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The euro’s emergence and the recent decline in the US currency and in reference to other key currencies does not look too good as far as the long term prospect of the US dollar is concerned. The dollar has lost almost half of its value versus a trade weighted basket of currencies since 1985. Though the dollar’s decline has been slow, it seems like it’s going to affect the long term role of the dollar, as it also reflects the dollar’s declining status as the world’s reserve currency.

In the past, the US currency has faced similar threats from the Japanese yen as well as the Deutsche Mark because of United State’s poor economic performance during the 70s and early 90s. Fortunately for the dollar however, both of these currencies were not able to dethrone the Dollar as world reserve currency. This was mainly due to the size of their economies. They were much smaller compared to the US. However, the Euro zone is different. It is a huge economy - almost as big as the US. This is the reason why a lot of analysts believe that the euro will soon dethrone the US dollar, since it is backed by a big economy.

As the US Dollar declines in value, other nations may just exchange some of their dollar forex reserves in favor for the euro. It has been estimated that more than 65 percent of the world’s wealth in savings and forex reserves is held in US dollars. The greenback has also been traditionally been a ‘store of value’ and has made it possible for US bonds to act as a safe haven of investments to other central banks.

This is however, a long term forecast. The dollar will still be the world’s reserve currency for at least a decade more. The transition would still be a gradual one, but inevitable!

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Quantitative analysis in forex trading involves the use of a financial technique that aims to understand what goes on within the forex market by using a complex system of mathematical and statistical modeling plus the measuring of market values as well as research.

This is in essence made possible by employing a series of numerical values to certain variables. By using these tools quantitative analysts will try to replicate reality by means of mathematical models to help them predict changes and moves with the markets.

So, what can be the possible reasons why analysts would utilize a quant? A quant can be used to evaluate the performance, measurement, or valuation of a particular financial instrument.

In a much broader sense, however, a quant is simply a way of determining and understanding certain things and events and can be used for more common paced tasks as solving simple financial ratios like earnings gained per share, or to determine option pricing or discounted cash flow.

However, quantitative analysis, although useful for evaluating market potential, is often lopsided and needs its qualitative counterpart to complete the picture.

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Sentiment Analysis is the art of avoiding extremes. When everyone seems so inclined in a particular direction, chances are it’s not going to stay that way for long if it has gotten to a certain extreme. It specializes on determining patterns of investors’ movement on a subjective basis, so that when a everyone is leaning too far in one direction, it is most certainly that shift in the opposite direction is about to occur - just like a pendulum.

Traders who use this method of analysis will observe investors as to how they are reacting to the current trend. They usually conduct investors sentiment surveys asking about their current market outlook. When these analysts see that everyone is leaning in one direction, they will then act in direct opposition to these results: if fewer than 25% of the surveyed investors surveyed are sure that the market will be profitable, sentimental analysts will usually increase a bet in the market expecting that there will soon be a buying opportunity.

If the actions of investors are such that it would seem that the value of a currency will rise, sentiment analysts will usually sell, in preparation for a drop in the currency’s value.

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Most countries in the world have Central banks. While these central banks may have several responsibilities, their man duty is to encourage and maintain monetary and financial stability. This is often done by creating monetary or economic policies in support of their respective countries’ economic agenda.

Key functions of a Central Bank

* Management of the monetary policy - this includes management of issuance of currency and management of inflation;
* Management of the credit system in the economy - A Central Bank acts as banker to commercial banks. It refinances their debt at the prevailing discount rates.

Central Banks are also clearing houses for commercial banks, and in times of extreme economic slowdown, may act as a lender of the last resort. This role then as a lender of last resort will be very much appreciated when commercial banks face a sudden credit crunch or when they are at the brink of insolvency. Another key role of the central bank is to restore confidence in the financial system of the country through bailout packages for commercial banks.

So how to central bank actions affect the forex trader?

Central bank actions are vital in knowing the value of currencies. The central bank’s strategies and its use of various monetary management tools, have very strong impact on the exchange rate of a country’s currency. When the Central Bank causes excess money to circulate, this can lead to inflationary tendencies, since it will cause the local currency to lose much of its value. If the central bank adopts a tight monetary policy, then this will most certainly result in what is called a liquidity squeeze and will exert an upward pressure on interest rates. Higher the interest rates the more investments the economy will attract, and with it pushing the value of the local currency upwards.

The central bank instills confidence in the country’s economy. If a financial system is stable, it means that the local currency is also stable.

Support and resistance is a pretty popular trading concept among traders; however, it does seem rather strange that every trader has his or her idea or opinion as regards the manner in which one should measure support and resistance.

Before we can truly appreciate how these processes occur, we will first examine the basics of support and resistance.

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In the image above, you will notice that there is an ascending zigzag or crisscross formation: This is a bull market. As the market surges and then falls back, the highest point attained by the market just before it pulled back is called resistance.

When the market experiences another surge, the lowest point touched by it before it climbed back up is called support. This is the manner in which resistance and support are created as the market changes over time. Of course, in the case of the downtrend, the reverse would be true.

