If you are new in the world of Forex trading, before you even think about making your first trade, you need to sit down and draw up a Forex trading strategy. The forex market is one of the most exciting and lucrative markets in the world, but it is also extremely fast moving and volatile and, while you can make tremendous profits, you can also make substantial losses if you do not have a very clearly defined game plan.
There are a number of different strategies that you can adopt for your trading in the foreign exchange markets and you will have to come up with a strategy that suits you. At the end of the day exactly what strategy you decide to adopt is largely immaterial but, what is important, is that you have a strategy before you start trading.
Many traders today 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 real successful traders will tell you that the real secret lies in not selecting one or the other, but the combination of the two.
Technical analysis holds that prices follow trends and that markets possess clearly identifiable patterns which can be recognized if you know what you are looking for. Both knowledge and experience play an important role in technical analysis, but here is a case of knowledge and experience, not only of the patterns in the market, but of working with the barrage of tools which are know available to the technical analyst.
Within technical analysis many traders like to work with what are called support and resistance levels. In this case a support price is a low price of two which a currency repeatedly 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 above which it tends to resist rising.
The importance of these two levels is that once the currency price falls below its support level (commonly continue to fall and, in the same way, once the price exceeds its resistance level it will continue to increase.
It is also common for technical analysts to make use of the moving average, showing the average price of a currency during a particular period of time, within a longer period of time. This is very useful for eliminating short term fluctuations in a currency price and producing a clearer picture of the movement of a currency over time.
These, of course, are just two of the many tools available to Forex traders who are following a technical approach and there is a wide range of much more complex and powerful tools available today.
In addition to technical analysis, many traders also believe strongly in fundamental analysis which holds that currencies move in response to a wide range of factors, including political events, changes in trade agreements and trading patterns, economic numbers, interest rates, employment figures and much more.
The Fundamental analysis is clearly a complex area that requires a lot of knowledge and experience for the teacher, which is probably one reason why many new traders are easily drawn towards technical analysis and tend to use fundamental analysis to a limited degree at first while they acquire the knowledge and skills necessary to work effectively.
Both technical and fundamental analysis are of course not in themselves trading strategies but are the foundation on which you will need to build your trading strategy. Your starting point should be to decide on the basis on which to analyze the market and well able to take their trading decisions. Once you have done this you need to pay attention to the mechanics of their trade, and detailing just how you’re going to trade that forms your trading strategy.