Looking for a Way to Improve Your Currency Trading? Find Yourself Some Forex Strategies That Work

Home » Looking for a Way to Improve Your Currency Trading? Find Yourself Some Forex Strategies That Work

Talk to any Forex trader, and they’ll all have an opinion on what it takes to be successful. However, there is probably one aspect that most will agree on, and that’s the importance of having the best Forex strategy you can stick to. Maintaining discipline is a key element, most will agree, but in order to do this, you need an effective strategy to follow. You should look for one that is well-reasoned and back-tested, and you’ll be confident you’ve found the best Forex system. Trading based on a hunch or a whim might hit the home run on occasions, but is not going to be a profitable course of action.

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What are Forex trading strategies?

The subject of Forex strategies is really rather complex, but to answer the question in the simplest terms is possibly the best place to start. A Forex trading system or Forex strategy refers to information a trader uses when deciding how, when, and where to make a particular foreign currency trade, and how much to invest. Forex strategies can be based on either fundamental or technical analysis. A trading strategy based on technical analysis makes use of charts and graphs to identify optimum buy and sell levels. A trading system based on fundamental analysis is also called “trading the news”, which is a perfect description, as trading on fundamentals requires a trader to study news events and economic statistics in order to determine opportunities for trading. A fundamental trader will keep an eye on economic indicators such as interest rates, inflation, and employment rates. The best Forex strategy is one that takes into account both types of information. Traders have the choice of developing their own strategy or visiting one of the many online Forex sites and either buying one for a fixed price or taking a monthly subscription. There is also the choice of getting one online for free.

The tools a trader should have in their toolbox when deciding which is the best Forex system

forex trading strategies

If a trader decides they want to develop their own Forex trading strategy, there are a number of techniques and tools that will come in useful. Basically, they fall into one of two groups:

Fundamental analysis
This type of analysis requires a trader to keep an eye on the world, and the economies of individual countries. It also means being aware of current political trends, the financial standing of influential companies, and even what the weather is doing; because a natural disaster can have a significant effect on an individual country, as well as on the global economy. Take, for example, the 2005 Atlantic hurricane season, which saw record-breaking storms. These included seven major hurricanes, with Hurricane Katrina being the most newsworthy. It is said to have been the most expensive tropical cyclone in history, in terms of economic and insured losses. In the US, the season as a whole caused an estimated $209 billion in economic losses, which of course started a chain reaction of negative economic impacts to countries all around the world.

A trader who chooses to use fundamental analysis as the basis for their Forex trading strategy can focus on one kind of information or more. The information is then used to decide when, where, and how to invest. A fundamentalist trader believes that work events can affect the value of foreign currencies in a certain way. This means they can make a prediction depending on what factors are coming into play.

Technical analysis
Historical data is what is used when technical analysis forms the basis of a Forex trading strategy. The data is used to help predict what will happen to the price of certain currencies in the future. Technical analysis has been used for a number of years, in particular for stock market movements. It can be done in a variety of different ways and with the help of various tools, which we’ll take a look at later.

Which is the best? Fundamental or technical analysis?

In the interests of being fair and honest, we really have to say that a combination of both is better than excluding one or the other; and there are a number of very successful traders who would completely agree. However, there are also some very experienced and well-known traders who have gone the opposite way and concentrated their approach on either fundamental or technical analysis. Take, for example, Martin Schwartz, who has a huge reputation and earned a lot of money basing his trading strategy on technical analysis. On the other hand, there is Jim Rogers, who has earned his success based almost exclusively on fundamental analysis. So, it seems there isn’t really a right way of doing it, as they all seem to bring a certain level of success. Indeed, many traders will say there are a couple of other aspects that are far more important, and these are emotional control and discipline.

Now we’ve looked briefly at the sort of information a trader uses, let’s look at some examples of different types of Forex trading strategies. We won’t be telling you which is going to be the right one for you, as this will depend on so many variables. Our aim is to give you as much basic information as possible, give you some examples, and whet your appetite so that you can continue with your own research, and either develop a strategy of your own or copy someone else’s.

Different types of Forex strategies that work

There are hundreds of different trading strategies, and the hunt is always on for Forex strategies that work better than others. We would love to share the details of all the best Forex strategies, but that would require us to write a book. Instead, we’ll give you a couple of examples, one based on technical analysis and one based on fundamental analysis, and then we’ll look at some of the different trading styles you can adopt. These different styles can also be considered as strategies, and you might want to adopt one of them as your own.

Fundamental Forex trading strategies might work for you

A trader who bases his strategy on fundamental analysis is one who believes that world events, whether they’re political, economic, natural, or financial, have the potential to affect foreign currency markets in a certain way. This belief will cause them to make decisions relating to how they trade the currency markets. It has been a strategy for making trading decisions since the trading markets began, possibly because it doesn’t necessarily require the use of computers – although nowadays, traders have access to a huge amount and variety of global news, far more than ever before. The type of  news now available to fundamental traders includes the following:

  • Inflation
  • Trade figures
  • Growth and productivity
  • Employment figures
  • And much, much more.

In fact, countries regularly release reports giving all the details of the current economic situation. A trader just has to read these reports and compare them with those of other countries, and then use their own intuition to predict what is going to happen to the value of a certain currency. It is a very personal evaluation, and traders may all view the information in a slightly different way. Take, for example, the recent issue facing the UK: whether or not to stay in the EU, and how the population voted in the referendum. There must have been thousands of Forex traders eagerly awaiting the news on the days leading up to and after the all-important vote. Half of Forex trading takes place in London, so UK news has the potential to have a big effect.

