How Foreign Exchange Rates Can Change To Your Benefit

Before you start trading foreign exchange rates, spend as much time as you can studying technical analysis. Technical analysis is the art of translating pricing patterns into meaningful lines, bands and channels that can help you see where a profit might pop up and tell you where to enter (and exit) a trade. The most popular technical tools are moving averages, particularly 10-period and 20-period configurations. Simple averages are not that time sensitive; smoothed averages are more so; and, exponential averages are the most. For analysing trends longer than 1 hour, simple or smoothed averages will do. For shorter time frames – such as the kind that “day traders” use – you need to deploy exponential averages.
Finding a trend isn’t that hard to do, particularly if you deploy a “Zig Zag” indictor on a monthly or weekly chart first. Then, check the volatility inherent in any trend by placing a pair of “Bollinger Bands® “ or “Keltner Channels” or “Donchian Channels” on a daily or 4-hour chart.

Going Long or Short Means You Can Profit From Foreign Exchange Rates

One of the biggest mistakes that newbies make is not correctly identifying long-term currency pair trends before trading. Always check the monthly and weekly chart of any currency pair – before you trade. Use a Zig Zag indicator. It’s great for seeing reality clearly (and can work, reasonably accurately, all the way down to the 4-hour chart level). Some traders also use Bollinger Bands®, Keltner Channels or Donchian Channels to see ongoing trends. Of the 3, a Keltner Channel indicator may be the most useful, as its math formula is extremely sensitive to volatility patterns and it does not “lag” as much as the other two. A “Know Sure Thing” indicator, for confirming any trade signal, is a powerful tool.

Foreign Exchange Rates Markets Can Increase In Value

When a very positive economic event occurs or a significant change in central bank monetary policy increases interest rates, the price of a currency pair can increase dramatically. For instance, if you look at the monthly chart of the AUD/USD, you can see that, starting in 2001and ending in 2011, the pair doubled in value. This was due – in part – to a giant Chinese industrial vacuum cleaner sucking up Australia’s natural resources at unprecedented rates (and prices). Small wonder, then, that the nation’s interest rates went 3% (in 2001) to almost 5% (in 2011), providing a wonderful “carry trade” for many an international investor. Could it happen again? Yes – around 2020 – when Australia becomes the world’s largest LNG exporter.

Foreign Exchange Rates Markets Can Decrease In Value

Events can also go against currencies, as the last 5 years of EUR/USD history sadly indicate. One would think that a currency drop from EUR/USD 1.6000 to EUR/USD 1.2000 would inspire a surge of export activity. However, with the possible exception of Germany, that doesn’t appear to be the case. In fact, the last 5 years have been rather horrible. According to EuroStat, GDP (“Gross Domestic Product”) for all 28 countries in the European Union in 2007 was 3.2% per annum, but by the end of 2012, it had decelerated down to a rate of -0.4% per annum. Viewed in this light, one cannot help but wonder if the European Central Bank’s monetary policies, of late, are not somewhat misguided.

 

 

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