You Must Acquire A Strategy Before You Begin To Trade The Forex

Posted on October 30, 2008
Filed Under Investments | Leave a Comment

If you are new to the world of currency trading then, before you open your first trade, you need to sit down and draw up a trading strategy. The currency market is one of the world’s most lucrative and exciting markets, but it is also extremely volatile and fast moving and, although you can make massive profits, you can also make substantial losses if you do not have a very well defined game plan.

There are numerous different currency trading strategies which you can adopt and you will need to come up with a strategy that suits you. Ultimately, exactly what strategy you select is largely immaterial but, what is important, is that you select a strategy before you start to trade.

Many traders nowadays choose to base their strategy on a technical approach to trading while others prefer to follow a fundamental approach. Both approaches are fine but the truly successful traders will tell you that the true secret is to be found 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 as long as you know what to look for. experience and knowledge play a key role in technical analysis but here it is a case of knowledge and experience of not only the patterns in the market but of working with the vast array of tools that are available today to the technical analyst.

Within technical analysis many traders like to use what are referred to as support and resistance levels. In this case a support price is a low price to which a currency constantly returns, effectively representing 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 from time to time but beyond which it tends to resist rising.

These two levels are seen as significant because once a currency price falls below its support level it will frequently continue to fall and, similarly, once the price exceeds its resistance level it will continue to rise.

Traders also frequently use moving averages which show average currency prices over a given period of time within a longer period of time. This is particularly helpful for eliminating short term fluctuations in a currency price and providing a clearer picture of the movement of a currency over time.

These of course are merely two of the tools available to traders who are following a technical approach and there are many complex and powerful tools available nawdays.

As well as technical analysis, many traders also believe strongly in fundamental analysis which says that currency prices move in response to a wide range of factors including political events, changes in trading patterns and trade agreements, 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 without doubt one reason why many novice traders are drawn to technical analysis and only tend to make use of fundamental analysis to a limited extent at first while they acquire the knowledge and skills needed to put it to work successfully.

Both fundamental and technical analyses of course are not in themselves trading strategies but provide the foundation on which you must build your strategy. Your starting point has to be to decide upon the base on which you are going to analyze the market and therefore make your trading decisions. Having done this you must then look closely at the mechanics of your trading and it is detailing just how you intend to trade which forms your Forex trading strategy.

Finally, remember that developing your strategy is something which needs to be done right at the start of your trading career and that you have to take full advantage of your ability to run a simulated Forex trading account and a mini Forex account to develop your strategy.

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