You will need a trading strategy to be a winning forex trader. Following these straightforward principles and becoming skilled at technical analysis can help you become a successful forex trader.
Each trading strategy should provide clear procedures that guide you on when to enter a trade, what to expect in terms of market movement, when to exit, and how much loss can be accepted in the event the deal moves against you.
Technical Analysis Based Approach
Technical analysis relies on a single basic theory: Prices move by trends. The universal expression in forex is ‘The trend is your friend.’ Market activities have special models that have been studied over a long period of time. A thorough grasp of these tendencies and how to interpret them forms the basis of a good trading strategy.
The neophyte forex trader is well advised to study all the analytical tools available and develop a command of market movements. Study each one individually to develop a working knowledge of each concept and its application. As each is understood, continue using it while studying others, as each application has a tendency to strengthen the others.
Many forex trading strategies use support and resistance levels. Support and resistance levels contain price movements for a period of time. ‘Support’ refers to the price level seen as the bottom. When the price reaches this level, it tends to rise. An upper price that currency rarely trades beyond is referred to as resistance levels.
When currency prices break through either support or resistance levels, prices are then expected to move forward in that direction. If, for example, the price rises above the previous resistance level, it is seen as bullish; the price should continue to rise.
To determine support and resistance levels, you need to analyze price charts for unbroken support and resistance levels. Although longer time frames establish more important support/resistance levels, charts can be analyzed from any time frame. Traders can use these support/resistance levels to establish when to enter or exit transactions.
Strategies with Moving Averages
Another common tool in forex trading strategies are moving averages. SMA, the simple moving average, shows the average price over a specified period of time from a given period of time. Moving averages eliminate temporary price fluctuations, providing a logical representation of price movements. To determine when prices will likely rise or fall, forex traders plot a SMA. When prices fall below the SMA, they tend to continue their downward motion. On the other hand, when prices cross above the SMA, they tend to keep on rising.
These 2 trading strategies can be used individually or jointly. Forex traders should employ a range of trading tools to observe market conditions and to support the conclusion drawn by other studies. When several indicators point to a market that is moving in a certain direction, the trader can proceed with more confidence than when depending on only one indicator.
Some traders rely exclusively on technical analysis, while others lean towards fundamental analysis. Fundamental analysis can reinforce technical findings, or vice versa. Many successful forex traders get a broad overview of the market for plotting entry and exit points by a combination of analyses.
There is no singular strategy perfect for all traders. Rather, each trader needs to develop an individual approach to forex. Ideally, forex traders take several indicators into account when plotting their trading strategy.