A Forex Trading Strategy - The Key To Successful Trading
Before you enter into the world of Forex trading it is important that you think carefully about the trading strategy that you will adopt. There is no one strategy for trading in the currency markets and each Forex trader will need to find his own strategy. What is important, however, is that you do have a clearly defined plan right from the outset.
Some traders choose to adopt a technical approach to trading while others feel more comfortable with a fundamental approach. Both of course are sound, but the truth is that truly successful traders use a combination of both to give them both a broad overview of the market and to allow them to plot specific entry and exit points for their trading.
The key concept behind technical analysis is that prices move according to trends and that markets possess clearly identifiable patterns which can be seen if you know what to look for. Here of course knowledge and experience come into play but it is also a matter of making use of the numerous analytical tools that are available and gaining a sound working knowledge of each tool in turn. Many of these tools work together and using several alongside one another can give you a good, clear picture.
Many traders also look for support and resistance levels. "Support" refers to a low price level that is repeatedly seen as the bottom of the market and from which prices tends to rise. "Resistance" levels are high prices beyond which a currency rarely trades.
If a currency price breaks through either its support or resistance level then the prices are likely to continue in that direction. For example, if the price rises above its previous resistance level it is seen as bullish and the price can often be expected continue its rise.
Another common tool used in Forex trading is that of moving averages. The simple moving average (SMA) shows the average price in a chosen period of time (say 7 or 14 days) plotted out over a longer time period. Moving averages are used to eliminate short term price fluctuations and to give a clearer picture of the movements in currency prices. Forex traders can plot a SMA to indicate when prices are showing a tendency to rise or fall. When prices rise above the average they will often continue to rise and, similarly, when prices fall below the average they will frequently continue to fall.
These are two from many examples of trading strategies that can be used either on their own or in combination and Forex traders should use a number of trading tools to analyze market condition. If several indicators from different tools show that the market is moving in a particular direction then you can trade with reasonable confidence, while relying on the indication from just a single tool is often risky.
Fundamental analysis also provides an extremely useful tool and can often be used to reinforce the indications derived from technical analysis.
Whatever your trading strategy it must provide you with clear expectations about movements in the market and indicate just where and when you should both enter and exit trades. A sound knowledge and understanding of both fundamental and technical analysis should be your starting point in building your own Forex trading strategy.