Categories: General Market Commentary
Topics: General Market Commentary

When to Ignore the Charts in Currency Trading

Most well-disciplined investors follow careful plan based on technical analysis and historical trends to determine what pairings to choose, where to set the stops, and what entry points to take when taking a position in a pairing. This disciplined approach helps to prevent careless or irrational trades based on the hunches and over excitement that is the fall of many investors. There are however certain markets where a disciplined approach simply means that you choose to stay out of the market or that you adjust your strategy to reflect conditions that are not conducive to your standard trading methodology.

When a series of dramatic world events (whether political or macro economical) occur that are so out of the ordinary that there is not enough historical data to produce a reliable forecast, it is imperative that the disciplined investor adjust their strategy. Attempting to rely on technical indicators based upon standard market conditions when the market conditions are being influenced by far more than interest rates and inflationary numbers is a recipe for huge losses.

While historically currency pairings are based upon actual demand for currency exchanges to enable world commerce, there are occasions where speculation as opposed to actual market needs take precedent in setting values. Situation such as the current political situation within the US causing speculation about possible default can drive the currency’s value based on anticipated need as opposed to current market needs. Since it is nearly impossible to accurately forecast either the resolution or the impact that resolution will have on the currency, attempting to use standard technical indicators to take currency positions is seldom reliable.

If an investor wishes to trade in this type of market is better to take longer-term positions that will help level out the psychological trading factors. In this manner your technical analysis may still prove to be of value. For the more common short-term trading that takes place in the Forex market by the typical investor, you would be better served carefully watching the news rather than the technical charts. Judicious placement of stop losses and willingness to accept gains as they come will enable a disciplined investor to take advantage of the volatility of the current market and reap profits.

It is also during these more volatile times that social trading can be of greatest value. Rather than watching charts to determine what direction the money is moving, involvement in a large social trading network will allow an investor to see real-time how the psychology is pushing the market. This is also an opportunity for the diehard technical investor to watch until market psychology has pushed a pairing out of all reasonable bounds and take the position to take advantage of the inevitable correction. Despite speculation push in the market, the investor has to remember ultimately currency trading is based upon available currencies used to conduct commerce. No amount of psychology or market fear will change the overall balance of trade in any given time period.