Forex Trading Success Market Equation

By: Kelly Price

How do forex prices move and why? Sounds an easy enough question but most traders have no idea and that's why 95% lose. Let's look at the equation and why people who don't understand its significance lose their equity.

A simple equation for market movement is:

Supply and Demand Fundamentals + Investor Perception = Price

Now that sounds nice and simple but as will all things simple its deceptive - lets look at the equation in more detail.

Prices move in line with the long term fundamentals - the facts are there for all to see but we are all human and we all see the facts in our own way not logically, but blurred by greed fear and opinions we hold.

So if you try and trade news stories you can't as not only can you not work out how humans perceive the fundamentals, you also can't act quick enough.

In today's world of instant communications the facts are available in a split second and discounted in the price.

So forget the news and what it is telling you its stories and out of date.

Will Rogers once said " I only believe what I read in the papers" he was joking but its surprising how many people trade a story off Reuters or Bloomberg, without even thinking about the fact its just a story by journalists.

If it was that easy a lot more traders would make money and they don't!

It's a fact that markets collapse when the fundamentals are at their most bullish and rally when their most bearish - this is investor psychology at work.

You therefore need to see both sides of the equation and that's where forex charts can help. If you trade off forex charts you see the reality of price and only have to follow and act upon it.

Forex charts simply assume the fundamentals show up instantly in price action so you don't need to guess their impact you can see it and it also tells you how humans perceive them to, so its quick a quick and simple method.

While traders make mistakes about news and trading it, they also don't see the limitations of technical analysis and its strengths.

They assume that as human nature is constant, chart patterns can be predicted in advance - WRONG!

They can't

If you try and predict with forex charts you will lose - on the other hand, if you get confirmation you will win.

What is confirmation?

This means watching charts and not predicting - but only following moves AFTER they have occurred.

Sure, you miss the start of the move but you can't catch that anyway, so forget it.

If you get just get a major chunk of the move (say 70%) you will build huge gains over the longer term.

The forex markets are hard to trade but you can trade them and because it's not easy the gains are huge.

If you use forex charts and simply follow and act on the confirmation of price changes - without the temptation to listen to opinions or jump the gun and predict, then the equation above can make you very rich.

It sounds simple and in essence it is, but you need to do your homework, to find the best technical tools and use them to trade when high odds trades present themselves to you with confidence and discipline.

If you do the above and you understand the equation you are well on your way to currency trading success.

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