Fact is, when you do day trading you make or lose money in the course of one day. If there is any question of a “trend”, then it would be a trend that perhaps lasts a few hours. You have to make quick decisions, move in and out of markets in a split second. If you take into account trading commissions, this market is best left to experts. Strangely enough, the excitement of day trading often appeals to beginners, who proceed to lose their fortunes very quickly.
Another type of trader is the so called swing trader. Swing traders do not trade as often as day traders. They wait for a medium term trend in the market, and then either go long or short on a particular currency. They will stay in the trade for as long as the trend lasts, and try to get out just before it reverses. This of course is more of an art than a science, since there is nobody that can actually predict when the market will turn around. External factors can cause it to turn around within a matter of hours.
The last type of trader we are going to discuss is the long term trader. Many would argue that there is no such thing as a long term trader – that it’s simply another word for an investor, someone like Warren Buffet. These guys are often big players in the market. They buy and sell massive quantities of forex, but over a much longer period of time than day traders or swing traders.
The tools of choice for day traders are called technical indicators. These are a series of mathematical formulas often displayed visually in the form of charts. All of them have one thing in common: they use the historical behavior of the market to try and predict future price movements. The most basic technical indicator is probably the moving average. A moving average charts gives one a good visual impression of the direction the price of a currency has been moving in over the past five seconds, or five years, depending on the time frame you are trading in. Another popular group of technical indicators are the trending indicators. They are more refined than simple averages, but still attempt to predict future ups and downs in the price by analyzing past behavior, and then trying to project that into the future.
Another type of analysis, used more by swing traders and long term traders is called fundamental analysis. In fundamental analysis one would try to identify ‘fundamental’ economic factors that will have an effect on the future price movements of a particular currency. One such example is the effect interest rates have on the value of a currency. If the interest rate goes up, it will have an effect on the value of that country’s currency which could not be predicted by looking at technical indicators alone.
Chart used by traders vary from the simple line chart, to candlesticks and bar charts. A line chart is basically just a line connecting today’s closing price with that of the previous day and so forth. Bar charts show both the opening price and the closing price. The hugely popular candlestick charts display a lot more information: highest prices, lowest prices, as well as opening and closing prices.
A final note: Anyone who ever develops a system to clearly indicate the start and predict the end of forex market trends will become an instant billionaire. Clearly nobody has done so yet, otherwise all of us wouldn’t still be looking for the holy grail of trading!
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