It is important to note that the levels of support and resistance are not exact values. In a lot of occasions, you will see the support or resistance level is broken; however, in most instances it only meant that the market was testing it. In the case of the candlestick chart, such tests of support and resistance are often represented by the candlestick shadows.

Other important things to remember regarding support and resistance:

• When the market passes through resistance, that resistance now becomes support.
• The more often prices test a level of resistance or support without breaking it the stronger the area of resistance or support becomes.

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Position trading basically involves taking a market position and waiting for about a day whether or not this will be a profitable place to stay. Staying in one position for too long can be quite disadvantageous, but since most position traders rarely hold their position for more than a day, then they can be relatively unscathed by downtrends in the market. In practice, the risks involved here are actually less than those taken by day traders, who have to enter or leave a particular market several times a day that just leaves too many chances for errors to occur.

One notable drawback to position trading is that any overnight or after hours changes in the market can often end in a grave financial loss. However, due to the ever fluctuating currency values, the same amount of value change can also happen in the other direction. This makes it possible for position traders to gain a higher profit during the time when day-traders are asleep.

So, is this type of trading for you? The only way to find out for sure is to try it out and learn from actual trading experience whether this method will work to your advantage. Remember that practice makes perfect.

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The mechanical trading method is just what its name implies - mechanical. It is an automated trading system that once it has gotten some momentum, requires very minimal trader participation - the very reason why it is often referred to as the end-all to Forex trading.

The way to set up mechanical trading is by first selecting a system or method to follow and enter it to a program that will then be responsible for picking up starting and stopping points and of course also maintain a trade position.

A majority opinion among traders seem to indicate that the mechanical trading system is the best system a forex trader can set up, since it will relieve him or her of the tedious and often repetitive task of determining trends in the market. However, people who are quite jumpy or are the nervous type, will find it hard to deal with a situation wherein they will have to give up direct control over situations, and therefore this type of trading is not for them.

Admittedly, it can be quite a scary thought at times to put the future of your profits in the “hands” of a computer program.

Nowadays, however, with the free limited-loss platforms, a program will not just ride go with a trend just to find out if it will fail in the end, and also a program doesn’t have emotions and can therefore quite “bold” when it comes to following a trend.

All around, the automated method is good to have running in the background, whether as trader you want to implement a reversakAs an automated system, a mechanical trading system is a good all-around program to keep in the background regardless of your general or tendencies as a trader.

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The Discretionary trading method is best suited for traders who have psychic abilities! Well, if you want to go engage in this kind of forex trading you will have to rely and trust your intuition to help you make up your mind whether or not to enter or exit a market. Whereas other trading styles put their emphasis on interpreting signals from formulas, patterns, and of course the news, discretionary traders use subjective experiences. These type of traders are the exact opposite of the mechanical traders.

This is basically a gut-feeling way of trading. Yes, they do rely on “feelings” whether to buy or sell. Many of these traders have made huge profits by swiftly jumping on profitable positions. But the disadvantage to this trading method is obvious: there is just no certainty. Without any formal system to back it up, you really can’t trace how you succeeded in the trade and there is no way to repeat the process, since the decision was just based on gut feeling.

But, statistics have shown that many discretionary traders have indeed become very successful traders. Should you discover that this kind of trading is for you, then you will have the advantage of flexibility and the ability to jump in and stop a trade that you feel will decline, or you can accordingly change your bid to maximize your profit if it feels to you that the trade value will increase.

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Day trading as regards the foreign exchange market is in a way very different from other markets, and it does not carry the bad connotation associated with the stock market.

If you have had the experience of trading in other markets, then you will notice that a lot of the methods used in foreign exchange trading such as futures, forwards, options, spread betting, contracts for difference as well as the spot market are very much like the methods utilized in equitiy markets, and usually maintain a minimum base currency trade size.

You might also note that day trading is fast moving and can therefore be extremely challenging. This method of trading however, is not for everyone. If you think this type of trading fits you, then you will also discover that there are also a number of sub-styles of day trading. It is therefore advisable to first try out each of these methods before finally making up your mind as to which method is really for you. Alternatively you can also choose a series of different methods, but then again do a number of tests before deciding.

It can’t be emphasize enough that as a newbie, the only way for you to learn what day trading is all about is by actual experience. Yes at first you should do some demo trading, but you won’t learn until you take real risks with real money!

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Swing trading is something that’s reflexive - almost instinctive trading. This requires quick reaction to changes that occurred in the market. So if you’re quick and fast, then you can benefit from swing trading. This trading method involves holding a particular position for a period that exceeds one day. If a trade seems to be going towards an unfavorable direction, swing traders can exit the market way before they’ve lost a lot of money.

Very often you will see swing traders holding a position for up to for 3 to 10 days, while waiting for any positive swings in the market. They take bits of trades here and there as they flow with the market.

As a matter of fact, swing can be found somewhere between day and trend trading as to the length of time a position is held. These traders wait for signs before they decide to stay on the trade or move on to the next to find greener pastures.

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