Forex trading strategies are essential for making money in the FX market. With the daily trading volume of foreign exchange standing at over $3 trillion; currency trading is done in the most liquid market in the world, which is bigger than all the stock exchanges across the globe put together.
However the extreme liquidity can also brings along volatility and it can be very easy to lose your money in the currency market unless you have carefully planned forex trading strategies in place.
Two of the tools used to analyze the FX market are fundamental and technical analysis. While fundamental analysis is valuable in predicting the overall movement and trend in the market; technical analysis is ideal as a tool for short term currency trading. It is based on the analysis of historical prices and volumes of currencies.
There are three distinct schools of thought when it comes to forex trading strategies; while some people are totally against technical trading and believe that fundamental analysis is all that is needed to predict the direction of the market; others believe that technical analysis provides a more realistic view of market movement.
However, you should ideally go with the third group of traders who are proponents of a mixed approach using the attributes of both fundamental and technical analysis. Here is a look at some classic signals and data that you should analyze when trying to formulate winning strategies.
currency trading strategies based of fundamental analysis
Economic indicators such as the unemployment rate, the fiscal deficit, the inflation figures and the bank interest rate will have a bearing on the currency market. For instance, if you are trading the USD/JPY pair (US dollar and Japanese Yen); you will find that any movement in the price of commodities, specifically gold and crude oil will have an impact on the price of the dollar.
Similarly, if the Japanese government were to find their exports suffering due to the price of their currency against the US dollar; they may push down the yen to make more money on their exports. All this information should be used when devising optimal forex trading strategies. Fortunately, economic data is usually released after prior intimation or at fixed intervals which give you enough time to chalk out a plan.
currency trading using technical analysis
If you would like to incorporate technical analysis in your strategy, you will need to constantly watch the charts and look for entry and exit signals. Ideally, the Japanese candlestick chart is the most suitable if you want to find signals based on price movements.
If you are a beginner in the currency trading market; start by analyzing the candle stick charts. Here you will see several distinctive patterns such as:
The Marabozu: This is a complete black or white candle with no shadows. A white candle signifies the continuation of a bearish trend or a bearish trend reversal while a complete black candle is indicative of a continuation of a bull run or a bullish trend reversal.
The doji: A skinny candle where the body is often a single line; to understand the signals with the help of the doji, you need to look at the candle that precedes it. Depending on the market in which a doji appears it means that there are no buyers or sellers left because of which the opening and the closing price of a currency were nearly the same; this may point to a trend reversal.
Another way is to look at the resistance and the support levels; the resistance is a level on the charts that the price of currency has jumped to but has not gone through while a support is a lower level on the chart that the price has plunged to but has not pierced. The theory holds that if the price goes through either the resistance or support levels; it will continue moving in that direction for some time before bouncing in the opposite direction.
Successful and efficient forex trading strategies should be based on two to three indicators; it is never prudent to rely on just one tool in currency trading.