Required for the forex course
Forex account: free account at Markets.com
Duration per lesson: about 10 minutes
In the previous lessons of the Forex trading course for beginners you learned how open a Forex position and things you need to be aware of when doing so. The next step is to understand how and why currency prices move and how to predict this. Forex is traded 24 hours a day from Monday to Friday. The Forex market is fast and transparent, and news often has a quick and direct impact on the price. Factual news, but also – and at least as important – speculative news (and lately even “fake news”.
News & Rumours
An important wisdom of the stock market is: “Buy the rumour, sell the news.” This means that the rumour of a certain future event often drives the price up (or down) and that by the time of the actual news event itself it is already almost entirely reflected in the price. In many cases, the actual news event often fails to meet expectations, causing the price to decrease even if the news itself still is positive.
A simple example to illustrate this. The days before the FED (Federal Reserve System) announces whether it is going to increase interest rates, the US dollar is often very volatile. People trade their expectations about possible interest rate hikes, because the actual news has yet to be announced. The most important thing often is not the actual interest rate hike itself – which is seldom surprising – but about what the President of the FED says; is it “hawkish” (“we’re going to increase interest rates”) or not? The same applies to announcements by the ECB (European Central Bank), even as the announcements of important figures in major economies such as France, Germany and Great Britain.
Whenever you expect the price of a currency pair to react on an economic news fact, try to find out if this reaction has not already taken place during the rumour phase. On the other hand, if there are new rumours which you think might be reliable, it can be rewarding to trade based on these rumours alone. Once the rest of the currency market comes to realize the rumour is gaining credibility, the price will start to move in the direction you predicted. You made a profit even before the actual news was released!
What to buy
It is important to carefully consider which position you want to take on the markets and why. Are there several sources that indicate a temporary rally in the Dollar? Is there speculation about important macroeconomic data in Japan? Will the European Central Bank soon come with a new interest rate hike? In the beginning it may all seem very difficult, but after a while you will notice that you are developing a feeling for this kind of information and the effect it has on forex prices.
An example. On the Globaltrader24 blog you read something like: “Dollar is likely to rise due to poor German economic performance”. Try to verify whether this rumour is supported by arguments. What exactly does the article on Globaltrader24 say? What do external news sources report about the Dollar and the German economy? If you cannot find anything reliable about it then the rumour does not have a lot of support. But if other sources support the news, then perhaps it might be something to trade on.
Check the forex charts
Next, take a look at the forex chart of the EUR / USD over the past months (You can find it at the Markets.com trading platform). Was the increase of last week the continuation of a longer trend or just a temporary upswing? Did a correction already seem to have taken place, or is it still to come? If the rumour seems to be valid but the price has not yet responded, then it might be a good time to take a position. If it seems that the US Dollar is also going to appreciate relative to other currencies, you might take multiple long positions on the US Dollar.
You decide to short the EUR / USD and open a position at a bid price of 1.2511 on the trading platform of Markets.com. You choose 1 micro-lot of 1,000 units. Because you know it is wise to always apply a stop loss, you place a stop loss at 40 pips. Meaning that your position will be automatically closed once it moves 40 pips in the wrong direction, which is at a price of 1.2551. However, you expect the EUR / USD to be able to drop as much as 100 pips, thus you place your take profit at 1.2411 (Remember, with a short position you make money when the price falls). You enter the conditions of your trade, confirm the order, and let the market do its work …
Be steadfast, have perserverance
Once you have decided what would be a good stop loss and take profit, it is important not to doubt your initial judgement. Many traders lose because in the process they keep adjusting their stop loss, (thus accepting a large loss), hoping that the price will still move in their favour eventually. Or they close their position with a small profit, so they miss out on a large part of the potential profit.
Of course, you will not make this big mistake. After all, you have studied the forex trading course of Globaltrader24!