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.
When we look at fundamental analysis we are looking at the economics of why currency prices change. We do this by looking at the big picture, for example if we look at news releases that will affect currencies such as central bank interest rate decisions.
These economic releases can affect how a currency pair will move against each other. An example of this is if a country has a higher central bank interest rate and another has a lower interest rate. Then a trend will develop in the currency pair as money is borrowed from the lower rate country and put to work 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.
One of these behavioural patterns is support and resistance. On any chart you will find areas where a trend will reverse. In an upwards trend this is called hitting resistance and in a downward trend it's called hitting an area of support. When we get areas on the charts where this happens repeatedly it makes the effect is more pronounced.
If the currency pair we want to trade is in a downward trend. We can look on the chart to see if there is an area of support and the more times we see that the market has turned at a set price the stronger the support will be. By using this knowledge we can look to open trades at these support and resistance levels.
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 have decided which approach to use we must make another choice. This is how we want to open and close our trades and we can open trades in 2 ways. The first is by manually opening the trades and the second is by using a computer to trade for us.
By trading manually we have to select our trades ourselves. We must click the buy or sell button and decide our position size, stop losses etc. We do this by using an interface provided by our forex broker. This interface provides a live feed of currency prices. To open a trade we must watch the live feed and wait until an opportunity appears and once we have opened our trade we must decide when we wish to close it.
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.
A computerized trading system runs on a set of trading rules. These rules are programmed into the system and they tell our broker when to open and close the trades. This is done automatically and without our input. When humans trade they suffer from the emotional effect of trading. A computer trading system however does not suffer from this and will follow the trading rules exactly. Unfortunately these rules are a set part of the system so if the market changes then the trading system may become unprofitable.
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.
When we look at fundamental analysis we are looking at the economics of why currency prices change. We do this by looking at the big picture, for example if we look at news releases that will affect currencies such as central bank interest rate decisions.
These economic releases can affect how a currency pair will move against each other. An example of this is if a country has a higher central bank interest rate and another has a lower interest rate. Then a trend will develop in the currency pair as money is borrowed from the lower rate country and put to work 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.
One of these behavioural patterns is support and resistance. On any chart you will find areas where a trend will reverse. In an upwards trend this is called hitting resistance and in a downward trend it's called hitting an area of support. When we get areas on the charts where this happens repeatedly it makes the effect is more pronounced.
If the currency pair we want to trade is in a downward trend. We can look on the chart to see if there is an area of support and the more times we see that the market has turned at a set price the stronger the support will be. By using this knowledge we can look to open trades at these support and resistance levels.
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 have decided which approach to use we must make another choice. This is how we want to open and close our trades and we can open trades in 2 ways. The first is by manually opening the trades and the second is by using a computer to trade for us.
By trading manually we have to select our trades ourselves. We must click the buy or sell button and decide our position size, stop losses etc. We do this by using an interface provided by our forex broker. This interface provides a live feed of currency prices. To open a trade we must watch the live feed and wait until an opportunity appears and once we have opened our trade we must decide when we wish to close it.
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.
A computerized trading system runs on a set of trading rules. These rules are programmed into the system and they tell our broker when to open and close the trades. This is done automatically and without our input. When humans trade they suffer from the emotional effect of trading. A computer trading system however does not suffer from this and will follow the trading rules exactly. Unfortunately these rules are a set part of the system so if the market changes then the trading system may become unprofitable.
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.
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