To be a successful FOREX trader you need to develop and adhere
to a trading strategy. There are many different strategy's
available and no particular one is good for all traders; rather,
each trader needs to develop his or her individual approach to
the FOREX. We each have special skills that separate us from
others and the FOREX trader needs to find what works best for
him/her. 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, or charting, relies on one key concept:
Prices move by trends. The common saying in FOREX and stock
trading is 'The trend is your friend.' If prices are moving in
one direction, the strength of the move can be observed by
looking at the chart. Market movements have identifiable
patterns that have been studied for many years and a thorough
understanding of these trends and how to use the trends to make
FOREX trading decisions form the basis of a good trading
There are many analytical tools available to study market
movements. FOREX traders can use computer software or even pen
and paper to perform their own analysis. Books abound describing
many of these strategies. The beginner FOREX trader should study
each one well and acquire a working knowledge of the concepts.
Study each method until it is mastered, then use itthe strategy
to fully learn it. Once mastered, move on to the next strategy
and repeat. It is a simple practice to "trade" FOREX simply on
paper, without entering any actual trades. In fact, this method
is highly recommended until the beginning FOREX trader builds
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. Prices will seldom fall below the
"support" line. At the opposite spectrum is the Resistance
levels. Resistance appears to be the peak that a price will
reach when buyers and sellers seem to agree. At this apex prices
will move up no further. The space in between "resistance" and
"support" is known as the "trading range". Prices can move back
and forth within this range for some time. The longer the time
frame spent in this range, the more important the signal
triggered when prices move outside of the range.
When currency prices break through either support or resistance
levels, the prices are expected to continue in that same
direction. As mentioned, the longer prices stayed in a trading
range, the more significant the "breakout", if prices move above
"resistance" or "breakdown", if prices fall below "support" For
example, if the price rises above the previous resistance level,
it is seen as bullish - the price should continue to rise.
signify's that more buyers have entered the market and this
increased "buy" pressure will move prices higher. Conversely,
when sellers are too many and buyers few, a "breakdown" could
signify prices moving lower again until buyers and sellers once
again reach equqlibrium. 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;
short term traders will study daily or even hourly charts while
the long term trader will use weekly or monthly charts to easily
see the long term trend. 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. If a trader only uses the closing price of a
currency at the end of the day as a guide, it is hard to
establish the true direction of the move. Moving averages
"smooth" out the large moves and give us a much clearer look at
the currency price. One average used is the simple moving
average (SMA) shows the average price in a given period of time
over a specified period of time. A 10 day SMA simply takes the
past 10 day closing price of a currency and averages out the 10
day data. Another popular moving average is a weighted moving
average. While similiar to the SMA, the WMA puts more emphasis
on the last several days trading. So while still showing a 10
day average, more weight is added to the last couple of trading
days to better reflect the true trend. When prices are above the
MA, they will tend to stay above the MA line. When the MA is
below the line, price decline can be expected as well.
These are 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 trading method or
another. Experienced traders will rely on several, rather than
one, key indicators to base their trading decisions on.
Similarly, fundamental analysis can be used to reinforce
technical findings, or vice versa. The FOREX trader will study
currency valuations, inflation rates, and other key financial
indicators to decide whether a currency is "cheap" or
"expensive" Ideally, the FOREX trader will use 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.
About the author:
Read more of this informative series designed for the beginning
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Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest / trade in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading.
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