Learn How Financial Markets Work
Plan your trade
The key to being a successful trader in financial markets is disciplined learning, understanding the markets and planning trading. Let's get ready to deep dive into the world of trading financial markets.
What moves the markets?
We discussed that forex is the most liquid and volatile financial market in the world. There are countless opportunities to trade the vast range of instruments in different asset classes, but to make the most of them, you firstly need to know what moves the markets. Ultimately, prices represent the interaction between buyers and sellers based on the fundamentals behind the value. So, it is essential to understand the factors deriving the value of the financial assets, which are mainly categorized as follows:
Economic events and news
The economy's overall health is measured by factors like GDP growth, sectors growth, trade balances, inflation, and employment data. These are known as macroeconomic data that affect the value of currencies in the big picture. Generally speaking, the healthier the economy, the stronger the currency is. Furthermore, companies financial statements, industries developments, demand and supply reports, known as microeconomic data, play a key role in driving commodity, bond and stock markets.
Central banks' monetary policy
Central banks' decisions on interest rate levels and quantitative easing impact the money supply, which does not affect only the currency markets but the other securities such as bonds, stocks and commodities.
Political news
The political landscape, such as government interventions, elections, local or international conflicts and any other environmental events with uncertain outcomes, can affect the relative securities in value.
Sentiment and market psychology
The overall feeling of market participants about the future direction of a particular market or economy is considered a powerful force that can move the markets. Market psychology can lead to bullish, bearish or neutral sentiment.
-
Microeconomic events and news
Companies reports, Dividends, industry development
-
Macroeconomic events and news
GDP, CPI, NFP, Retail sales, JOLT, Jobless claims, Trade balance
-
Central banks decisions
Interest rates, FOMC statement, QE
-
Political and environmental events
Election, Hurricane, War, rebellion, Government policies
-
Sentiment and market psychology
PMI, IFO, business cycles, Trends
Market analysis
Traders use two common approaches to examine the future direction of the markets.
Fundamental analysis
Fundamental analysis refers to studying all financial, economic, political, and environmental factors that cause market movements to evaluate the intrinsic value of a particular instrument such as currency, stock, or commodity.
- Fundamental analysis is broken down into macroeconomic analysis and microeconomic analysis.
- Traders use these powerful methods for long run investments.
- They go long on undervalued assets when they expect the relative market values will rise and go short on overvalued assets when they believe the prices will crash soon
Technical analysis
Technical analysis is the method of identifying the effect of all relevant factors on market psychology through the study of market action.
- Technical analysis assumes all available information, either known or unknown, is reflected in the price.
- Following the price trends can eventually reveal the market psychology leading to the future direction of the market.
- Traders use technical analysis to recognize the price patterns to spot the best trading opportunities.
Plan your trade
Each of which analysis methods you have chosen, you need to put your knowledge into action eventually. To do this, you essentially need to build up a trading plan that aims to keep you on track with your winning mindset.
A trading plan is a road map to success and consists of three components:
- Trading strategy
- Proper risk management
- Discipline in trading
Trading strategy
The first step to build your trading plan is having a trading strategy made by specifying the follows:
- Your trading style: Choose one that suits your trading personality
-
Trend following
Trade in the same direction as the existing trend
-
Range bound
Buy and sell at significant support and resistance levels
-
Contrarian
Trade against the prevailing trend
-
Swing trading
Buy and sell at the pivotal points of swing legs
-
Scalping
Trade the minor changes in price
- Your trading instrument: Deeply learn the asset class to choose your trading instrument
Forex
Cryptocurrencies
CFDs
Shares
Commodities
- Your trading timeframe: Decide on your best trading hours
| Short term | Medium term | Long term |
|---|---|---|
| Trading in 1 min to 30 min time frames | Trading in 1 hour to 4 hours time frames | Trading in Daily - Weekly – Monthly time frames |
- Your trading rules: Develop well-thought rules to spot high probability trading setups and follow them
| Entry point | Take profit level | Stop-loss level |
|---|---|---|
| When to buy and when to sell | When to take profit and close a profitable trade | When to accept loss and exit a losing position |
Proper risk management rules
Risk management is considered as the most crucial component of a trading plan aiming to identify, control and mitigate associated risks by following rules:
-
Your risk limits
Specify the amount to be risked per trade
-
Protective stop-loss
Identify pips you have at risk by placing stop-loss
-
Optimal position size
Calculate the amount to trade for each position
-
Proper Risk-Reward ratio
Ensure its return is worth risking your money
Discipline in trading
After developing your trading strategy and applying proper risk management rules, it is time to practice discipline by sticking to your trading plan. Discipline is the key to being a successful trader, which is characterized as follows:
- Have a trading schedule and watch relative news releases closely
- Enter and exit the markets only when all conditions are met based on your trading strategy
- Ensure to apply proper risk management
- Stick to your stop-loss and take profit levels
Mastering discipline makes you control your common emotions like fear and greed to achieve a winning mindset.
-
Trade only high probability setups
-
Keep learning to develop your trading strategy
-
Control your fear by sticking to your stop loss in losing trades
-
Control your greed by sticking to your take profit levels in profitable trades
-
Trade confidently by applying proper risk management
-
Plan your trade and trade your plan