Analyzing - FX Market

Written by JS T. Alexander | 25 September 2009

To have a better understanding of the Foreign Exchange Market, an investor or trader does not only have to know the basics learned from the trading courses offered by broker-dealers or from the demo accounts and subsequently graduate to the actual live accounts to use the different techniques of trading strategy; but be able to have a comprehensive knowledge of how the FX market works as a whole into one conclusive market analysis.

As some would summarize it into analyzing the FX market either in a fundamental perspective or on a technical angle. However, the law of supply and demand, the principles of cause and effect, the process of elimination and deduction, the business and financial cycle that affects these exchange rates are just but a few to be considered on the fundamental factors affecting the prices is a ' must know ', if one would engage in the trading of the financial markets.

With the developments of newer technology, certain principles that used to be simple became a little more complex in today's trading. However, it has produced efficiency, added more revenue and volume transactions as technology improved the way of trading the global markets.

Reading the FX Market today can be quite tedious than ever before. But searching for the best way in analyzing the Foreign Exchange Market is the question. How does one go about to improve reading the market and be able to identify potential market opportunities that has a lesser risk ratio? Addressing this is just like searching for the holy grail of FX trading.

Every trader / strategist as well as sophisticated investors who spends more than enough time in connecting the dotted lines so to speak, with both technical and fundamental factors may have a higher rate & probabilty of success in trading the FX market specially the one who follows a certain degree of trading methodology that has been applied in the actual market.

All the technical tools that traders use have their own definition and interpretations even though these systems are often applied in the Stock market, commodities and other financial instruments. But not all technical systems can be best applied in these markets, as most of the traders have already experienced what trading platforms work for them. Remember, if these trading techniques, charts and mathematical formulas are working in their favor it is because of the other factors like experience and some qualified mentors / individuals who have a set of trading procedures that are followed religiously and have delivered good results in some time from their past trading experiences.

Candlestick Chart Ex.01

Here is a clear cut example of a reversal pattern based on a candlestick bar configuration.

An increase volume with a depreciating open interest confirms the outcome.

Applied Technical Analysis

The Candlesticks are now the most popular charting and instrumental analysis used by traders worldwide. In the US it only gained its reputation sometime in 1993 when some companies such as Trade Station. Knight Ridder, Telerate, Future Source and CQG where among the best companies that uses the International Monetary Market ( IMM ) data in developing their trading systems. Bloomberg were in fact still developing their own system during those times along with some of the other known companies now.

A well known charting analysis that defines the candlestick bars, its configuration and provides more in-depth market outlook and interpretation of what is going on in the market place. Although, everyone may and may not agree, but after sometime it has become more of a standard compared to the regular Western bar formation better known as the bamboo chart. The only significant precaution that needs to be mentioned hereunto is that since most of the common trading platforms apply the candlesticks in their graph, it is imperative to note that if every trader sees the same configuration on the screen, it looses its significance and true meaning as interpretations vary from one eye to another. And this is true enough in viewing the currency in this charting system and in different time frames as the bars reconfigure themselves automatically from the specific time period involved.

In other words, an FX trader / investor may have to come up with a set of chart formats that would be strictly followed that will provide a true definition of the candlestick theory in actual trading. A simple yet effective approach can be used as an example:

A four ( 4 ) hourly chart can be use to develop entry and exit strategies in timing the market. Relatively, it can also be use to trade within a shorter period of time for those who would not want to stay longer than necessary and avoid unnecessary loss while being exposed.

A daily chart can best define the trading and price range of any specific currency from the opening of Asia to the closing of the US session. Although, the 8 hour chart can also combine the market sentiments of each session and can double up as a day's range in the three major market. But this is not provided in most trading systems because the regular daily bar is compose of the prices from Asia opening to the close of the US market.

The weekly chart would provide a bigger picture more of a medium term outlook. And most medium term traders and professional managers normally use these procedures since they have a sizable investment portfolio trading this FX market. And normally uses the leverage amounts provided by interbank in a more complex trading systems applied. It is not advisable for speculators who happen to have only a fairly decent amount to risk in the market. since their tolerance levels can easily be swiped out of the market due tot the wider and diverse trading range of the interbank participants.

Reading the FX market in both sides of the coin may take some considerable time to even get close to the real market sentiments. That is why there are other companies and individuals who try to simulate such market activities by designing robots, expert advisers, programs that can depict market patterns and would show signals that may and may not be as accurate as it is designed to be. For the fundamental economic reports differ from time to time and simply would not be able to integrate into the algorithmic equations these fundamental outcome in the trading system. The closest one is the pattern recognition based simply on the chart formation and applying the candlestick theory in reading the variable information of the bar configuration.

From time to time, there will always be the search for the holy grail in trading. But the time spent on developing such trading skills can only be as gratifying specially when one has achieved their level of confidence by making remarkable trades in the market. So take the time and invest in the time spend in knowing the intricacies of the market and it can only get better through time itself.