A Forex trading strategy based on technical analysis might work better for you

Making use of technical indicators is another type of Forex trading system, and there are plenty of Forex trading sites that will offer their help; sometimes for a fee, and sometimes for free. Technical analysis often comes in the form of a graph. One trading strategy that uses technical analysis is called the “Fibonacci Indicator”.

The Fibonacci Indicator is possibly one of the better-known and more popular long term Forex strategies. It makes use of a “pullback”, as well as an important concept called the “trend”. Looking at price changes on an individual basis can be very difficult, as it is often hard to explain them and find a pattern, quite simply because there are so many of them. It is better to look at the bigger picture, and then you can see trends on a larger scale. Say, for example, the price of a currency, over a moderately short trend, experiences a period when it goes down in value, and also two periods when the value goes up. Overall, the trend will be to go upwards, but the part in the middle where it goes down is called a pullback. The difficulty is deciding whether the reversal of the trend is a pullback or simply just a reversal of the trend. Fibonacci comes to the rescue, allowing analysis of the data to help with the decision. The Fibonacci Indicators make use of numbers and ratios used among mathematicians and artists for centuries. And the brilliant thing is that you don’t need to do the maths, as there is software to do it all for you. You just need to make a decision based on the data.

Other types of Forex trading systems you might want to try are as follows:

Day trading
This is another popular form of trading, which many call active trading. It is a method of trading that involves buying and selling foreign currencies on the same day, without leaving any positions open overnight. Positions are opened and closed on the same day, and it is a form of trading popular amongst professional traders. Traditionally, it has always been the practice of specialists or market makers, because it was this type of trader who had access to the most up-to-date information; but the introduction of online trading sites and online brokers has meant that even the novice can take part, because access to the latest figures is now available for all.

Position trading
This type of trading is done over a significantly longer period of time. It could be a week, a month, or even years. Essential requirements for this type of Forex trading system are knowledge and experience. Long-term charts are used to gather the relevant information, and in combination with other methods can determine trends in current market direction. A trend trader will look for a series of higher highs and lower highs in order to determine a securities trend, and then “jump” on and benefit from riding the wave, thereby benefiting not just from the ups but from the downsides of the market as well. A trend trader isn’t trying to predict price levels, but instead determine the market direction. The idea is to jump on the trend when it has become established, and jump off again when the trade breaks. Trend trading is a little more difficult in times of high market volatility, and positions are generally reduced.

Swing trading
The time for a swing trader to get in on the game is when a trend breaks, as when a trend breaks there is often volatility in the price as a new trend tries to establish itself, and this is what the swing trader is trying to take advantage of. A swing trade will usually be held for more than a day, but not for the length of time that trend trades are held. A swing trader will use a combination of technical and fundamental analysis that has been designed to determine when it is time to buy or sell. The rules or algorithms used don’t have to be exact and accurately predict a valley or peak; but it does need the market to move in only one direction, regardless of whether that is up or down. If the market is sideways or range-bound there is more risk for the swing trader.

Forex scalping strategy
This type of strategy involves exploiting price gaps in the market, usually caused by order flows and bid/ask spreads. It usually involves buying at the bid price and selling at the ask price in order to benefit from the difference. A trader using a Forex scalping strategy only holds their positions for a short period of time, as this decreases the risk involved in such a strategy. A Forex scalper isn’t interested in exploiting large moves or high volumes. Instead, they are trying to take advantage of smaller and more frequent moves, and in smaller volumes. Profits are generally small, so a scalper is going to be looking for markets with higher liquidity in order to increase the frequency of their trades. A scalper also prefers a quiet market that isn’t going to surprise them with sudden price movements, because this means they can make the spread again and again on the same bid/ask prices.

We have gone into a little more detail with just a small selection of the most popular Forex systems, but  there are plenty more to choose from. So, how should you go about picking the best Forex strategy?

Tips for picking the best FX trading strategy

The honest truth is that there are no hard and fast rules to follow that will ensure that you pick the best trading strategy, as it really is a very personal thing. We could give you a few suggestions, but they really aren’t going to work for everyone. Basically, you should choose whatever strategy you want. If you like the sound of trend trading, then give it a whirl. If you prefer to trade on a daily basis, then day trading may be the right system for you. It might be better if we concentrate on what you can do if the trading strategy you’ve chosen doesn’t work. So here goes with our tips on what to do if the trading system you’ve chosen isn’t making you any money:

Don’t hide from your losses; cut loose and try something else – Sticking your head in the sand and pretending it’s not happening isn’t the wisest move to make. Sometimes it’s best to cut your losses and try something else.
If you don’t want to cut loose, reduce the size of your trades – This will give you time to work out a loss, and possibly add another trade when the price is more favourable. This is called cost averaging. Rather than running a mile, you’re hedging your bets, and you can always add to the trade if the price goes in your favour. Admittedly this course of action isn’t going to win you millions of dollars, but by trading small you can still win big over time.
Hold winning trades open longer – Do this rather than trying to hit a big win on every trade, and with the next trade, you could try a few extra dollars.

The whole idea of a winning strategy is really only wishful thinking. What works for one trader isn’t necessarily going to work for you. However, once you’ve decided on a strategy, run with it, stick with it, and give it a chance to reap a reward.

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