Just like thinking of a strategy, it is also essential to think critically about the tenets of forex market analysis.
Know the Drivers
Somehow, the art of successful trading is due to an understanding of the current relationships between markets and the reasons that these links last. Also, it is vital to get a sense of causation, jotting down that these relationships can and do change after some time – just like any other relationship.
Now, for instance, investors who are expecting an economic recovery can very much likely explain a stock market recovery. Also, these investors think that firms will have improved earnings and, thus, higher valuations in the future – meaning it is an excellent time to buy. But speculation – based on a flood of liquidity – might be driving momentum, and good old greed is urging prices higher until larger players are on board so that the selling can start.
With this, the initial questions to ask are:
- Why do these things happen?
- What are the reasons behind the market actions?
it will be helpful for traders to chart the important indexes for every market for a longer time frame. By doing this, it can help traders in determining relationships among markets and whether a movement in a market is inverse or in concert with the other.
In 2009, for example, gold was showing record highs. And the question here is if this move in response to the perception that paper money was decreasing in value quickly that there was a need to return to the hard metal or was this the outcome of cheap dollars igniting a commodities boom. And the answer? This could have been both, or as mentioned, market movements fueled by speculation.
Consensus in Other Markets
People can get a perspective of whether or not the markets are hitting a turning point consensus by charting more instruments on the same weekly or monthly basis. With that, they could take advantage of the consensus to start a trade in an instrument that will be impacted by the turn.
There is a much bigger chance of a successful trade if one can find turning points on the longer timeframes. After that, they could switch down to a shorter time period to fine-tune an entry. The initial trade can be at the specific Fibonacci level or double bottom, as noted on the longer-term chart. But once it fails, the second opportunity will often happen on a pullback or test of the support level.
Now, the patience, discipline, and preparation are what will a trader distinguish itself from other traders who simply trade on the run without any preparation or analysis of multiple forex indicators.