| | 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 technical analysis can help you
become a successful FOREX trader.
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