Often Forex traders purchase a forex trading technique or system without fully understanding the market behaviour on which the system is based. In this discussion about market behaviour we will be looking at forex market behaviour which can be used as a strong basis for the design of highly effective and profitable forex trading techniques.
It is important to make a strong distinction between a forex market behaviour pattern and the forex trading technique used to take advantage of that particular market behaviour. Many traders are confused by this. They forget that the technique they are using is particular to specific market behaviour and they try to use their forex technique in any market conditions.
Some examples of these market behaviour patterns are:
· Weekend Gaps: The Friday close price is seldom the same as the opening price on a Monday.
· Specific Time of day movements: Many daily events such as the opening and closing of certain financial markets cause short term trends
· The tendency for the market to move in waves and Zig Zag movements: The price generally moves in up down movements and only occasionally in a straight path.
· The habit of the Forex market to make high volatility moves. Many events cause high volatility moves in the market – from a support or resistance violation to a dramatic economic announcement.
· The habit of currencies to react to the movements of other currencies. Certain currencies are highly correlated and travel in the same or completely opposite direction.
· The fact that a currency trends in different directions at the same time based on the timeframe used. When using different timeframes to trade, the trend often appears to be going in opposite directions.
· The tendency for currencies to build horizontal and non horizontal support and resistance areas. It is a well known fact that currencies trade between support and resistance areas.
· The habit of currencies to revisit certain price levels over and over again. When viewing a trading chart one will see many examples of currency prices revisiting the same price level over and over again.
· The habit of currencies to make small retracements even when trending. Even when trending the price moves up and down on its way to higher price levels.
Most technical analysis techniques have been developed in stock market conditions using long term approach to trading. The periods covered could be weeks or even years. Therefore when using technical analysis in a day trading environment, a trader should take all of the above market behaviour patterns into account as they could all occur in the same day. Sound knowledge of these behaviour patterns and technical analysis techniques on how to take advantage of them, are therefore essential components of any online Forex traders trading arsenal.