Analyzing The Market For Great Forex Profits

There are so many Forex trading strategies out there that it's not surprising so many people don't know where to start. But actually, all of those strategies are some combination of two different techniques: fundamental or technical analysis.

A fundamental analyst looks at a nation's entire financial picture to guide her trades, studying international macroeconomics and the forces that drive the supply of and demand for a currency. There are five of these factors:

• is that country's government in good financial shape or in the red, and what is their financial policy (pro-business, labor, etc.)

• the balance of imports versus exports, which directly affects a nation's money supply

• the growth of that country's real gross domestic product (GDP); in other words, that nation's purchasing power

• interest rate levels

• inflation level; in other words, how high are prices

These last three are all relative, which means they are compared to those same measurements for other countries to determine their strength or weakness, rather than considered as stand-alone numbers.

The fundamental analyst looks at all these factors and balances them against each other to determine whether a nation's currency will appreciate or depreciate. Of course, as the Forex market trades the currency of one nation against that of another, the fundamental analyst cannot simply study the economic picture of one country; she must study both of them, and then compare them to determine which paints a more compelling financial picture.

The technical analyst, on the other hand, looks only at the charts. He looks at the price of a currency pair (or any other commodity, such as oil prices or stocks) and sees how it has varied through time, examining the patterns it has drawn with an eye to predicting what it might do in the future.

Technical analysis is flexible. It works the same way in any market with charts (Forex, stocks, commodities, etc.). Once you learn how it's done, you can apply it in other markets and get the same results.

Fundamental analysis, on the other hand, is not flexible, because it looks at the economic data for each nation individually. The financial numbers for Great Britain, after all, have nothing to do with those for Japan or New Zealand, and the fundamental analyst cannot take her studies to another market. She must study one currency pair and learn its two nations' economies intimately if she is to be successful with this technique.

That said, fundamental analysis is good for understanding what ought to happen and for predicting the long-range trend of a currency pair. It's also true that many profitable trades are made immediately after economic announcements, when savvy traders jump into the market while everyone else is still gasping over the numbers.

On the other hand, technical analysis can give you a specific strategy for a trade, including entry and exit points and where to place your stops. It requires less time to learn than fundamental analysis, and works well for shorter trends and individual trades.

The most successful traders use a combination of these two techniques, combining chart analysis with the timing provided by economic announcements to get the best of both worlds.

Forex Profits and Losses

Just about any online Forex broker you pick will have a trading platform available to automatically calculate your profit and loss. However, it's important to understand the basic math that goes into this. That's a good way to make certain that your broker is honest, and it's a good skill to have. Calculating profit and loss is fairly simple. There are only two simple formulas to keep track of.

When the quote currency is USD (the second part of a currency pair), the formula you'll need is: Profit = Price Change in Pips X Units Traded. If USD is the base currency (the first part of the currency pair), the right formula is: Profit = Price Change in Pips X Units Traded / Exit Price. Here are a few examples to help you better your understanding.

If the quote currency is USD, assuming that the broker requires a one percent margin, you'll be able to trade a hundred thousand dollars for only a thousand. If you're planning to trade EUR/USD (currently trading are about 1.2518/9), and you predict that the euro is going to rise in value against the dollar, you'll execute a trade to buy euros, selling USD at the same time. If you're buying, you'll have to take the asking price (the second number in the quote).

If your calculations are correct, and the price rises, you then initiate a trade to sell your euros and buy US dollars. At this time, you'll use the bid price, say: 1.2532. Since you were able to buy at 1.2519 and sell at 1.2532, you had a profit of seventeen pips, expressed as 0.0017. To convert that into real money, use the formula listed above: Profit = Price Change in Pips X Units Traded, or Profit = 0.0017 X 100,000 = $170.00

One easy rule to keep in mind is that when you're trading a standard sized lot of a currency pair (like 100,000) in which USD is the quote currency, a pip is always ten dollars. That means that seventeen pips equals a hundred and seventy dollars.

Now, we'll take a look at an example where the base currency is USD instead. When we decide to buy a hundred thousand units of USD/JPY at 117.22, and our calculations are correct, the price rises, and we're able to sell at 117.35. This earns us thirteen pips.

To calculate our profit, make use of the second formula: Profit = Price Change in Pips X Units Traded / Exit Price, or Profit = .13 X 100,000 / 117.35 = $110.78. It's really very simple.