Trade Forex Fundamentally

What does it take to catch the big moves?

As I mentioned in an earlier post, if you want to be one of those profitable forex traders who gets into the market before a new trend develops, you have to understand the principle of “imbalances.” Nearly every big forex price move that’s occured has been due to either some type of imbalance or a complete shift in perception of the market (a.k.a. a ”Gestalt Shift”). Now, how does one make money trading forex imbalances? Let’s find out in the following forex trading tutorial:

1. Go to a site like INO or TimingCharts and watch key commodities and stock indices such as gold, oil, the CRB index, and the S&P 500 index. You can look at a daily chart over the last 1-3 monhts.
2. Compare the respective currencies over the same time frame and see if there is a divergence between the price action of the commodities/stocks and the currencies that they normally track (e.g. Oil goes up but CAD/JPY goes down). For an explanation of which currency-commodity or currency-stock index correlations to look for, see this post.
3. If there is a divergence, take a position in the currency in the direction that it would correct in, in order to restore the correlation. (e.g. CAD/JPY would become bullish again to track the initial positive run in oil).
4. SUPER IMPORTANT: Wait for sentiment to shift toward the intended direction before entering so that that you have an underlying driving force/momentum supporting your trade. Usually what you’ll see is a strong move on a weekly price chart of the currency reflecting the fact that the imbalance is correcting. If you don’t wait for confirmation for the currency pair to move, it could be that the commodity/stock price moves to correct the imbalance instead of the currency, causing you to be in the wrong trade.
5. IMPORTANT: Limit your risk and run your profits (i.e. make your wins much bigger than the amount risked), because you could be wrong a couple times before the trend finally catches on. When it does, you’ll want to hold on for as long as possible.

Possible scenarios for catching new trends before they happen

How to make money trading forex imbalances

Basically,  six different possible types of divergences can occur between currencies and commodities/stocks that should signal a profitable imbalance so that you can make money trading forex. Each column in the table above shows a divergence between a currency and the stock/commodity that the currency normally moves in sync with, as well as an arrow pointing up or down, which corresponds to the direction you should trade the currency in if you spot such a divergence. Hopefully you can see how trading imbalances should be a valuable part of your forex trading strategy.