Learn about the forex trading strategies for new and existing strategies. This also looks at technical and fundamental analysis which are the foundation for any strategy.
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Below shows a summary of forex trading strategies but if you want the most comprehensive, up to date lists then we recommend you visit Trading Strategy Guides. They have a full and regularly update forex strategies section worth visiting.
If you’ve come here looking for a golden trading strategy that will propel you to currency trading greatness, you’ve come to the wrong place. There are plenty of blogs and websites out there promising vast riches in the short term from trading Forex.
They’ll use fancy jargon, talk up their crazy charting strategies and by the time they start using words such as “blade runner” or “Fibonacci” you would have all but zoned out. Before you even start exploring charting techniques you need a clear plan of action and below outlines some principle, forex trading strategies to live by.
1. Have A Game Plan
Perhaps the most common mistake forex traders or any day trader for that matter makes, is that they have no clear approach. The cardinal rule of trading is to make sure you have a list of defined forex trading strategies BEFORE you make your first trade.
Forex trading in Australia is extremely appealing. The market is a 24 hour a day market and you are free to both long and short a stock using significant leverage to amplify your gains. Many are attracted to currency trading by the promises of building huge fortunes. They are eager to prove themselves by making a killing overnight. However, these people are usually the first to lose a fortune. Entering currency markets with the simple goal of making millions is NOT a sound strategy. Many learn to trade and understand what is forex the hard way but if you accept some home truths about the Forex industry and plan a roadmap accordingly, you have more chance of success than most.
2. Why Are You Buying/Selling This Currency Pair?
Before trading a currency pair you need a solid reason. For example, why did you choose the EUR/USD currency pair over another? Do you believe this currency will appreciate the base? Do you think it will drop and you’ve decided to shorten it to make money on the downside? Have you studied its moving averages and delved into a technical analysis?
Plenty of traders get burnt because they haven’t devised forex trading strategies based on the currencies they plan on buying or selling. Don’t long or short a currency pair just for the sake of it. Try to understand what is happening to these currencies and why before you enter a position. Whether you source fundamental or technical information (or both) about a pairing, make sure it makes sense to you. Your forex trading strategies should also only concentrate on a few, major pairs. It is ill-advised to trade risky and less liquid exotic pairs as this is a sure-fire way to lose money.
3. Why Do You Want To Trade This Currency Pair Right Now
So you’ve decided which types of currency pairs to trade and have solid reasons backing your Forex trading strategies. However, when are you going short or long these pairings? Are you going to buy and sell right away or are you going to time your entry or exit with a market announcement such as an economic news release?
In Forex trading, timing is everything and needs to be decided upon before you commence trading. For example, are you going to day trade a particular currency pair and enter and exit the pair numerous times throughout the trading day or are you going to hold them for a while? The amount of time you have available to trade will also have some sort of effect on your Forex trading strategies.
4. How Much Money Do You Want To Make From Trading Forex?
Another question traders wanting to trade currency markets need to ask themselves is how much money do you want to make and how much are you prepared to lose if things go badly?
Traders need to have clear Forex trading strategies around their profit targets and stop-loss limits. Much like gambling, traders can plunder their profits by holding out too long. Conversely, from time to time traders will also let their losses run thinking prices may turn around and improve their positions. It is incredibly important to trade with discipline and learn to accept that sometimes your Forex trading strategies may be plain wrong.
New traders often get caught up in unrealistic profit targets. In general aim for a 20% gain in your first year. However, as a newbie, breaking even is an admirable target. Don’t be disheartened; the wealth of knowledge gained will hold you in good stead moving forward.
5. What Are You Doing To Protect Your Trades?
We touched on this slightly above, but traders also need to have clear Forex trading strategies around protecting their capital. Market forces can move against you unexpectedly and at any moment.
Stop losses and guaranteed stops can help minimise losses from adverse price movements by stipulating the lowest possible price you’d expect to sell a currency pair. Furthermore, guaranteed stops provide an absolute sale price and eradicate the risk slippage can have on an individual trade. Place your stop losses as soon as you commence trading to help you avoid sustaining significant losses. View more on broker strategies.
