As part of an educational series on Forex trading TheLFB-Forex.com Trade Team reguarly post information that tries to engage retail traders in defining what really makes the market, and forex traders tick.
Forex traders are blessed with a market that has specific drivers, a handful of pairs to chose from, and is a market of necessity, not greed. Forex is the oil that allows the cogs of global trade to turn, and therefore when the main drivers of Forex valuations change, (interest rates, business cycles, economic growth, and commodity values), the US$ value changes to suit. It is a fairly easy market to read, but still many chose to look so hard at charts and cross-over's on a minute by minute basis that they miss a very simple fact; forex Trade Desks are using currencies as way to hedge equity and commodity positions, and as a way to hedge forward interest rate commitments TheLFB-Forex.com Trade Team said.
Trade desks are mainly reactive to forex drivers, and it takes a lot to easily break and hold new forex ground without a main driver having changed. The noise on a 5 minute chart is not a trend, it is the general search for an area of fair value that suits both buyers and sellers of a currency pair on any given day.
Yes, the news reflected in the charts, eventually, but do not look too hard on too low a time-frame at the tiniest of detail; this is a market that runs on need, not greed. Always keep an eye on that 4 Hour trend, and try to keep one ear out for where the dollar index and equity markets are headed. Keeping an eye on the big-picture chart and a fundamental dollar direction from equity market trade is hard when leveraged at 100:1, the need to jump in for some is unbearable, their 'fear of loss of potential gain' overwhelms them. The really hard part for most is controlling leverage and keeping available margin in check so that those small time-frame moves do not whipsaw the best laid plans when they jump in too soon following too low a time-frame signal that is against the 4 hour trend.
The hard part however is not in being able to read the markets or the charts, it is controlling expectancy and controlling risk, the Trade Team say. The easy part is noticing on a given day, for example, that global equities are lost, that U.S. Futures numbers are in the red, and then understanding that equates to a positive Usd against the high yielding currencies and a negative Usd/Jpy. That in turn equates to the other Yen cross pairs going lower, but those lower moves being contained by each major currency's moves against the Usd themselves. (Usd/Jpy x Eur/Usd = Eur/Jpy % value). Having the information is great, knowing the likely impact of it is not that hard, but containing enthusiasm to jump-in is tough for most retail traders.
The intra-day swings and cycles, and those 0.0001c moves that equate to one dollar get too much of most trader's attention. Make sure to contain any risk to between 1% of the account balance at any one time, and make sure that you have a plan. All-in-all expect to see some flat days that whipsaw it tight ranges, or side-wind into nothing as Wall Street meanders through its day. Professional traders have a plan, do not over-leverage their account, look at the daily and 4 hour charts for market direction, accept failure as a part of the work at hand, understand the drivers of the dollar pairs, and do not jump in because of the fear of loss.
Trade the 4 hour trend, and look to the 5 minute chart only for near-term entry signals in the direction of the bigger chart momentum. Do not be a jumper-inner.