When trading FOREX, using a consistent and effective currency trading strategy is very important to win in this volatile market of FOREX. Strategies are categorized in two, between Fundamental and Technical strategies. Both of them are considered effective depending on each trader’s trading behavior and personality.
Technical Forex Trading Strategy
Trading FOREX using technical analysis is the most common method by which traders execute transactions in the Forex market. However, it is advised to use both the fundamental and technical analysis when trading to get the most appropriate signal. Technical analysis is normally used in analyzing data such as historical price trends, volumes, open interest, etc. Generally, it is conducted based on the historical movement of the currency. It will not definitely predict the exact movement of a certain pair in the future, but rather will guide or help traders in determining what will “most likely” happen with future prices.
When doing a technical analysis, charting methods and indicators are needed to complete the process. Therefore, a trader might need the following:
Simple Moving Averages (SMA)
– this can be considered as one of the easiest method in technical analysis. It simply indicates the average price of a currency pair within the given period.
RSI or the Relative Strength Index
– this is one of the most popular indicators in the oscillator charting methods. This indicator is the one that compares the currency strength and predicts currency price movements in the future.
Stochastic
– another easy to understand indicator in the oscillator charting methods is the Stochastic. It simply indicates if the currency is already on its overbought or oversold phase.
Parabolic SAR
– this indicator is important, for this is the ones identifies the end of a trend in a timely manner. Once the SAR dot changes position, it simply indicates the end of a current trend. Very simple to use and understand.
EMA or the Exponential Moving Averages
– works like the SMA however, this is more sensitive to changes than the SMA, since it contains to most recent data.
Other mathematically or statistically derived factors like the patterns and trend lines can also be a big help in determining the market’s movements, which includes Fibonacci, pivot points, and Elliot wave.
Fibonacci retracement level
– this is used by traders in determining the support and resistance levels, and will eventually let traders know when to enter and close the position.
Pivot Points
– it works like the Fibonacci, pivot points levels are the possible entry and exit points when trading. However, when trading, traders should look first at the pivot point, since major price movements usually occur at the price of the pivot point.
Elliot Wave
– this theory is another factor to be considered when trading. It has the thing called waves, which are determined thru the chart pattern. Wave 1 normally caused by a small amount of traders that feel like the perfect time to buy due to its low price, which eventually causes the price to rise. Wave 2 is the level wherein the price will slightly goes down, however will not meet the previous low. The Wave 3 is the longest and the strongest wave. People now noticed the market’s movement and will tend to buy, which generally causes the market to go even higher. The pattern can be up to wave 5, the market become overpriced and will start to go down, and starts back the ABC pattern.
Fundamental Forex Trading Strategy
Just like the technical analysis, fundamental trading strategy also has different indicators that will help guide FOREX traders.
When we say fundamental indicators, these indicators normally refer to the economic issue of a certain country or origin of a currency.
The basic understanding when it comes to fundamental analysis is that, the investment performance will affect the economy. Returns may possibly change due to inflation or deflation. That is why it is important to take into consideration the country’s economic condition when trading FOREX. Various factors like the unemployment rate, housing statistics, and the government’s stability of ones country generally affects the movement of the FOREX market.
Most of the time, traders tend to overlook the economic condition of a certain country. However, traders should know that the economic condition of a specified country is generally the reason why the market is moving. That is why when trading FOREX, this type of analysis should not be taken for granted. So what are the most powerful factors that move the FOREX market and how they will affect it? Let us take into consideration the following items below:
Retail Sales –Retail sales are where the purchasing power of a nation can be determined. The retail sales measure the total receipts of all the retail stores of ones country.
Interest Rate – When interest rates move, the market value will move accordingly. If the country’s interest rate rises to a higher level, there will be a tendency that investors will be attracted to invest more, and therefore will strengthen up the country’s currency value and vice versa.
The Gross Domestic Product (GDP) – another indicator used in fundamental analysis is the GDP or the Gross Domestic Product, which is considered the widest and broadest way to measure a country’s economy. GDP represents the total market value of all the goods and services produced by a certain country, and it is normally measured in a yearly period and not in weeks or months, for it will provide better statistics on the products and services produced by one country. However, this indicator is not enough in forecasting FOREX market movement. It must be analyzed using some other indicators to confirm of the market’s movement.
Unemployment Rates – This is definitely a strong indicator for a country’s economic condition. It can be measured through dividing the number of unemployed workers by the total civilian labor force of a certain country. Therefore, if you see a high unemployment rate, this simply and logically means that the economic condition of the country is definitely weak.
