If you are a newcomer to the world of foreign currency trading then, before you open your first trade, you must draw up a strategy. The Forex market is one of the world’s most lucrative and exciting markets, but it is also extremely fast moving and, while you can make tremendous profits, you can also make large if you do not have a very well defined plan of action.
There are various different foreign currency trading strategies which you can adopt and you will need to develop a strategy which suits you. At the end of the day, exactly what strategy you pick is largely immaterial but, what is important, is that you choose a strategy before you start trading.
Nowadays, many traders choose to base their strategy on a technical approach to trading while others prefer to follow a fundamental approach. Either approach is fine but the successful traders will tell you that the true secret lies in not selecting either method but in combining the two.
The principle behind technical analysis is that prices follow trends and markets possess clearly identifiable patterns which you can recognize if you know what to look for. Knowledge and experience play a key role in technical analysis but here it is a case of knowledge and experience of not simply the patterns in the market but of working with the large number of tools that are now available to the technical analyst.
Within technical analysis many traders like to work with what are referred to as support and resistance levels. In this case a support price is a low price to which a currency repeatedly returns, in effect marking the bottom of the market or the price at which it supports the market. By contrast, a resistance price is the high price which a currency reaches at times but beyond which it resists rising.
These two levels are seen as important because once the price of a currency drops below its support level it will frequently continue to drop and, similarly, once the price exceeds its resistance level it will continue to rise.
It is also common for traders to use moving averages which depict average currency prices over a specific period of time within a longer time period. This is particularly useful for getting rid of short term price fluctuations and producing a clearer view of currency price movements over time.
Of course these are simply two of the many tools available to Forex traders who are following a technical approach and there is a wide range of far more powerful and complex tools available nawdays.
As well as technical analysis, a lot of traders also have a string belief in fundamental analysis which says that currency prices move in response to a wide range of factors including political events, changes in trade agreements and trading patterns, economic numbers, employment figures, interest rates and much more.
Fundamental analysis is a complex area which requires a great deal of experience and knowledge to master, which is probably one reason why many novice traders are drawn towards technical analysis and only tend to make use of fundamental analysis to a very limited degree at first while they acquire the knowledge and skills needed to put it to work successfully.
Fundamental and technical analyses of course are not by themselves trading strategies but are the foundation on which you must build your strategy. Your starting point has to be to decide upon the foundation on which you want to analyze the market and therefore make your trading decisions. Having done this you must then look carefully at the mechanics of your trading and it is detailing precisely how you intend to trade which forms your Forex trading strategy.
Finally, do not forget that developing your strategy is something which needs to be done at the beginning of your trading career and that you have to make full use of the ability to operate a simulated Forex trading account and a Forex mini trading account to develop your strategy.