6. How To Manage Your Funds
One of the most important aspects of Forex trading is acknowledging that at certain points in time you WILL sustain some losses. Not even the most advanced traders get their Forex trading strategies 100% right all the time and they will often factor in the risk of loss into each trade. In general, experienced traders risk up to 5% of their account balance on each trade.
While this may look quite low, only risking a small portion of your capital on each trade will, without doubt, help you avoid significant loss. It will also help ensure a positive average profit to average loss ratio which will keep you trading Forex long term.
7. Record and Document All Your Trades
The final trading tip we’ll give you is to ensure you keep tabs on those Forex trading strategies and forex signals that were successful and those that were less so. Keeping a detailed record of your exact trades will help you uncover exactly which strategies worked. Many traders compile a comprehensive list of their successful strategies and proceed to develop their Expert Advisors or algorithms designed to execute their successful trading strategies at high speed and with little intervention. While some coding ability is often required here, successful Forex trading strategies are highly marketable and many Forex traders have made money from selling their tactics.
Do you want to manage Risk?
If you are new to trading, risk-averse or trading volatile market conditions you may wish to use risk management strategies to help minimise your losses. Risk Management does mean higher costs when it comes to spreads but it is a sound money management techniques when you buy and sell currency pairs. Types of risk management tools include guaranteed stop loss, guaranteed stops, dealCancellation, price level change alerts and trailing stops. guaranteed minimum account balance or no negative Account balance. These tools will ensure that your investment does not result in more losses than you might otherwise experience. Risk management is about considering the risk-reward ratio and assessing if the risk is worth managing.
In summary, the list put together above is preliminary only. Much more knowledge is required to trade Forex effectively and successfully. However, it is hoped that after practising free demo accounts and reading through some of the key principles above, new traders will develop discipline and the requisite proficiency to go on and make money trading currency and commodities CFD trading using top forex brokers.
An Introduction To Technical Analysis
Forex traders of all experience levels know that currency pair prices can do one of three things: Prices can go up, prices can go down, or prices can go sideways. With only those three potentials to consider, it would seem as though Forex trading would be easier than it is. After all, a trader holding a long position can only be hurt by the one potential, which is that of falling prices. If prices go up, the long trader earns profits and if prices hover in a sideways channel, well, no harm done.
Even new traders, including those who have been exposed to the Forex market only briefly through simulated trading accounts, quickly realise that Forex trading is extremely challenging. These traders, along with their more experienced intermediate and advanced counterparts, use analysis techniques to predict future price direction and to react to price changes as they happen in real time.
Types of Forex Analysis
Forex traders use fundamental and technical analysis to make their predictions and reactionary strategies. Fundamental analysis looks at long term historical exchange rates between any two paired currencies. It also considers the price impact of economic data that is released as news. These news events often quiet price changes before and after they are made public and cause wild gyrations in price in the minutes following their release.
Technical analysis, on the other hand, is a way of understanding price movement in the more immediate term of days, hours and minutes. Traders using technical analysis will sometimes be called chartists, because they rely on price charts to guide their trading actions.
Many traders will prefer or favour one of these types of analysis over the other, but in common practice, almost everyone will combine aspects of both types in the attempt to fully grasp the uncertainty of predicting currency pair prices.
A few of the key aspects of technical analysis can be found below:
Theory of Technical Analysis
At the heart of Forex technicians’ approach is the concept that all the elements that cause prices to change are shown on a price chart. All historical data, from the routine economic data news events that affect prices temporarily, to major world events with long-lasting implications, are displayed to provide assistance in predicting future prices.
Technical Analysis Basics
Forex charts combine a horizontal axis representing time on a grid with a vertical axis representing price. Simple analysis is possible from this alone. Prices that are historically high indicate a selling opportunity; low historical prices suggest a chance to buy currency pairs “on sale.”
