Forex Trading Guide 5: Understanding Statistics
You have now become somewhat familiar with how the stock market works, and you understand to a point what is involved in trading on the Foreign Exchange Market. Now, you would like to know how to gauge market trends in order to profit from your business ventures on the open market. We are no longer discussing penny stocks and playground games. You want the real goods.
The name of the game is statistics, and the first rule is that you must be aware there is no such thing as a sure thing on the stock market. While you can never be 100% sure at any given time of the next move that will be made on the market as a whole, being able to read statistics and interpret them will place you ahead of the pack in regards to “guessing” what will happen next.
Investing is a lot like gambling. If you can keep track of the cards that have already been played, you are more informed, statistically, regarding what is likely to be dealt next, meaning you can place abet with greater insight than someone who has no clue what has already been played. With the open market, if you have information as to what has already occurred over the past few days, months, or even years, you are again placed in a better position to more logically conclude what will happen next. You simply learn the pattern and follow it to the end, reaping the financial rewards.
Charts and Chartists
Wait, did you think you were going to have to research and map out the market’s past all by yourself? Of course not! There are people who get paid to do that sort of work. They monitor the market hourly, daily, weekly, monthly, and yearly so that they can provide big-time traders with the same knowledge mentioned before. The more an investment company knows about the market, the more money they can make. The same is true for stockbrokers. They make money when you make money, and they want to do the best they can to make sure that you make intelligent decisions.
The best part of this is that you have access to the same information as these VIP clients. Chartists, who are essentially market analysts that publish their findings in easy to read charts, produce what is referred to as a candlestick chart. These charts are basically a combination of a line graph and a bar graph that show the trend of various stocks, indexes, or other interests over a specified period of time. Therefore, you can easily determine if the commodity is on an uptrend or if it is taking a downturn, when the last major change occurred, and how long it is predicted that the stock or bond will continue on the current path.
You can actually find information on most commodities and their market trends for years in the past, and some even all the way back to their introduction to the open market. Using this information can help you decide whether it is a good idea to buy or sell the stocks or securities in which you have interest, or if it is better to hold off for a peak in the market trend.
Understanding Market Trends
Understandably, as economies vary, the value of various commodities can change. This is because, when an economy is strong and flourishing, a nation is wealthier and has more purchasing power. Along with that power comes a higher value for the items purchased. In other words, if people have more money to spend and are spending a greater amount of that money at Walmart stores, the value of stock at Walmart is going to multiply at a considerable rate. Therefore, stockholders become wealthier in terms of assets, simply because the shoppers are driving the market with their purchasing power. When stockholders are wealthy, and the value of their holdings is on the rise, they continue to purchase stock, which again, pumps the economy. A strong upward trend in the stock market is an excellent sign for any economy.
However, there are also things that affect the market in a negative fashion, causing stock values to plummet. For example, warfare rarely has a positive effect on the stock market. On September 11, 2001, when terrorists attacked the World Trade Center in New York City, the economy of the United States took a huge dive, and the nation was threatened with a depression. Some analysts were sure that it would never properly recover. The same thing typically happens any time there is an attack or act of war within a nation. However, the critics proved to be wrong, and the United States proceeded to rebound, or recover from a bad downtrend, in a strong manner. This quick recovery occurred mostly because the people of the United States continued to push and spend, forcing money and wealth back into the economy. In watching the reaction of the stock market, you can learn to read trends based on world events.
Oil prices commonly affect the stock market, as well. Especially on the Foreign Exchange Market, you will find trends vary depending on many current events. You will also note that, over time, the principle value (or face value) of a currency may purposely be revised by a nation in terms of currency conversion. This is referred to as devaluation, which will be discussed in greater detail in the following chapter.
Chapter 6: Forex Volatility and Market Expectation
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