Forex market players see volatility as a logical result of a large volume trading during the day. In terms of economy, there are varying fluctuations i.e., oscillatory movements generated by the supply and demand for a particular product.
If a trading volume is low then we have low supply, which makes traders buy more currency pairs. If a trading volume is high then we have high demand, which makes traders sell more currency pairs. It is recommended reading the Stochs and CCI – Commodity Channel Index, if you want to observe overvaluation of assets.
The only thing that really matters in Forex is prices. If you can determine an overall trend , is there any need to complicate trading activities? Clearly not. There is one more interesting observation: stop trading hour by hour! Some traders are accustomed to checking every tick!
You cannot win on all decisions you make in Forex. Just try to make one or two tradings of 24 hours’ or 48 hours’ duration, and you may possibly get more profit. The vast majority of traders are looking for miraculous formulas helping in decision-making. They generally believe that a good FX system will make all work mechanically. Thus, they prefer using good robots to see what prices are telling you.
Does anyone think that currency fluctuations make serious correlations with physics? I do and I’ll give an example. Newton’s first law is really very important in the study of the motion of objects.
When an object is at resting, your velocity is zero and there is no movement. When the same object is moving, there is a speed difference, caused by some external force. The object will remain in motion until an opposing resistance makes it stop or change its direction. We can correlate it with what traders call the theory of price action. If the price rate is going up, then there is a greater probability of going long.By analogy, the declining price shows that traders or investors are uninterested in the asset. The change direction is called a bullish or bearish reversal.
The function of a trader is to know at what time to buy or sell. So, analyze historical prices to see if there is any breakout. Note that there are several breakouts per day or per week, which determine the continuation of the trend . At some time, certain asset is overbought or oversold. We have a potential for selling if the currency is overbought and a potential for buying if the currency is oversold.
There are several reasons for which a price gains further modifications. Political interventions are inevitable for new strenghtening or weakning of a currency.
Let’s take Japanese Yen as an exampe.
Why would anyone buy Yen if the objective of Japan’s central bank is having a weak currency? A weaker currency would help exporters to compete by the international scenerio. The Asian session is interesting because prices are changing in order to set a new trend for the next day. In other words, the Asian session is good if you’re planning a new trade, possibly a pullback or a continuation of the trend. See the image below.
After the Asian session the price of the currency pair is redefined. The candles are exhausted. I can correlate the happening with the law of economic gravity: what goes up must fall! See that a negative breakout changed the direction of the EURJPY. We can see that the price action is useful to determine the whole trend or to predict a pullback.
Pay attention to the trading volume and draw daily support and resistance lines which will make it possible to enter an organized trading setup.
The article is written by Igor Titara and is participating in the Forex Article Contest. Good luck!