The relationship is not understood by most traders so let's look at it and how you can profit.



Let's look at a simple fact first:

FOREX markets move in trends:

They move in sustained upward or downward directions, for periods of months or years.

These trends are not of course a one way movement and we see constant retracements, which can last for various periods of time.

These retracements can form shorter trends of a few days or weeks and can be against the major trends.

What causes these trends?

Currencies reflect the underlying economic health of the country the currency represents.

Economic cycles tend to last for months or years and these are reflected in longer term currency trends.

Markets don't of course just respond to economic fundamentals, but also how people view these fundamentals.

Prices therefore are a combination of:

Economic fundamentals + Investor perception = Currency price movement.

Prices do not move logically, in relation to the underlying economic fundamentals ? they are influenced by the emotions of greed and fear of the investors.

When you trade currencies you have to be aware of this combination:

Price is determined by the economic fundamentals and investor perception of what those fundamentals mean.

Investors therefore ultimately determine the price on what they see and how they perceive it.

It is obvious from the above that simply studying the economic fundamentals will not make you money.

Economic forecasting has made huge advances in recent decades, yet the ratio of winners to losers still remains the same.

You MUST be able to gauge human psychology and see when it has pushed prices to far from fair value.

You can then calculate the odds of when prices are likely to turn.

The simplest way to do this is with technical analysis.

By studying charts you see both.

Economic fundamentals ? These are reflected instantly in price action, so technical analysis allows you to forget about studying economic data and news.

Investor psychology ? It allows you to see how investors perceive the fundamentals and the emotions of greed and fear at work.

Human nature is constant and can be traded for profit

As investor psychology is constant this shows up in repetitive price action and chart formations that can be traded for profit.

Traders very often think that all they need to follow is the economic fundamentals and yes, these assert themselves longer term, but short term retracements and price spikes are caused mainly by investor perception with the emotions of greed and fear to the fore.

The simplest way to see both is to use a technical approach to trading.

Learn to use technical analysis correctly and you will soon be spotting some great trading opportunities.