To succeed at forex trading you need to understand greed and fear and why it makes most traders lose. Learn to sell greed and buy fear and you can catch some great high return, low risk trades - while the majority lose.
First let's start with a simple equation which in forex trading gives us price
Fundamentals + Investor Psychology = Price
Let's look at this simple equation in more detail
In forex trading prices move in line with the long term fundamentals over time - that's why you see currencies trend for months or years, as they ultimately reflect the underlying health of the economy.
You can't trade these though in isolation.
Because humans ultimately determine the price of anything and decide the price and they don't act logically, their dominated by their emotions. In bull markets when greed dominates, they push prices too far to the upside. Conversely, when prices are falling fear, means that prices get pushed to far to the downside.
When a market has been pushed to far up or down by these emotions, the price eventually recoils beck to be in line with the longer term fundamentals.
Most markets collapse when they are most bullish and rally when their most bearish - this is a reaction to traders pushing prices too far.
These price spikes are easy to see on a forex chart.
Short term price spikes never last long and if you learn to trade them, you can make money from other trader's greed and fear.
It's not enough to spot a market ruled by greed and fear and sell or buy IT - you need to find out when the turning point is coming, this is the hard part!
The key here is to look at price momentum and support and resistance.
Firstly, watch for prices to form a top or bottom in some shape or form, then watch momentum oscillators to time your entry.
If you are unfamiliar with using momentum, you need to make it an essential part of your forex education.
Three good oscilators to start with are:
The stochastic, the average directional movement and relative strength index.
All of these gauge the momentum of price when they wane at important resistance or support levels from over-bought readings a turning point is near.
The trick is to wait for CONFIRMATION.
Don't guess a top or bottom, wait for resistance or support to form and a change in price momentum and then its time to execute your trading signal.
The beauty of looking at a forex chart is that it takes into advantage the fundamentals (it simply assumes that in today's world of instant communications they show up in price action instantly) - but more importantly it shows you the reality of how investors perceive the price. You therefore see:
The truth - the price as it is and act on the reality.
No hoping guessing or listening to opinions - you see the facts and can take advantage of them, to buy or sell, with great odds and profit potential.
Many traders like to listen to the news or opinions - but if you do you will join the losing majority.
Forex charts will keep you detached and focused on the reality of price so you can take a step back and see things clearly with no emotions involved.
This may sound simple and it is.
You just need to keep your emotions out of your trading and watch price action - if you learn to do this and stand alone you will win.
At turning points, the more traders who disagree with you the better - only the minority of traders (who make the big profits catch them) so you're in good company. If you want to win big at forex trading learn to stand alone - buy fear and sell greed and you can pile up some huge profits.
Source by Kelly Price