FOREX
TRADING STRATEGY
To be a successful FOREX
trader you need a trading strategy. There is no one
set strategy that is good for all traders; rather,
each trader needs to develop his or her individual
approach to the FOREX.
Some traders rely solely
on technical analysis while others prefer fundamental
analysis, but many successful FOREX traders use a
combination of both to get a broad overview of the
market and for plotting entry and exit points.
Technical analysis relies
on one key concept: Prices move by trends. The common
saying in FOREX is ‘The trend is your friend.’
Market movements have identifiable patterns that have
been studied over many years and a thorough understanding
of these trends and how they can be read forms the
basis of a good trading strategy.
There are many analytical
tools available to understand market movements. The
beginner FOREX trader is well advised to study each
one separately for getting a working knowledge of
their concepts and application. Once one has been
understood, keep on using it while studying others.
Each tool tends to reinforce the others.
Support and resistance
levels are used in many FOREX trading strategies.
‘Support’ refers to the price level that
is repeatedly seen as the bottom – when the
price reaches this level it tends to rise. Resistance
levels are upper prices that the currency rarely trades
beyond. Support and resistance levels contain price
movements for a period of time.
When currency prices
break through support or resistance levels, the prices
are expected to continue in that direction. For example,
if the price rises above the previous resistance level,
it is seen as bullish – the price should continue
to rise.
To find support and resistance
levels, price charts need to be analyzed for unbroken
support and resistance levels. Charts can be analyzed
in any time frame; however longer time frames establish
more important support/resistance levels. Traders
can use support/resistance levels to determine when
to enter or exit a transaction.
Moving averages are another
common tool in FOREX trading strategies. The simple
moving average (SMA) shows the average price in a
given period of time over a specified period of time.
Moving averages serve to eliminate short term price
fluctuations giving a clearer picture of price movements.
FOREX traders can plot a SMA to determine when prices
have a tendency to rise or fall. If prices cross above
the SMA they have a tendency to keep on rising. Conversely,
prices below the SMA have a tendency to continue their
downward motion.
These are two examples
of trading strategies that can be used individually
or in combination. In practice, the FOREX trader should
have a repertoire of trading tools to examine market
conditions and to support the findings of one study
or another. If several indicators show that the market
is moving in a particular direction the trader can
act with more assurance than when relying on a single
indicator.
Similarly, fundamental
analysis can be used to reinforce technical findings,
or vice versa. Ideally, the FOREX trader will take
several indicators into account when plotting a trading
strategy.
Every trading strategy
should provide clear guidelines about when to enter
a trade, what to expect in terms of market movement,
when to exit a trade, and how much loss can be accepted
in case the deal moves against the trader. Following
these simple guidelines and learning about technical
analysis can help you become a successful FOREX trader.
