FOREX Trading Strategies

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.

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How do forex prices move and why? Sounds an easy enough question but most traders have no idea and that’s why 95% lose. Let’s look at the equation and why people who don’t understand its significance lose their equity.

A simple equation for market movement is:

Supply and Demand Fundamentals + Investor Perception = Price

Now that sounds nice and simple but as will all things simple its deceptive – lets look at the equation in more detail.

Prices move in line with the long term fundamentals – the facts are there for all to see but we are all human and we all see the facts in our own way not logically, but blurred by greed fear and opinions we hold.

So if you try and trade news stories you can’t as not only can you not work out how humans perceive the fundamentals, you also can’t act quick enough.

In today’s world of instant communications the facts are available in a split second and discounted in the price.

So forget the news and what it is telling you its stories and out of date.

Will Rogers once said “ I only believe what I read in the papers” he was joking but its surprising how many people trade a story off Reuters or Bloomberg, without even thinking about the fact its just a story by journalists.

If it was that easy a lot more traders would make money and they don’t!

It’s a fact that markets collapse when the fundamentals are at their most bullish and rally when their most bearish – this is investor psychology at work.

You therefore need to see both sides of the equation and that’s where forex charts can help. If you trade off forex charts you see the reality of price and only have to follow and act upon it.

Forex charts simply assume the fundamentals show up instantly in price action so you don’t need to guess their impact you can see it and it also tells you how humans perceive them to, so its quick a quick and simple method.

While traders make mistakes about news and trading it, they also don’t see the limitations of technical analysis and its strengths.

They assume that as human nature is constant, chart patterns can be predicted in advance – WRONG!

They can’t

If you try and predict with forex charts you will lose - on the other hand, if you get confirmation you will win.

What is confirmation?

This means watching charts and not predicting - but only following moves AFTER they have occurred.

Sure, you miss the start of the move but you can’t catch that anyway, so forget it.

If you get just get a major chunk of the move (say 70%) you will build huge gains over the longer term.

The forex markets are hard to trade but you can trade them and because it’s not easy the gains are huge.

If you use forex charts and simply follow and act on the confirmation of price changes - without the temptation to listen to opinions or jump the gun and predict, then the equation above can make you very rich.

It sounds simple and in essence it is, but you need to do your homework, to find the best technical tools and use them to trade when high odds trades present themselves to you with confidence and discipline.

If you do the above and you understand the equation you are well on your way to currency trading success.