Building Your Knowledge Base

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Build a knowledge base; an understanding of what it is you are trading.

Why does it exist? When did it start? What does the future look like?

Understand generally what currency trading is all about and know a little

Bit about the history and evolution of the FX market.

Learn those aspects of technical and fundamental analysis that you need

To know to be a successful foreign exchange trader.

High-speed number crunching capability is a relatively new thing and as

Such many traders rely on highly mathematical technical indicators in

Arriving at their buy sell decisions. In my opinion number crunching is

Highly effective in some areas such as arbitrage but its ability to

Profitably forecast future price changes is suspect, especially when

Fundamentals are completely ignored.

Fundamentals refer to the Government itself and its policies and all the

Factors affecting the economy of a particular country and its currency.

Most technical traders pay no attention to fundamentals. The argument is

That current price reflects all available information so there is no need to

Know the fundamentals. Their argument goes further and says

Fundamentals matter for long-term trading and should be ignored for day

Trading and intra-day trading.

The evidence as I see it puts fundamentals at the heart of short-term

Trading. In fact, upon close examination you will find that most

Meaningful daily changes in currency values occur after the release of

Scheduled monthly and weekly economic numbers. At the very least, it is

Widely accepted that when an economic report is released and the number

Is much higher than the estimate or much lower than the estimate, a price

Adjustment will soon occur to reflect this new information.

In itself that makes day trading fundamentals a viable and extremely

Profitable venture. There’s more. Upon close examination you will find

That at times unexplainable relatively large price changes occur in

currencies following scheduled economic releases that are right on the

mark – exactly as expected. Why this happens no one knows for sure.

Later on we will explain why we think this happens and how you can

take advantage of it and book serious trading profits.

In order to take advantage of these opportunities, getting in early and

confidently, you need to understand the fundamentals. In addition to

knowing the fundamentals, an understanding of market expectations and

market sentiment is also required.

Simply put, market expectations are what the economist forecast the

economic number would be. When the economist are wrong in their

projection (the actual reported number is meaningfully different from

what the economist forecast) the currencies react, oftentimes

significantly. We dig deeper into the projections for clues of their likely

accuracy. For example, we believe an economist for a brokerage firm

would tend to be consistently overoptimistic. We go further, studying the

past forecasts versus actual for clues of likely accuracy or more

importantly for our trading purposes – likely inaccuracies (more on this

later).

Market sentiment is how the market feels about a particular currency in

general. For example, recently the UK had the issue of a government

official spinning the Iraq chemical weapons information; the GBP

therefore had a dark cloud over its head. Despite clearly improving

economic numbers the Pound was weak. In time the cloud passed and

now the Pound is a darling of the currency markets (more on this later).

Suffice it to say, to be a complete trader requires an understanding of

what, why, and when the market moves. Armed with this knowledge it is

much easier to initiate a position because it makes sense to you. Missing

a two hundred-point move because “it doesn’t make sense” is a

knowledge deficiency and not an option for a complete trader.

Once your foreign exchange knowledge base is in place you are a step

closer to trading but your not there yet. Next is money management. How

much you want to invest; how much of a return you’re looking for; is the

relationship between the two reasonable and doable? How much can you

risk at one time and expect to survive the bad trading periods. How you

should react to bad times – and good times. Why are you trading? What

are you really looking to get out of trading?

Work with yourself to answer all these questions truthfully. Then put

together a trading plan that works for you. Then stick to your plan; it is

vitally important (more on this later).

The online foreign exchange brokers are in business to make money. I

have been dealing with them and know many of their strengths and

weaknesses. You can benefit from my experience. Know what to expect;

how to best react to problems as they arise (more on this later).

Spend some time trading a demo account. Become an expert on the FX

platform of your choice before trading with real money.

Good luck.

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