Forex Trading Strategies and Tactics

forex trading strategies

Forex trading strategies include a wide range of techniques and analysis used in spotting potential currency trades. These techniques can range from technical analysis, fundamental analysis, systems trading and automated trading. Each of these forms the broad basis of an individual forex trading strategy which will generally use the principles of one or more of these methods of trading. In this article we will look at how each variation can be used and applied successfully by traders as well as the potential problems that traders may encounter through trading with each of these foundations of their currency trading strategy.

The first, and most widely used, foundation of a forex trading strategy is technical analysis. This is known as the study of price charts and is used widely amongst professional traders to spot opportunities which have previously occurred and have a high-probability of resulting in a similar outcome. Forex trading strategies which rely on technical analysis look for signs of strength and weakness in price charts, through the analysis of specific patterns in order to base formulate trading decisions.

Some of the most popular currency trading strategies using technical analysis are the observation of trend lines in price. These lines can be drawn on to charts by those who have learnt how to spot them and they act as powerful determinants of market direction. Price reacts when it reached a trend line and many forex trading strategies based on trendline analysis will look for either continuation or break of important trend lines in order to dictate the entry and direction of a trade. Other forex trading strategies based on technical analysis will look for familiar patterns which are obvious (and become self-fulfilling) to many traders such as ´head and shoulders´ and ´double-bottoms´ which have a very high probability of success.

Forex trading strategies based on fundamental analysis use less-specific criteria and are focused less on the intra-day movement of price and instead look at the broader, underlying economic trends guiding a market. Currency trading strategies based on fundamental analysis include swing trading with interest and inflation data. Many fundamental analysts take medium-term positions based on the longer-term effect that this data will have on the market.

Data announcements such as interest rate changes shift the demand for a currency and therefore form very reliable forex trading strategies. The problem that many traders have with this form of position trading is the fact that these large price movements, although potentially very profitable, can take several weeks to materialize and require large, flexible stop-losses. This form of forex trading strategy is therefore not always suitable for all traders, especially those who prefer to day trade. However, another form of forex trading strategy based on fundamental analysis is trading the news throughout the day. This can be a fast and exciting way to trade, especially when day trading large news and data releases such as the US non-farm payroll announcements which affect all currency pairs to some degree.

Systems’ trading is very popular amongst traders who want a forex trading strategy which will help them to remove any subjectivity from the market. These mechanical trading systems and tactics have a defined set of entry and exit rules and can be traded without allowing a traders emotion to disrupt the outcome of the trade. These currency trading strategies are tested over time and good systems are proven to ´have an edge´. This means that they will incur losses but over time will generate more profits than losses.

Forex trading strategies based on mechanical trading rules include Moving Average crossover systems at the most basic level and complex signal-generators, based on advanced algorithms, at the advanced level. An extreme version of these mechanical forex trading strategies, which still require traders to actually enter and exit a position, are automated systems. These systems form less of a strategy but simply let a computer programme make trading entry and exit decisions. These systems can provide a very easy income with minimal hassle (if they are reliable), however, finding an automated system which works across all market conditions is very difficult, if not impossible to find. However, the risks of letting computer programmes dictate such forex trading strategies does not always sit comfortably with all traders.

The differences in the foundational basis of forex trading strategies available to traders are fairly diverse. These foundations are usually centered on either technical fundamental, mechanical or automated forms of trading which will inform a particular trading strategy. Combinations of these are often used, such as a mechanical forex trading strategy based on technical analysis. The decision of which one a trader will choose to employ will very much depend on their trading style, capital, preferred timeframe and discipline. Taking all of these factors into account certain forex trading strategies will suit one trader far more than another.

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