First, you should review the previous day’s market activity so that you know what the market sentiment was and how investors may be feeling now.
Most traders rely on fundamental or technical analysis or a combination of the two.
Focus on the pairs you are most interested in and see how they have behaved previously. For example check the highs and lows they have hit and the support and resistance levels they have touched.
Support and Resistance: look for the high and low values of the pair you want in the previous day.
Common Currency Pairs
EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, CHF/USD, USD/NZD, AUD/USD, USD/CAD
You should also review yesterday’s news in order to get the market sentiments.
Here, it is important to pay attention to unemployment (NFP) and economic growth indicators (GDP), and most importantly, interest rates decisions.
Secondly, you should check the economic calendar and assess the news and announcements planned for the day.
Currency rates tend to react to economic reports as their main barometer of the country’s economic health.
Announcements from central banks and those relating to employment may be about the most market’s volatility so, it is important to note the time of the day of the scheduled releases and the currency pairs that may be most impacted.
You should also review the daily outlooks summaries of the day ahead that give indications of market sentiment.
Next it is important to check the stock market performance.
Examples: FTSE, DAX, S&P500, DJIA, NIKKEI, AND HSE
For the past four years, price movements in most financial markets have been greatly influenced by equities.
In stock markets, full traders may liquidate positions in riskier assets and shift funds to the less risky assets seeking safe haven in currencies like the USD, Swiss Franc, Japanese Yen and Gold.
Conversely, when stock markets rise, there is a greater demand for riskier assets and high yielding currencies like the Canadian, Australian and New Zealand dollars.
Finally, you should review the technical analysis of the currency pair you are interested in trading. Technical analysis usually starts with the identification of chart patterns.
There is a multitude of tools that can be used to interpret chart patterns that can help determine technical buy and sell opportunities based on market price action.
Forex markets often move in identifiable long-term trends. Technical analysis can be used to spot a trading opportunity and help gauge if a trend for a particular pair may continue.
A technical trader may look at the news to confirm the strength of his technical signal.
If the news is positive, it would give further confidence in the trade.
Remember a trend is your friend and unless you are scalping the market, it is safe to trade in the direction of the trend. Once you complete your analysis, you’re ready to trade.
It is important that you insure your trade with a predefined risk-reward ratio.
You should never risk more than you are prepared to lose. The ratio is calculated by dividing the amount of profit you expect in reward and the amount you stand to lose if the trade goes against you.
Profit expected/amount to lose
A good risk-reward strategy should have a ratio of 3/1.
The margin should not exceed 3% of your total capital. After you open a trade, it is important you continue to monitor its performance, as well as what is going on in the market.
You might want to amend the trade in response to market conditions. Remember, the Forex market is very fast and volatile, and it’s critical to reassure your investment is protected by a predetermined stop loss and take profit point.
By doing your research and analysis, you will learn to spot trading opportunities that will help you make more from your trades.