A trading strategy is imperative for success in FOREX trading. There are numerous possible strategies to employ but more importantly, each trader should strive to develop their own individual approach since everyone has their own strengths and weaknesses. There is the technical analysis approach which many traders rely exclusively upon while others prefer fundamental analysis. However many successful FOREX traders use a combination of both to get a broad understanding of the market and for discovering key entry and exit points.
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The technical analysis approach is based upon one important idea: Prices move by trends. The common saying in FOREX is ‘The trend is your friend.’ The flow of the market follows particular patterns that have been studied for a long period of time and so the basis of a solid trading strategy is a methodical understanding of these trends and how they can be tracked.
In order to develop a successful trading strategy the FOREX trader needs to study all of the different analytical tools that are available in understanding market movements. In order to truly grasp the concepts and application provided by each tool, it is advised to study them one at a time and then continue utilizing the tool and you branch out and study others. Each tool you acquire can only add to and reinforce your knowledge of the market.
Many FOREX trading strategies make use of support and resistance level. ‘Support’ refers to the price level that is repeatedly seen as the bottom – when the price approaches this level it tends to rise. Resistance levels, on the other hand, are upper prices that the currency rarely trades beyond. Support and resistance levels offer casual frameworks which contain price movements for a period of time. When money 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 optimistic and confident – the price should continue to rise.
To discover support and resistance levels, one needs to examine price charts for a pattern of consistent support and resistance levels. Charts can be analyzed in any time frame; however the larger the time frames the more important the support/resistance levels are. Being able to analyze support/resistance levels and working with them as part of your strategy, you can easily determine when to enter or exit a transaction.
Another common tool in FOREX trading strategies are moving averages. The simple moving average (SMA) shows the average price in a given period of time over a specified period of time. You can achieve a clearer picture of price movements since moving averages serve to eliminate short term price fluctuations. In order to determine the set of circumstances or period of time that prices have a tendency to rise or fall a FOREX trader should plot the SMA. 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.
The aforementioned tools are two examples of trading strategies that can be used individually or together. To be successful, the FOREX trader should have wide and diverse range of trading tools in order to be able to examine market conditions. Relying on a single indicator for forming market decisions could lead many traders into trouble whereas if several indicators show that the market is moving in one particular direction the trader can then act bolder with that extra assurance.
Similarly, as was mentioned in the introduction, fundamental analysis can reinforce technical findings, or vice versa. It is well advised that the FOREX trader take several indicators into account when forming a trading strategy.
Every trading strategy should provide a clear plan of action regarding 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. By following these simple guidelines and educating yourself about technical analysis, you can undoubtedly become a successful FOREX trader.