Forex Trading Strategies
Forex trading is an extremely lucrative activity if done right but also carries a significant element of risk. Before embarking on this activity, it is important to take the time to learn some basic forex trading strategies and techniques.
Forex trading strategies comprises mainly of two components, fundamental analysis and technical analysis. Many investors either use a combination of both, or one or another.
Fundamental analysis is the study of the markets and economic circumstances of a particular country that might affect it’s currency either positively or negatively in comparison with currencies of other countries. For example, the credit crunch in the United States affected it’s currency in a negative way and fundamentalists would put a bet in the USD falling against other currencies. Fundamental analysis is often studied by large financial corporations but it’s important for the retail investor to keep track of the news and the major trends.
Technical analysis is the study of charts and trends and is a favourite of many retail investors as it allows for quick buy and sell trades. Technical analysts study historical charts and believe that all trades follow a pattern and that by applying historical patterns on current prices, they can correctly identify entry and exit points. Support and Resistance, Fibonacci sequences, Simple Moving Average and Elliot Wave are examples of forex trading strategies using technical analysis.
While fundamental and technical analysis helps the investor in determining their trades, there are other forex trading strategies that you should apply in making the trade itself. One strategy that you must almost always use (unless you are scalping) is the stop loss order. This strategy protects you from potentially losing a lot of money when a trade goes against what you predicted it to be. The stop loss order kicks in when the exchange rate breaches a pre-determined price point and automatically liquidates the position. The stop loss order is usually used in conjunction with the limit order which automatically takes profits by liquidating the position at a pre-determined profitable price point. The stop loss order and limit order are important as forex is traded 24 hours a day and you might not be online to make the trade when the exchange rate breaks through a critical price point where you must either limit your losses or take your profits.
Finally, one of the most overlooked forex trading strategies is money management and the improper use of leverages. Because of the generous leverages offered by most forex brokers, many investors tend to get carried away and gamble most of their capital on one big trade. When the trade goes wrong, the find their entire capital wiped out or even worse, with a huge debt. Always trade with discipline and with only a percentage of your capital. Remember that irresponsible and rash trading based on emotions is not investing, but gambling.
Before you go looking for the perfect forex trading strategy, it’s important to understand that there’s no such thing. Most investors start off by adopting forex trading strategies from attending courses and reading as many books as possible and slowly evolving these strategies to suit their individual trading preferences and personalities. As in all investments, there’s an element of unpredictability in currency trading that would make it impossible for any strategy to guarantee 100% winning trades every time. A successful forex trading strategy is one that minimises risk and maximises returns to generate profits in the long term.