One of the most important skills you need to attain if you want to be a fulltime Pro trader is the ability to pick currency direction.
Now this is something that isn't rushed at the Banks when training junior traders. It's so important to the future career of the traders they take their time, sometimes a few years, to get this knowledge clearly squared away.
Once the junior traders get this knowledge they are then ready to become senior traders and attack the market!
So how do you pick currency direction?
Unfortunately for many it's not through adding a load of indicators on your charts, and this is where many new traders are misled.
Currency direction comes from two sources: Central Banks & economic data.
The Central Banks manage the economies via monetary policy and they do this by monitoring the monthly economic data.
The best thing is these economic data releases are scheduled a year in advance and are completely transparent, so we can trade with them when they are released.
Historically, if Inflation goes outside their 'inflation band of 2-3%' they change interest rates.
If inflation breaks above 3% they raise rates, usually by 0.25% and if it breaks down below 2%, they lower interest rates, usually by 0.25%.
What economic data do we concentrate on?
Now you could sit back and wait for the Consumer Price Index (CPI) number but by then the currency may already have moved aggressively and that's because all the other data: retail sales, employment data, manufacturing, consumer confidence, industrial production, etc. all have an impact on inflation.
So by monitoring the monthly economic data releases I mentioned above we can seriously gauge what the inflation expectations will be before they come out.
If all the other data is strong then it surely points to a strong inflation number. If they are weak then it would point to a lower inflation number.
If all the other data is mixed (some stronger, some weaker) then we have an uncertain outlook and that's when the CPI data itself will be the major focus.
Central Banks plan ahead and are transparent
So the central Banks collect all this data and they make plans around future changes to policy.
Now they don't want to create volatility so they plan months in advance to change rates and they mention it in their Statements, which is released at the time of their interest rate decisions.
This is called forward guidance and it's not uncommon for the central banks to highlight specific data they are watching, which will be integral to their next interest rate decision.
So all traders have to do is follow the economic data, listen to the Central Banks (and/or read their Statement) and isolate the key data that they are waiting for.
Then when that data is released you trade immediately. There is no need to wait for the next central bank meeting because they already told you what they were going to do should the data be a certain result.
It's at these times you trade and you leverage up, because that's when we are absolutely certain of currency direction.
Now this might seem like a lot, and it probably is, but once you understand the sequence you can seriously attack the market and that's what the Bankers do!
How else can you pick currency direction if you don't understand the economic data?
OK there's a really simply technique that will enable you to identify if the currency pairs are going up or down and it comes back to technical analysis.
Now this will depend on what technical analysis system you use. I use Reuters Xenith as it tracks the real market and provides real time live economic data releases.
So to quickly and clearly identify currency direction I usually go straight to my 'Daily' charts of the major currency pairs.
I look for clear trading channels and isolate those using 'Trend Channels' trendlines. If a currency has clear direction it will stand out like a sore thumb like the charts below.
By doing this I don't have to second think are the currencies going up or down. I can see clearly what is going on and these are the long term trends of the currencies.
Where are the best trades?
The best trades are those that go with the long term trends of the major currency pairs.
So when you're watching the monthly economic data releases you can simply follow them and isolate the ones that go with the long term trends.
These trading opportunities are the best to get on and all it takes is patience and control to wait for them.
Now this might be a little too much for you to take in straight away so for some extra guidance you can check out our webinar archive for the most recent presentation on this topic.
Don't rush the learning process
The most important thing with 'Identifying Currency Direction' is to not rush the learning process.
There's a bunch of information and a sequence of central banks events that you need to understand to fully get a grip of this concept.
But the best thing is once you do know (for sure) which way the currencies are going, trading becomes so much easier!
This is where your results will go through the roof and your lifestyle choices will be so much better!
Good luck Traders.
The risk of loss in Forex trading can be substantial. You should, therefore, carefully consider whether such trading is suitable for you in the light of your financial condition. The high degree of leverage that is often obtainable in Forex trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains. Past performance is not indicative of future results.