When we look at trading the forex market we have many different strategies to choose from. However there are some forex basics that will help us choose a strategy that will improve our chances of making a profit. There are 2 forex basics that we need to know about. The first is fundamental analysis and the second technical analysis.
To understand the fundamentals we have to look at the economics of the currencies we are studying and to do this we need to take an overview of how currency pairs will move. To trade the fundamentals we use economic data such as interest rates from central banks.
A currency pair will move depending on the economic news coming out of different countries, such as news releases and by central bank decisions on interest rates. One way of trading these releases is by looking at different levels of central bank interest rates. When one country has a high interest rate and another a low interest rate a trend will develop. This trend is caused by traders borrowing money from the country with the low rate and investing in government bonds in the higher rate country.
Now let us look at the technical trader. These traders use charts to understand how the market will move in the future and they are able to do this because they believe that our emotions are at play in the market and as a result they show up on our charts. As these emotions are always present in the market they produce patterns on the currency charts and a technical trader is looking to trade these patterns.
A profitable pattern is support and resistance as these are areas on a chart where trends have changed direction. When a currency is in a downward trend it will hit an area of support, and when we are in an upward trend we will encounter resistance. Where the multiple trends change direction at a signal price on a chart the effect becomes more pronounced.
Let's imagine we have a downward trend in our currency pair. By examining our chart using the larger time frames such as the daily or weekly charts we can identify potential areas of support. When we have identified an area we can look to open a buying position at this support level and when we do this we are expecting the support to hold and the market to reverse as it has done previously.
A strategy used by some traders is to combine the techniques outlined above. They will use a fundamental approach to select which currency pairs they wish to trade. While using technical analysis to decide when to open and close their trades. However some traders prefer to only use one approach, the one that works for them.
Once we know how we wish to trade we have to decide how we manage our trades. We can do this by manually opening our trades or we can have our computer do this automatically.
With manual trading we have to select our own trading set-ups. We do this by using a program given to us by our forex broker. This program gives us live currency data and allows us access to the market and to open a trade we have to manual click the button and when we decide to do this is our decision.
Another way we can trade manually is to take a semi-automated approach. In this instance we would use the brokers interface to manage our trades for us and by knowing our opening price and choosing whether we use a buy or a sell order, we select our stop-loss and our take profit points. Then we can let the computer trade for us. Once the trade is open the market will either hit our stop-loss or our take profit orders and this will either give us a loss or a profit.
Another way we can trade forex is by using an automated system which will trade for us. This trading system will run autonomously without human interference. We can buy a trading program from a developer or we can choose to develop our own system.
An automated trading system has a set of trading rules programmed into it and the trades are opened and closed depending on these rules. An automated trading system has an advantage over a human trader, as the trading system will follow the trading rules exactly because it does not suffer human emotions. However markets always change over time and this means the set of trading rules used by our system may not be profitable after the market shifts.
Everyone has different preferences in life and trading is no different, by identifying our trading preferences we can find a way for us to trade successfully.
Whether we trade automatically or whether we select our trades ourselves does not matter. Only that we trade in a way that is right for us and by trading in a way that is compatible with our own self will we have found our own successful trading strategy.
To understand the fundamentals we have to look at the economics of the currencies we are studying and to do this we need to take an overview of how currency pairs will move. To trade the fundamentals we use economic data such as interest rates from central banks.
A currency pair will move depending on the economic news coming out of different countries, such as news releases and by central bank decisions on interest rates. One way of trading these releases is by looking at different levels of central bank interest rates. When one country has a high interest rate and another a low interest rate a trend will develop. This trend is caused by traders borrowing money from the country with the low rate and investing in government bonds in the higher rate country.
Now let us look at the technical trader. These traders use charts to understand how the market will move in the future and they are able to do this because they believe that our emotions are at play in the market and as a result they show up on our charts. As these emotions are always present in the market they produce patterns on the currency charts and a technical trader is looking to trade these patterns.
A profitable pattern is support and resistance as these are areas on a chart where trends have changed direction. When a currency is in a downward trend it will hit an area of support, and when we are in an upward trend we will encounter resistance. Where the multiple trends change direction at a signal price on a chart the effect becomes more pronounced.
Let's imagine we have a downward trend in our currency pair. By examining our chart using the larger time frames such as the daily or weekly charts we can identify potential areas of support. When we have identified an area we can look to open a buying position at this support level and when we do this we are expecting the support to hold and the market to reverse as it has done previously.
A strategy used by some traders is to combine the techniques outlined above. They will use a fundamental approach to select which currency pairs they wish to trade. While using technical analysis to decide when to open and close their trades. However some traders prefer to only use one approach, the one that works for them.
Once we know how we wish to trade we have to decide how we manage our trades. We can do this by manually opening our trades or we can have our computer do this automatically.
With manual trading we have to select our own trading set-ups. We do this by using a program given to us by our forex broker. This program gives us live currency data and allows us access to the market and to open a trade we have to manual click the button and when we decide to do this is our decision.
Another way we can trade manually is to take a semi-automated approach. In this instance we would use the brokers interface to manage our trades for us and by knowing our opening price and choosing whether we use a buy or a sell order, we select our stop-loss and our take profit points. Then we can let the computer trade for us. Once the trade is open the market will either hit our stop-loss or our take profit orders and this will either give us a loss or a profit.
Another way we can trade forex is by using an automated system which will trade for us. This trading system will run autonomously without human interference. We can buy a trading program from a developer or we can choose to develop our own system.
An automated trading system has a set of trading rules programmed into it and the trades are opened and closed depending on these rules. An automated trading system has an advantage over a human trader, as the trading system will follow the trading rules exactly because it does not suffer human emotions. However markets always change over time and this means the set of trading rules used by our system may not be profitable after the market shifts.
Everyone has different preferences in life and trading is no different, by identifying our trading preferences we can find a way for us to trade successfully.
Whether we trade automatically or whether we select our trades ourselves does not matter. Only that we trade in a way that is right for us and by trading in a way that is compatible with our own self will we have found our own successful trading strategy.
About the Author:
Find out how to make forex trading profits as an forex trader on autopilot and make money while you sleep. Or check out the forex trading basics at my website forextradingtutorial.biz and start your forex trading tutorial.
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