Hello everyone! By the time you read this, I will probably be somewhere in the Caribbean enjoying the wonderful weather, beautiful beaches, and a wonderful ocean voyage, and best of all, no markets to study and analyze for two weeks! Yay! Of course, when I’m immersed in trading, I rarely give any thought to just what is this thing is we call “the market”. As traders we spend so much time immersed in it, but what is it really? For those of us new to trading, it’s more often than not this mysterious and malevolent entity that wants to take all of your money! The truth is, markets (whether be Forex equities, futures, whatever) are neither favorable nor malevolent, and it’s not out to get you, it’s just a benign system reflecting the change in the price of a commodity.
According to Investopedia, the foreign-exchange market (Forex) is the market in which participants are able to buy, sell, exchange and speculate on currencies – it’s made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail Forex brokers and investors (that’s us). It’s the biggest of the commodities markets, trading some 4 trillion daily worth of financial instruments. That’s a lot of bread! It’s a very liquid market in which retail traders such as myself can participate in 24 hours a day, five days a week. But at its core, what is it all about? By definition what is it that markets do?
Markets essentially are about two things: price discovery and equilibrium.
This is particularly true of all markets, not just the Forex market. Imagine a group of central banks who are flush with British pounds looking to downsize their holdings and simultaneously selling this asset – what you think is going to happen? Most likely, in the market, British pounds will become less scarce and therefore will command a lower price when compared to other currencies. If the same players want to increase their holdings of US dollars, what do you think is going to happen to the price of the dollar compared to other currencies? Yes, it’s going to go up. 90 this is economics 101, no rocket science here, but it does act as the driving force behind what we deal with every day is retail Forex traders – the idea of equilibrium. Now we’ve seen what happens in the market on certain days of the month, such as FOMC news release and nonfarm payroll announcements – very often we get a price spike in the market. People who are fond of trading the “news” thrive on these moves, but I like to pay attention to what happens later. Just as with gravity, what goes up must come down (and conversely what goes down must go up) as the market tends to correct back to its previous price track before the news event. This is what equilibrium is all about. I’ll say it again, what goes up must come down. This is an important idea. I’m not a really big fan of trading the news. I do it sometimes but not often and usually more modest news events, such as high-impact news for Australian dollar, but typically, I wait for what happens after the news event. That is, a correction of the market, a retracement which drives price closer to where it was before the news event. That’s what equilibrium is all about. Spikes caused by news events tend to overvalue/undervalue the underlying asset, and one thing that markets are very good at is making a correction in the price of an asset. This is the sort of thing that retail traders such as ourselves should pay strong attention to, as it’s an easy market price direction to forecast. Yes I know, rule number one is “the market will do whatever it wants to do”. This is true, yet the majority of the time you can catch a nice retracement after a major spike in price action.
One of my favorite methods of entering a retracement trade is to wait for the volatility to settle down a bit, and place a pending order behind the vector of the price movement (below a bullish move or above a bearish one). If the market price action continues in its original vector, I can move my pending order up, endeavoring to get a better entry when a reversal occurs. Something I like to use in conjunction with this style of trading is the Slick Trade “trailing stop” expert advisor, which makes managing the trade easy as pie. All I need to do is have the expert advisor running on the chart, set my pending order with an initial trailing stop, and the expert advisor does the rest. I love it! It’s just another benefit of Sapphire membership in Slick Trade. So if you have been thinking about it, why not sign up and give it a try? A great opportunity to learn Forex while getting some hands-on experience with trading, receiving trade signals, accessing expert advisors, great strategies, help and insight from other traders just like you and more! So what are you waiting for? Sign up today!
Due to my holiday schedule, this was a short one part installment. Next time I will return to the usual two-part format when I share with you some thoughts on one of my very favorite indicators and how it can be used by beginners to handily understand and forecast what’s going on in the Forex market. Until then good luck in the room, and, as always, thanks for reading! JC