Trading in the Forex (foreign exchange) market is often considered more of an art than a science. However, even though Forex trading does not follow basic scientific law, like chemistry and physics, there are proven methods for predicting many of the trends in currency values on the exchange. This is because many of the fluctuations in the Forex market are often the result of actions based on basic human nature. For decades, Forex traders have been using proven scientific theories to help them accurately predict the market to increase their profits and success. The most popular theories focus on the works of Fibonacci, Elliott, and others. There is obviously not a basic scientific theory to accurately predict all actions caused by humans. If there were, every trader would know beforehand how a currency price will fall or rise in the Forex market. However, even though the theories are somewhat flawed, they can be used effectively in trading the odds in the market and are often utilized by some of the Best Trading Platforms. Generally, human beings tend to react to their emotions. Because of that, the Forex market is often subjected to lows and highs based on the panic, foolishness, or greed of the traders involved. Analyzing these abrupt changes can create a significant advantage to an experienced trader sitting on the sidelines, waiting for the opportune moment to enter or exit their trade.
At its most basic level, trading the Forex market is a game of beating the odds. Profits are generated by the loss of traders that are improperly betting the exchange. Often times, their losses are a result of a lack of knowledge in successful proven Forex trading practices. Proven methods are based on strategies that have been thoroughly analyzed, tweaked, perfected, and finally tested out in a demo account before taking it to live in real-time.
A proven strategy can only be successful when the trader sticks to the plan faithfully. Any sudden change, decision, or knee-jerk reaction based on a gut feeling, motion, or instinct can easily cause a significant loss for the trader. The best scientifically proven strategies are those that are based on logical, simple, and steady trading methods.
Fibonacci Retracements Theory
Nearly every successful trader in the Forex markets takes advantage of Fibonacci retracement methods. Properly applying this proven technical analysis method can lead to successful results, including proper entry points and profitable currency positions.
When utilizing Fibonacci retracements, it is best that they fit inaccurately in the price action by keeping reference points consistent. This means that when a trader is referencing a trend at its lowest price on the body of the candle or the close of the session, the reference point will indicate the best high price at the top of the trend or the body of the candle.
However, mistakes and improper analysis can easily happen when reference points on a chart are mixed. Drawing a line from the candlewick (at its high point) to the candle base (at its low point) is an inconsistent way of measuring, which often provides inaccurate results.
Unsuccessful traders commonly avoid the larger picture of trends. They tend to measure significant pullbacks and moves over the short term while avoiding long-term movements. By analyzing long-term trends using Fibonacci retracements, the trader can accurately detect the direction of momentum. This will provide phenomenal profitable opportunities that are impossible to see in the short-term analysis.
Fibonacci is a wonderful tool. However, retracements cannot be relied upon by themselves, without confirmation. A successful trader can take advantage of indicator and oscillator tools to confirm the trend, instead of just hoping for a positive outcome.
The Elliott Wave Theory
Ralph Nelson Elliott developed the Elliott Wave Theory over a century ago. It was his theory that many actions in nature occur in five-wave patterns. When applying the wave theory to the Forex market, many pattern indicators often involve an upward trend on waves one, three, and five separated by a downward trend at two and four. This theory has been proven effective for many traders when looking for obvious trends in the market.
In reality, actions in the Forex market, as with all things in nature, tend not to blossom in clean, neat, and simple to follow patterns. However, like most science, and nearly all art, various interpretations of what is happening should be expected. Just like using Fibonacci Retracement, utilizing the Elliott Wave requires a strategy.
Successful traders use analysis or charting software when developing an effective plan. Although waiting is difficult when wanting to trade the market, a successful trader remains patient and holds back on taking any action until indicators occur. In fact, it may take months for an experience in a single Forex market to be properly set up for an entry or exit move.
Just like Fibonacci Retracements, other tools are used with the Elliott Wave for confirmation to ensure the action is likely to be successful. These additional confirmation tools might include the “Relative Strength Index” and/or the “Commodity Channel Index.” Using the Elliott Wave with confirmation tools requires identifying an acceptable stop-loss point before entering the trade.
Fundamental Analysis and Technical Analysis
Successful traders often use fundamental analysis to gain insight into a specific country’s economic health. All countries actively exchanging their currencies in the Forex market release reports that detail and analyze nearly every aspect of their local economy. This might include the rates of inflation, employment, productivity, growth, and trade. The fundamentals of the country are often released on weekly, quarterly, and annually scheduled intervals. This data tends to create a dramatic impact on the Forex market at the moment of their release.
Fundamental analysis can be a phenomenal tool for a Forex trader. The information provides the ideal insight into how individuals will respond to the Forex exchange as soon as it is released to the public. Some profitable traders have used this tool to determine the price movement (demand) of a specific currency.
Alternatively, technical analysis tends to be used more effectively than fundamental analysis. This is because it is the trader’s belief that technical analysis is far more crucial to predicting the market.