Trading Forex

by Mike Carr, CMT

Technical analysis works in any freely traded market. Legend has it that technical analysis has been employed for centuries in the commodities markets for hundreds of years, since the days when Japanese rice traders relying on candlestick charts. In the first half of the twentieth century, great technicians such as Shabacker and Edwards and Magee, applied the principles of the field to the stock market.

In Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications, John Murphy wrote that technical analysis is well suited to futures markets. The diversity of these markets makes it difficult to master fundamental analysis in any one market.

Foreign exchange is the latest market where technical analysis is an invaluable tool to analyzing the markets. Forex is a deep market where traders employ a great deal of leverage to profit from small moves.

Recently, some brokers have been offering leverage greater than 100 to 1. IG Markets (www.igmarkets.com) has recently allowed traders to take on 700 to 1 leverage. Dan Cook, who provides training for that firm, explains that when properly used, such leverage can actually reduce risk.

Major currency pairs have a great deal of liquidity and see few gaps. The markets also never close during the week, trading continuously from Sunday evening New York time until late Friday afternoon. The relative scarcity of gaps makes leverage less problematic.

Trading timeframe is an important consideration when employing leverage. Forex is generally a short-term instrument, where trades last for minutes and long-term may be thought of in hours. In liquid markets, short-term moves should be relatively small.

In addition, the use of stops is critical when trading with leverage. Tighter stops should help to keep losses small, allowing for increased leverage, and potentially greater profits.

For more information on these ideas, please see www.igmarkets.com.