Technical forex traders are always looking at support and resistance in order to help them figure out what the best possible move might be for a particular currency pair. Support and resistance can help forex traders determine when to enter and when to exit a trade.

It is important to note, though, that sometimes the process is not always so cut and dry. Due to the volatility of the FX market, it is possible that support can become resistance. If a currency pair falls below its line of support too often in a short period of time, all of sudden you have resistance instead of support. You should watch carefully for this, since it happens frequently and changes the equation.

See Also

• Currency Trading on the FX Market
  Information and analysis for forex traders

The Federal Reserve is meeting today and tomorrow, ostensibly to decide on interest rate policy. However, with the rate effectively at 0%, and quantitative easing measures still in force, there is little for the Fed to discuss in terms of immediate interest rate policy. Instead, it is likely that the Fed will focus on the future.

Right now, there are some concerns about future inflation. Currently, inflation is near 0%. With unemployment still high and the economy still in recession, there is little in the way of economic growth. However, once the economy picks up, inflation is expected. Some believe that hyper-inflation may even be on the way.

What is likely is that the Fed will make a policy announcement for the future, as well as provide its view of the current economic situation. Doubtless, part of the Fed's meeting this week will be devoted to an exit strategy from economic stimulus, and talk of the measures that can be taken to prevent high inflation.

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• Inflation and Forex Trading
  Economic news and information for forex traders

One of the ways that investors limit their exposure to losses is through hedging. You can use hedging as a technique in forex trading, and you can also use a currency hedge to help you limit exposure you might have in other markets -- as well as hedge your FX market exposure. The Forex Blog offers this look at ways to hedge your indirect and direct exposure to currencies:

Hedging indirect exposure to currencies (from overseas investments) involves the separation of currency risk from credit/equity risk. In other words, if you are an American invested in a European stock, you may wish to hedge against fluctuations in the Euro (which impact you insofar as the stock is priced in and pays dividends in Euros, but your account is denominated in Dollar), so that you are exposed only to fluctuations in the stock, itself. Simply, this would involve selling Euros simultaneously with buying the stock; the amount of Euros that you sell depends on what level of exposure to currency risk you are comfortable with. If you buy $100 worth of stock in a European company and buy $100 USD/EUR, then you are fully hedged.

Hedging direct exposure to currencies is inherently more sophisticated. For example, if you sold $100 EUR/USD, you can’t hedge your position by simply buying EUR/USD, or you will negate any return without changing the level of risk. Instead, you can use financial derivatives (options, forwards, futures, swaps), which if executed properly, are tantamount to buying insurance on your portfolio. For example, if you are long the Dollar, you can buy put options in order to protect yourself from significant downside. Likewise, if you are short the Dollar, you can buy calls to achieve the same end.

With so much volatility in the financial markets right now, it is little surprise that investors and forex traders are trying to find ways to limit their exposure. Markets could go any direction, and being protected against such swings is important.

See Also

• Currencies in Forex Trading
  News, analysis and information for forex traders