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 fundamental and technical analysis can help you become a successful FOREX
trader.
