How To Choose A Forex Strategy That Works
When we trade the foreign exchange market we have many different ways we can make money. To be able to choose the right strategy we need to understand some basics. First we need to look at two different ways of understanding the market, the first is with fundamental analysis and the other is with technical analysis.
The fundamentals are the economic reasons that currencies pairs will fluctuate against one another and this is the big picture of forex trading. One of the things we can look at is the interest rate decisions made by central banks and other economic news releases.
These economic releases can affect how a currency pair will move against each other. An example of this is if a country has a higher central bank interest rate and another has a lower interest rate. Then a trend will develop in the currency pair as money is borrowed from the lower rate country and put to work in the higher rate country.
Technical traders look to trade in a different way, they read the currency charts to determine if there are any patterns. Chartists believe that human emotion drives all market moves and these emotions are represented on their charts. By looking for the patterns these emotions make the chartist is able to make an educated guess as to where the market may be heading.
A common technical pattern is called support and resistance and by looking at our chart we can see areas where trends have reversed direction. When this happens in an upward trend it has met resistance and when it happens in a downward trend it has met an area of support. When this has happened repeatedly at a certain price the stronger the effect will be.
If the currency pair we want to trade is in a downward trend. We can look on the chart to see if there is an area of support and the more times we see that the market has turned at a set price the stronger the support will be. By using this knowledge we can look to open trades at these support and resistance levels.
Both fundamental and technical skill can be combined. We can do this by using our fundamental skills to select which currency pairs to trade and then we would then look at the charts to show us where to open and close our trades. Some traders however will favour one discipline over the other and this is fine as long as we get the desired results.
Once we know how we wish to trade we have to decide how we manage our trades. We can do this by manually opening our trades or we can have our computer do this automatically.
By trading manually we have to select our trades ourselves. We must click the buy or sell button and decide our position size, stop losses etc. We do this by using an interface provided by our forex broker. This interface provides a live feed of currency prices. To open a trade we must watch the live feed and wait until an opportunity appears and once we have opened our trade we must decide when we wish to close it.
When we manually trade we can chose to trade semi manually. In this method we would open our trade manually but we would use our computer to close the trade. This is done by using a stop loss and a take profit order. By using these orders the trade will be closed when the market reaches one of our chosen orders. Our trade will be in profit if the take profit point is reached first and we will have a loss if the stop loss is hit first.
When we trade automatically with a computer we are using a trading program to open our trades for us. We can either develop our own trading program or we can buy a commercially available trading system.
An automated trading system has a set of trading rules programmed into it and the trades are opened and closed depending on these rules. An automated trading system has an advantage over a human trader, as the trading system will follow the trading rules exactly because it does not suffer human emotions. However markets always change over time and this means the set of trading rules used by our system may not be profitable after the market shifts.
Everyone is different in how we react to trading. To be able to trade successfully we must learn what works for us and only then will we be successful in our trading.
Some of us will enjoy the excitement that comes with manually running our trading set-ups while others will like a computer to make the decisions for us. There is no right way or wrong way to trade. Only the best way that works for us as an individual and then we will have found our trading strategy that works.
The fundamentals are the economic reasons that currencies pairs will fluctuate against one another and this is the big picture of forex trading. One of the things we can look at is the interest rate decisions made by central banks and other economic news releases.
These economic releases can affect how a currency pair will move against each other. An example of this is if a country has a higher central bank interest rate and another has a lower interest rate. Then a trend will develop in the currency pair as money is borrowed from the lower rate country and put to work in the higher rate country.
Technical traders look to trade in a different way, they read the currency charts to determine if there are any patterns. Chartists believe that human emotion drives all market moves and these emotions are represented on their charts. By looking for the patterns these emotions make the chartist is able to make an educated guess as to where the market may be heading.
A common technical pattern is called support and resistance and by looking at our chart we can see areas where trends have reversed direction. When this happens in an upward trend it has met resistance and when it happens in a downward trend it has met an area of support. When this has happened repeatedly at a certain price the stronger the effect will be.
If the currency pair we want to trade is in a downward trend. We can look on the chart to see if there is an area of support and the more times we see that the market has turned at a set price the stronger the support will be. By using this knowledge we can look to open trades at these support and resistance levels.
Both fundamental and technical skill can be combined. We can do this by using our fundamental skills to select which currency pairs to trade and then we would then look at the charts to show us where to open and close our trades. Some traders however will favour one discipline over the other and this is fine as long as we get the desired results.
Once we know how we wish to trade we have to decide how we manage our trades. We can do this by manually opening our trades or we can have our computer do this automatically.
By trading manually we have to select our trades ourselves. We must click the buy or sell button and decide our position size, stop losses etc. We do this by using an interface provided by our forex broker. This interface provides a live feed of currency prices. To open a trade we must watch the live feed and wait until an opportunity appears and once we have opened our trade we must decide when we wish to close it.
When we manually trade we can chose to trade semi manually. In this method we would open our trade manually but we would use our computer to close the trade. This is done by using a stop loss and a take profit order. By using these orders the trade will be closed when the market reaches one of our chosen orders. Our trade will be in profit if the take profit point is reached first and we will have a loss if the stop loss is hit first.
When we trade automatically with a computer we are using a trading program to open our trades for us. We can either develop our own trading program or we can buy a commercially available trading system.
An automated trading system has a set of trading rules programmed into it and the trades are opened and closed depending on these rules. An automated trading system has an advantage over a human trader, as the trading system will follow the trading rules exactly because it does not suffer human emotions. However markets always change over time and this means the set of trading rules used by our system may not be profitable after the market shifts.
Everyone is different in how we react to trading. To be able to trade successfully we must learn what works for us and only then will we be successful in our trading.
Some of us will enjoy the excitement that comes with manually running our trading set-ups while others will like a computer to make the decisions for us. There is no right way or wrong way to trade. Only the best way that works for us as an individual and then we will have found our trading strategy that works.
