting package with their platform, and how the live data was free. This is good as it keeps costs down. Some of these platforms have excellent charts, like the MT4 platform, Ninja Trader or VT. This is where the Jireh Capital FX Trade platform is a bit of a letdown as their charting capabilities just don’t compare. Having said that, you can still trade off the Jireh Capital charts no problems at all; they just haven’t got all the bells and whistles.
With technical trading, you can be as simple or complex as you like. I am not going to go into all the various indicators, fibs, pivots, breakouts, trend lines etc. There are literally thousands of ways to trade and the Forex Trading forums are swamped by them. So you can do your own research here and find something that suits you.
The standard MT4 platform automatically comes with a large basket of various popular indicators that can easily be loaded onto any chart with the settings you choose and this is more than enough to get started. You can also add custom indicators to the platform. This is a very simple process and there are thousands of these custom indicators freely available online. Jump in the trading forums or Google it. If you need to know how to load these indicators on to MT4, that’s where YouTube is a great help. The resources available online these days are incredible, but if you are having problems, you can always contact me.
Time frames & how it affects your analysis
I will discuss time frames. As we already know, the Forex market runs 24hrs a day during the week, so there is plenty of opportunity to trade. Remember the previous discussion on the different sessions also, which helps with regards to identify when the action is more likely to occur.
On the trading platforms, most brokers offer 1 minute, 5 minute, 15 minute, 30 minute, 60 minute, 4 hour, daily, weekly and monthly charts. That’s the majority of them. Some also offer tick, 10 minute, 2 hour and 3 hour charts. Remember all this data is live and it’s free.
Everyone wants to be a Day Trader! Myself included. I think it is just a romantic notion that is built into the human make up. It is especially cool if someone asks you what you do for a living, and you reply “I’m a Day Trader”. It sounds impressive. I wish it was that easy though. Because the charts and the data are so good, you are always tempted to keep on shortening the time frame, where eventually you will be trying to scalp off the 1 minute charts. This all sounds good in theory, but it is very difficult to do.
Look, I’m not saying it can’t be done as I am sure there are a few successful scalpers out there. Not many I would imagine, but enough to show that it is possible. I have tried all time frames, and even though I have probably had most success on the longer time frames like 4 hours and above, I am still a Day Trader at heart.
Should you be a day trader or long term trader?
Again, this is a decision you have to make, whether you want to be in a trade for days or minutes. Trading the longer time frames will obviously give you less trades, but more than likely larger profits, and spend more time monitoring than actually trading. Trading off the shorter time frames will give you more action, more spreads to make up and more than likely smaller profits. Then you would have considerations like stop size. Trading on a Daily chart may require you to have a stop 120 pips away from your entry price, and when you consider the 2% risk rule, you would end up with a much smaller position size. Now, if you were trading off the 5 minute chart and had a 15 pip stop, and using the same 2% risk, you can see that your position size would be much larger. The trade of being the possible potential profit as I’d expect to drag a lot more pips from a Daily chart trade than a 5 minute chart trade. Bit of a catch 22 here.
Then you have to decide which pair or pairs you want to trade. If you are trading multiple pairs on the larger time frames, it is quite easy to do so. This may also help with giving you more action, if that is what you are after. But trading multiple pairs on the smaller time frames can be a little stressful and sometimes difficult to keep control of when things start moving quickly. It also plays with your mind a little, especially if you have a losing trade on one pair and try to make up for it on another pair, which may cause you to ignore your normal exit rules. I think they call this revenge trading.
If you are going to trade off the smaller timeframes, may I strongly suggest you concentrate on one pair to start? This just makes life a lot easier and you can put all of your efforts and concentration into this one pair.
My bread and butter set up, is the EUR/USD on the 5 minute chart, with a 60 minute chart next to it, just to give me an idea of the general trend. I have a couple of basic indicators on both charts. I chose the EUR/USD for a couple of reasons. One it has the lowest spread on Jireh Capital, dropping down as low as 0.5 pip during normal trading times, and two, it is by far the most popular currency pair traded. I think it accounts for close to 70% of total Forex volume. Don’t quote me on that though! I have a target amount of pips for the day and then I am done. I close down my charts and do other stuff. I sleep better when I have no trades on.
The above is what I do, and what works for me. It may not work for you and I’m certainly not trying to convince anyone to follow my path. If you have had experience at trading anything, you will know that there are thousands of different ways to trade, and Forex is no different.