In forex trading there are many different strategies that will make us money, but to make money we must first understand the basics. The first strategy is how we trade a currency and this can either be by following the fundamentals or trading on a technical basis.
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.
Technical traders look to trade in a different way, they read the currency charts to determine if there are any patterns. Chartists believe that human emotion drives all market moves and these emotions are represented on their charts. By looking for the patterns these emotions make the chartist is able to make an educated guess as to where the market may be heading.
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.
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.
Many traders will use fundamental analysis to select which currency pairs they wish to trade and once they have decided they would then use technical analysis to find their entry and exit points for the trades. However some traders will only use fundamentals analysis and other traders will only use technical analysis.
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.
Some traders will use market orders to open and close their trades and we can use our brokers terminal to do this. We first must decide how we wish to trade, the price we want to open our trade and whether we want to use a sell or buy position. We also need to understand where our take profit point is and where our stop-loss will be. We must know these things before we can trade. Then we input this information into our computer and the trade is then completely managed by the computer.
When we trade automatically with a computer we are using a trading program to open our trades for us. We can either develop our own trading program or we can buy a commercially available trading 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 is different in how we react to trading. To be able to trade successfully we must learn what works for us and only then will we be successful in our trading.
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.
Technical traders look to trade in a different way, they read the currency charts to determine if there are any patterns. Chartists believe that human emotion drives all market moves and these emotions are represented on their charts. By looking for the patterns these emotions make the chartist is able to make an educated guess as to where the market may be heading.
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.
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.
Many traders will use fundamental analysis to select which currency pairs they wish to trade and once they have decided they would then use technical analysis to find their entry and exit points for the trades. However some traders will only use fundamentals analysis and other traders will only use technical analysis.
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.
Some traders will use market orders to open and close their trades and we can use our brokers terminal to do this. We first must decide how we wish to trade, the price we want to open our trade and whether we want to use a sell or buy position. We also need to understand where our take profit point is and where our stop-loss will be. We must know these things before we can trade. Then we input this information into our computer and the trade is then completely managed by the computer.
When we trade automatically with a computer we are using a trading program to open our trades for us. We can either develop our own trading program or we can buy a commercially available trading 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 is different in how we react to trading. To be able to trade successfully we must learn what works for us and only then will we be successful in our trading.
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.
