Both techniques have their advantages but as a trader you are probably going to prefer one or the other. If your signals provider isn’t working on the proposition that you like, it is possible that you’ll distrust the alerts that you are receiving and not use them in the simplest way. That’s why this is crucial.

Let us look now at these two very different techniques of analyzing the currency market, and also at one signals provider Forex Mutant.

Technical analysis

This first technique is popular with a larger number of traders. It does not require any special understanding of the economic or political forces that underpin the global currency trading markets, so it is simpler for noobs to pick up.

All you need to do is understand the charts and indicators that are provided by the currency exchange software that you are using, and apply them to the market to make profit-making trading choices. Well okay it may not be quite as straightforward as that to make money, but it is within the grasp of any person with a logical or analytical turn of mind, and that is generally the kind of person who is attracted to something similar to currency trading.

Fundamental analysis

Fans of fundamental analysis tend to claim that what truly drives the foreign exchange market is world economics and therefore it is crazy to make trading decisions based on anything else. They point out that charts and indicators ( particularly lagging indicators based primarily on moving averages ) are giving you a picture of the past, not the future. It could be the recent past but still, the time has passed.

They would say that it doesn’t seem sensible to trade on the presumption of what the market was doing five mins or an hour back. You need to know what is going to happen next. However , this can be hard to do if you’re not working in the thick of the financial world. So perhaps it would be helpful to receive signals that would advise you of these forex market movements.

We previously said that it can be a distraction to get forex alerts that don’t suit your trading style. However, these 2 systems of analysis can complement each other very well, so provided you are mindful of what is happening, in a few cases it can be particularly helpful to just do that and order forex signals that are based on a technique that you would not use yourself.

That way, you can cover both of the bases while only needing to defeat one yourself. You could rely on the signals to warn you of important developments in the other methodology, and then check them against your own way of working. This is something to take into account when picking a currency exchange signals provider.

Here’s the theory: Because the two currency pairs maintain their correlation over time, one can assume that when they start to move independently, it will be a temporary event, and that at some point they will return to their old ways of moving in sync with one another. After they have moved apart by a certain amount, we simply ‘bet’ that they will move back together again in the future.

For instance, if the EURUSD and the GBPUSD are seen to be closely correlated, they will generally both move up and down more or less together. This can often be seen by studying the charts. Should a time come when the EURUSD moves up but the GBPUSD moves down, they will separate, and we will trade based on the assumption that in time they will come back together. In this case we would short the EURUSD and buy the GBPUSD, so that we can gain overall if the EURUSD falls or the GBPUSD rises, or both. It’s not a perfect strategy (what is?) but statistics have borne out its valued over the years.

Caveats to heed: First, be aware that it’s never certain how far two currency pairs will pull apart before they revert to their correlation, so you might ride a fairly decent loss (particularly on one side) before you see the gains developing. Also it’s typical to end up losing money on one side of the hedge even if you make a greater amount on the other side. It’s not too common to make money on both sides, but it does happen. Finally, there are times when currency pairs will pull apart a significant amount, then instead of coming back together they simply begin tracking their up and down movements without ever really reverting to their original mean. This is when you must simply take a loss and move on to the next trade.

I haven’t gone into the math required for this technique at all, but it’s important that you understand how to do the necessary calculations before you attempt this strategy. Perhaps I’ll tackle that in another post.

Next installment – Mean Reversion Trading.

A straight hedge is used to allow a trader to stay in a seemingly bad trade much longer, allowing for the market to correct back in the trader’s desired direction.  At the point that the hedging position is taken any existing loss is locked in, so that if the trade never recovers, the trader will eventually need to take that loss.  The bright side is that she doesn’t need to make that decision right away, and can give the market plently of room to move.  If prices move in the ‘right’ direction, the hedge position can be closed and the original position played in the intended manner.

There are other forms of hedging employed, such as in interest rate arbitrage.  If a trader has accounts at two different brokers and there is a significant difference in the overnight interest rates charged (or paid) by those brokers, a hedge can be created across the two brokers for the purpose of taking advantage of the interest rate difference.  Also, many options trading strategies employ hedging of a sort, as puts and calls are played off against each other in an attempt to sculpt the outcome of a particular market’s movement.

All in all, forex hedging is a questionable tactic, but there are as many opinions about it as there are traders.  There are potential benefits, but there are also costs associated with such forex trading techniques.  Although straight hedging is now disallowed in the US, as a strategy the hedge is almost surely here to stay.