5 Tips for Better Technical Analysis When Trading Currencies

The foreign exchange market is a means of investing in currencies by purchasing them and then converting them into other currencies, taking advantage of the fluctuations in exchange rates to tap into the wealth of developing nations. This is predicated on the premise that stable currencies, such as the dollar or the euro, tend to remain steady while developing currencies become more valuable as their country becomes more prosperous and begins importing goods and services that they need to pay for in dollars and euros.

It is a famously complex and dynamic market that can make money when there is a depression and lose money during the biggest of booms. It’s also inherently risky and high volume, since money usually does not gain or lose value very quickly, and so the investments must be large. They also need to be sold quickly when specific conditions are met, since most foreign exchange traders make their money by preying on very slight upticks in value. It is also possible for a currency to become worthless in a matter of hours should there be an environmental disaster or military coup. For these reasons, it is invaluable to have good technical analysis in regards to how a particular currency is doing in order to maximize value and minimize loss. There are five main ways that this is done.

5. Watch the news.

It may seem painfully obvious, but many beginning investors fail to understand the political and social realities of the countries whose currencies they have decided to purchase. It is easy for greedy dictators or corrupt bankers to manipulate the value of the currency used in a small nation, and such deception is usually readily apparent, yet even major banks sometimes get suckered in by a deal which is too good to be true.

Currencies may also be slow to move in times of political uncertainty as speculators wait for the price to go down and current holders try to keep the price up. It is important when engaging in foreign exchange trading to always keep both feet firmly planted on the ground and never be afraid to dump a currency when the nation who owns it appears to be on the road to disaster. Remember also that this can happen to any nation, even modern and well-developed ones, as was proven by Iceland in 2008.

4. Study the culture and economic realities of any nation you invest in.

In large economies like the United States and China, the value of the local currency is usually dictated by a vast array of products and forces which are too complex even for the national governments to fully understand. However, smaller nations tend to have very specialized economies which are very heavily influenced by a small number of sectors. For example, many Caribbean nations are almost entirely dependent on tourism for their economic well being.

This means that natural disasters, crime and disease will have a much more devastating impact on their economies than those of countries who are more dependent on mining or farming for their income. The same is also true of large countries. For decades, the low rates of interest in Japan made the yen very attractive to American foreign exchange traders, since they could take out large loans in yen, convert them into dollars, and then pay off the debt through favorable exchange rates.

For many companies, it was almost like printing money. But when the American economy began to deflate due to the collapse of the housing bubble, those very same investors found that they now owed large amounts of yen and did not have enough dollars to pay for it. The American economy was heavily dependent on mortgage backed securities and other financial products tied up in the housing market, which came down hard on those not wise enough to ask questions about the integrity of the American economy.

3. Watch the PIPs and look for trends.

The term “PIP stands for “Percentage In Point” and it is a means of watching how currencies relate to one another. Most currencies are traded all the way out to four decimal points, the major exception being the yen that is traded to only two decimal points because it is worth approximately 1/100th that of the dollar or the euro. A “PIP” is defined to be one unit of change of the last decimal point in a currency’s value. For example, if the exchange rate of the dollar to the euro goes from 1.3000 to 1.3010.

Then the exchange rate has seen an increase of ten PIPs. In general, monitoring the PIPs is similar to monitoring the value of a stock, and the gain and loss in PIPs is widely available as a tracking service from many online resources, and most virtual trading software works by constantly monitoring the way in which PIPs change in currency trading markets worldwide. Just as the price of a stock tends to follow general trends over time so do the PIPs, and it is possible even for a novice to observe large trends.

It is also possible to observe more refined trends over smaller periods of change, but this is limited to specific factors unique to specific currencies. Still, examining and exploiting trends is the best way to invest in the foreign exchange market over the long term, since it allows one’s investments to rise with the growth of entire economies.

2. Subscribe to trade publications and read the blogs.

To really make money in the foreign exchange market, one needs to understand what is going on at all times. Today’s global economy is too big for any one person to comprehend, but nonetheless one bad economy eventually wreaks havoc well beyond its borders. The starkest example is how the bad economy of Greece was threatening to take down the euro in the spring of 2010, but there are innumerable smaller examples.

It is therefore essential for a currency trader to know in detail what is going on with the currencies they have invested in. It’s dangerous folly to simply invest in what is currently a strong currency and then sit back and wait for it to mature. Trade publications and blogs will detail all sorts of useful and relevant information that non-investors are highly unlikely to care about.

Every day, an investor should know what the central bank is doing, what sort of interest rates are being offered by local private banks, and if there is any pending legislation which might open up or close off currency. Any currency is subject to constant “wiggling” in value as market realities try to determine what it is really worth. Investors who keep an eye on that fluctuation can often profit immensely by buying and selling a currency on the same day.

1. Talk to other traders.

In the end, the foreign exchange markets are run by humans, staffed by humans, and filled with human decisions and human flaws. Therefore the only way to really get what’s going on with the market is talk to other people who are investing in it and seeing what they think. While it is important to note that everyone has a vested interest in keeping some things secret and other things widespread, constantly talking to others to find out their opinions is always invaluable.

While individual people make mistakes, usually the market overall is able to anticipate major problems and avoid obvious pitfalls. Listening to individuals also gives investors an opportunity to hear different and often important points of view. Those few who rang the warning bells about the American debt crisis made millions of dollars when they moved their currency into yen or euros, as the American dollar quickly became worth less than even it’s Canadian counterpart. Talking with other investors also gives one the opportunity to have their mistakes corrected. Hindsight is always 20/20, but often it’s possible for someone to be able to spot an error very easily simply because they did not make it themselves. Fortunes have been won or lost simply because someone took or did not take a bit of advice, and often all it takes is a single overlooked currency report to make or break a fortune.

The foreign exchange market is even more complex than most stock markets and should not be entered in to lightly, even by persons willing to take a significant loss. While it is certainly possible to make thousands or even millions in a few smart trades, all of that income can be wiped out by a bad investment or a late sell. The foreign exchange market also has a network of brokers, software and other intermediaries that are inherent and necessary for buying and selling currency across international borders. Currencies often trade early in the morning or late at night when compared to local times in America, meaning that foreign exchange investors often have to anticipate what is going to happen a whole world away. Still, it is a fair market that offers substantial rewards to those willing to put in the effort.