FOREX Trading Strategy

FOREX Trading Strategy

There is no one specific FOREX trading strategy that is 'right' for all traders. Each trader needs to develop his or her individual approach to the FOREX.

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FOREX Trading Strategy

To be a successful FOREX trader you need your own trading strategy.

You must understand, however, that there is no one set strategy that is "right" for all traders. Each trader needs to develop his or her individual approach to the FOREX. Some traders will be well advised to rely solely on technical analysis while others will prefer fundamental analysis, but, many successful FOREX traders will actually choose a combination of both for a broad overview of the market and for plotting entry and exit points.

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Technical analysis relies on one major concept: Prices move by trends. The saying in FOREX is 'The trend is your friend.' Market movements have identifiable patterns that have been studied over several 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 which are available to help the novice and the professional 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

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 generally contain price movements over a given 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

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 analysis findings, or vice versa. 

Ideally, the FOREX trader will take several indicators into account when plotting a FOREX trading strategy.

At the least, 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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FOREX Trading Strategy
Page Updated 4:22 PM Monday 9/24/2012