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31 January 2016

What is a Trade in Forex - Making the Small Significant

Forex trading is about money. But not money as it is usually seen in life. Forex magnifies movements in the value of a currency, movements which may mean little in real life.

The charts, a typical way to see the market in action, shows the movement of the valuation of a currency relative to another. So to trade it, one needs to consider why a currency may change its value, up or down, relative to another currency. But in Forex trading, the movement are small fluctuations and ways of thinking about valuation which takes this into account, may need to be considered. To look at factors which may increase or decrease a currency valuation, may not help in a trade.

So a trade is really about what happens to small fluctuations in the valuation of a currency. Put simply, they tend to move up and down, which when one thinks about it, this is not unexpected. So how can a trade be made on these.

A chart can be analysed as if these are moves on a larger scale, for example using fundamentalist methods. But the market may react in apparently strange ways. Technical analysis can be seen as accepting in a way that these are moves of a small scale, as it does not concern itself, in its pure form, with fundamentals, per se. But can these methods scale down.

Consider a trade where a currency is to be bought, with the expectation it moves higher, or sold with the expectation it moves lower. In this case Forex is problematic, it will tend to fluctuate, and clear direction is needed, for a time. However the representation of the charts can show patterns forming.

But because Forex is a sea of fluctuations, chart patterns as they are used on other assets may be also problematic in Forex. They work and then they do not. However looking at actual value can be helpful I believe, particularly big figures.

These changes have meaning on a trading level (for example where barrier options may be placed, or clusters of stop-losses or limit orders) and even to an extent in real life. They have a significance. These are still small changes in currencies, but these changes do matter much more, especially given some of the functions of Forex.

As these values become bigger, for example 125, 150 (or whichever values are relevant for a given currency) they may be seen exerting a particular force on those fluctuation driven moves.

Now Forex moves between big figures, so one can see the effect of these changes even between big figure changes. This is particularly the case with .50 (using the example of Yen), which is to say, the mid point between big figure changes. The market does tend to break into patterns as it approaches big figures, as support or resistance comes into play.

Between big figures there may also be patterns forming, for example around .75 or .25. The pair may find these figures support or resistance, and create patterns which attempt to move through it. So the patterns are grounded in value, which are grounded in real value, to some extent.

It is an interesting question to me whether big figures value are support or resistance. They may have an apparent effect of support or resistance, but they may have an apparent reverse effect, that is they may attract and accelerate a move. This may be one reason why the pattern of breaking through, up to around .10 or so and then coming back down through the figure (in the example of 'up' on Yen), happens.

That is, big figures have the consequent effect of sending a pair back into a generic pattern, which is to reverse, perhaps because of the unusual speed or strength of the move. Forex seems to like to put things in order, when the (sometimes highly desirable) unusual happens.

It needs to be considered that they may be past support and resistance, wrapped into repeating types of value, which may be a difference which might account to some extent for the accelerations. However when these numbers are not repeated patterns, so much, such as 125 and so on, they can be seen acting as sometimes strong support and resistance.

Increases in the power of support and resistance in these cases may be seen if these were support or resistance or were broken through in some way to become then resistance or support. However that can be seen as the power of a downward or upward move and the difficulty in reversing it in an easy way.

In general in Forex it can be helpful to look for things to make the small fluctuations more significant, for example also market opens, closes, and other markets. In a news trade, the market can suddenly become something meaningful in real life, but of course this takes place so quickly and the reasons are so market based, that it may be a special case. However Forex comes into play even here, as the moves fades on a past support or resistance.