Analyzing the Market
Being a successful FOREX investor requires a good dose of due diligence. This means analyzing the information that’s available on the market. In a manner of speaking, it’s like sports teams watching game film of themselves and their opponents. In doing so, they can be ready to attack the opposition when they take the field. Most importantly, it enables the team to develop a strategy that they can put to use when going on the field.
As such, market analysis is critical in the FOREX market. You cannot expect to be successful by simply placing trades haphazardly. You need to have analytics that can enable you to make the right investment decisions, given your expectations and risk tolerance.
The good news is that MetaTrader 4 provides you with a great deal of tools to conduct technical analysis. As such, you won’t have to scour the internet looking for sources of credible information. However, it’s what you do once you get that information that makes the difference between underwhelming returns and actually making money on deals.
So, let’s take a look at three important elements of market analysis you need to become familiar with in order to become a truly successful FOREX investor.
Trend analysis is at the core of technical analysis in all financial markets. As for FOREX, it’s vital that you become familiar with trend analysis as this will enable you to get a handle on where the various types of currency pairing may be going.
At a glance, you can quickly spot trends just by looking at a chart. However, the secret to truly analyzing a trend in charts is to spot the potential reversals in that chart. This requires a bit more of a trained eye as not all folks are able to easily spot these points.
Firstly, a bullish trend means that the valuation of one currency is going up with regard to another. When you look at a chart, you can quickly spot a bullish trend by noticing how the line curves upward, then rounds off at the top before beginning to descend. In some cases, you’ll find charts moving up and then have a sharp decline in an inverted “V” shape. The goal, in this case, is to follow the trend so that you can get in before the price goes up and capitalize on the highest possible point at which you can exit the trade.
Secondly, a bearish trend is the opposite of a bullish trend. You can quickly spot a bearish trend by seeing the line dip down to the bottom of the chart in a “U” shape. If the recovery in price is quick, it will resemble a “V” shape. In either case, you’ll find that getting out of a trade before the line hits the bottom is essential to either minimizing losses, or perhaps finding a potential entry point.
Lastly, when the line trades at a seemingly horizontal manner, then you are looking at a “sideways” trend. In this case, you are seeing how the currency pair is trading in a “band.” The term “band” means that the pairing is in a tight range in such a way that there isn’t much room to maneuver. When this occurs, it’s either due to low trading volume or perhaps investors looking to get in at a specific point in time.
With MetaTrader 4, charts automatically calculate trends both in real-time and with historical data. This makes it a valuable tool when looking to make the most of the data you have available. If you are looking to trade with the trend, then it is quite easy to just follow the charts. If you are looking to follow a countertrend strategy, then you really need to pay close attention to any signs of a potential reversal.
It is quite common for certain currency pairs to trade in a specific range or “band.” In these cases, you have predictable movements in price. These movements are usually the reflection of investor sentiment when it comes to price action in that pair. Additionally, it is quite common to find that correlated pairs trade in a band. By “correlated pairs,” we’re talking about currency pairs that have a long history together. These are currencies that are commonly traded together. As such, there is a plethora of information on these pairings.
Consequently, investors know what to expect. Hence, they build strategies to capitalize on the range they trade in. Unless there is a considerable disruption in the market, you won’t find correlated pairs suffering from any unexpected jolts.
Using the technical analysis tools in MetaTrader 4, you can determine these ranges as the charting application will show you the highs and lows. Over time, you can ascertain where these highs and lows can be found. Since currency pairs that trade in a range have a rather predictable fluctuation in their valuation, you can reasonably determine when to get in and when to get out. By following this dynamic, you’ll most likely make money practically every time.
In FOREX, significant levels are those which are charted based on the fluctuations in the pricing of a given currency pair. These levels generally indicate a reversal in trend. For instance, if a currency pairing is trading with a bullish trend, this trend will eventually hit a significant level at which investors are signaled to get out of the trade unless they risk losing money. When you set up alerts for these levels, they will quickly flash on the screen. This is where you can exit the trade manually or set up a limit in order to automatically liquidate your position when you hit that mark.
By the same token, if a currency pair is trading on a bearish trend, the significant level may be triggered to indicate that there is a potential reversal coming. When this occurs, the reversal may signal that it’s time to get in. In such cases, you can capitalize on the upswing.
It should be noted that significant levels are also based on trading volume. When trading volume picks up, the system notices this. It then takes into account where the trendline would be moving based on the increased activity. This is important when considering that increased trading volume may be a signal that it’s time to get out. If you happen to spot a high trading volume on the “sell” side, then it might be time for you to get out. In contrast, if you detect that a large number of investors are taking positions in a given trend, then it might be a good time to ride the wave.
So, do make sure that you set up alerts to notify you of changes in significant levels. This will help you spare yourself from complicated situations down the road.