Monday, February 8, 2010

Trading Strategy Before You Begin To Trade The Forex

If you are a newcomer to the world of currency trading then, before you make your first trade, you must develop a trading strategy. The foreign currency market is one of the most lucrative and exciting markets in the world, but it is also very fast moving and, while you can make emormous profits, you can also make sizeable if you do not have a very clearly defined game plan.

There are numerous different Forex day trading strategies which you can adopt and you must develop a strategy that suits you. Ultimately, exactly what sort of strategy you adopt is largely immaterial but, what is important, is that you pick a strategy before you start trading.

A lot of traders nowadays choose to base their strategy on a technical approach to trading while others choose to follow a fundamental approach. Both approaches are fine but the successful traders know that the true secret is to be found in not selecting one or the other but in combining the two.

Technical analysis holds that prices follow trends and that markets demonstrate clearly identifiable patterns which you can recognize as long as you know what you are looking for. experience and knowledge play an important role in technical analysis but here it is a case of experience and knowledge of not only the patterns in the market but of working with the barrage of tools which are available today to the technical analyst.

A lot of traders and technical analysts like to make use of what are referred to as support and resistance levels. Here a support price is a low price to which a currency repeatedly returns, in effect marking the bottom of the market or the price that supports the market. A resistance price by contrast is a high price which a currency reaches at times but above which it resists rising.

These two levels are seen as significant because once the price of a currency falls below its support level it will commonly continue to fall and, similarly, once the price exceeds its resistance level it will continue to rise.

Traders also frequently make use of moving averages which depict the average price of a currency over a specific period of time within a longer period of time. This is very helpful for eliminating short term price fluctuations and producing a clearer picture of currency price movements over time.

These of course are only two of the tools available to Forex traders who choose to adopt a technical approach and there is a wide range of far more complex and powerful tools available today.

As well as technical analysis, a lot of traders also have a string belief in fundamental analysis which holds that currencies move in response to a wide range of factors including political events, changes in trade agreements and trading patterns, economic numbers, employment figures, interest rates and much more.

Fundamental analysis is a complex area which requires a great deal of experience and knowledge to master, which is probably one reason why many new traders are drawn to technical analysis and tend to make use of fundamental analysis to a limited degree at first while they gain the knowledge and skills needed to put it to work effectively.

Fundamental and technical analyses of course are not in themselves trading strategies but provide the base on which you have to build your strategy. Your starting point must be to pick the foundation on which you are going to analyze the market and thus make your trading decisions. Having done this you then need to look closely at the mechanics of your trading and it is detailing just how you intend to trade which forms your Forex trading strategy.

Finally, do not forget that drawing up your trading strategy is something that has to be done at the start of your trading career and that you have to make full use of the ability to run a demo Forex account and a mini Forex account to build your strategy.