The forex rates market works in patterns and cycles. This leads a lot of traders to believe that you can look at past performance and determine how to trade in the future. While this is what a lot of trading indicators do there is a limit to this. When you look at trading forex rates based on past performance you have to consider the market now. It is important that when you look at this trading you understand the limitations of past performance, the differing variables and the risks of trading in this manner.
How You Gauge Past Performance
The forex charts are the tool that people use to look at past performance. The past performance that traders are generally looking for relates to forex news. When you complete fundamental analysis you are looking at how the market will react to news. The reaction you expect from the market is often linked to the reaction that the market had in the past. It is easy to determine what the past performance of the market was in relation to a single news release.
All you would need to do is find out when the news releases was for the previous month. Once you know this you can look at the charts from that date. You can then see when the news release was and what the reaction on the market was. This helps you determine what the market reaction will be in the future.
The Forex Rates Variables You Need to Consider
There are a number of variables that you have to consider when you look at past performance. The most important variable is the sentiment of the market. The market sentiment for the upcoming news release will not be the same as a month ago. This is due to other news releases which have changes the conditions of the market and the ideas that traders have of the country’s economy.
Another variable you have to take into account is the differences in actual trading. While spreads do not affect a lot of long-term traders there are many short-term traders that rely on past performance to trade. When these short-term traders are looking at the market they need to consider what the spreads are. The spreads that they profited on the previous month may have been tighter than the ones on offer at the present time.
The Risks of Trading on Past Performance
Many traders who look at past performance are going to be proactively trading. This kind of trading is very risky because you are trading before the market has reacted to the news. If the market turns is the way you are expecting then you will make a good profit. However, there is the risk that the market will turn against you and you will make a large loss.
If you are going to trade on past performance you have to consider what you can lose if you do not wait for the market reaction. It is recommended that you trade reactively instead because it lowers the risks.