Price bars are the next piece of the picture. There are more than a few types of price bar, but two of the most popular are the Open-High-Low-Close (OHLC) bar and the candlestick bar. For any given selected chart time frame, both these bars show traders the price when the bar began, its high and low points, and where prices were when the bar closed. The main difference between the two is that the OHLC bar has a uniform vertical thickness, whilst the candlestick has a wider body betwixt the open and close price levels. It is possible to construct effective trades and trading strategies from charts and price bars alone, such as when a trader uses them to find support and resistance price areas, selling when resistance is touched and buying at support levels. Many traders feel that trading from bare charts, those that have little other than time, price and price bars is the best way to discern truly the direction that prices take in the future.
Basic Technical Analysis Indicators
Looking only at the technical indicators supplied as defaults by Forex trading platforms, it will be seen that there are thousands of different technical indicators. The natural question arises: which indicators are best and which are of limited value?
That question has been asked since trading began. The closest thing to a simple answer is that the best technical indicator is the one that works best for a particular trader. That answer reveals something of the true nature of trading and the true nature of indicators. If there were one or several indicators that were bulletproof, effective 100 percent of the time, trading markets would cease to exist. Without uncertainty, there would be no speculative markets.
A good forex broker in Australia that provides technical analysis is AxiTrader.
All that being said, below you’ll find a few technical analysis indicators that have been a part of most traders’ toolboxes for many years:
Forex traders use moving averages due to the proven idea that prices always return to an average of their highest and lowest levels. This reality will be seen best on price charts dealing with longer time frames, but it is also apparent on time frames as short as one minute. The shortcoming of moving averages is that whilst they effectively inform traders of where prices will go, they cannot reveal when prices will go there.
Forex trading platforms allow traders to draw lines connecting a series of low price levels, or a series of high price levels. Price trend lines that connect a series of higher highs are said to be revealing an uptrend, indicating a buying opportunity. An uptrend line will ascend from left to right on a chart. A trend line connecting lows on a chart with a series of lower lows and lower highs will descend from left to right on a chart and indicate a downtrend, offering a selling opportunity.
These are but two of the indicators that have served traders of financial instruments for decades. Combined with charts and price bars, they are the mainstay of many effective trading strategies. Other technical analysis indicators, however, may prove valuable to different traders and all traders should make learning about as many indicators as possible an ongoing goal of a Forex trading career. The beauty of this school of thought is that any of the Australian forex brokers offer suitable software to ‘tech trade.’
Some Forex Technical Analysis Questions
Is the Fibonacci Retracement indicator applicable to Forex trading? What makes the Fibonacci Retracement indicator valuable is that it considers trader psychology. Prices seem to follow certain patterns that reflect human nature.
What parameters should be used with Bollinger Bands? Bollinger Bands are a type of technical indicator known as an overlay indicator in that the bands are displayed right on the chart. They resemble the banks of a river in some ways. Traders use them based on the assumption that when prices touch an upper or lower band, prices will reverse direction as the market tries to contain prices within the bands. Another strategy is based on the idea that when prices do break one of the bands, they will do so with vigour, offering buying opportunities when the upper band is broken and selling opportunities when the lower band is broken. Like many technical indicators, experienced traders often use Bollinger Bands more to supply good trade exit points than for determining when to initiate a trade.
View the fundamental analysis page for more details on the opposite forex perspective.
Forex fundamental analysis adheres to the basic laws of economics. This includes macroeconomics, microeconomics, monopoly, unemployment, interest rates, supply and demand. The English Economist Adam Smith described how the invisible hand created a self-regulating marketplace.
Supply & Demand
In a perfect world, each nation would have its own currency. This currency would be used as a unit of foreign exchange currency (Forex), it would account for trade balances and national productivity.
Supply and demand are important rules of fundamental analysis. This rule suggests that a Foreign exchange price will be a balancing point between how much currency is supplied and how much currency is demanded. The demand for currency is the desire to possess that currency to purchase a good or service from another nation.
For example, if the Australian mining industry finds a new gold deposit and turns this precious metal into gold coins at the Australian mint, the supply of gold coins has increased. International coin collectors may want to purchase these valuable coins, but need Australian dollars (AUD) to complete the transaction. Thus, the value of the AUD should increase due to higher demand.
In Australia, when it comes to currency, supply is controlled by the Royal Bank Australia (RBA) which the the Central Bank of Australia. The level of supply combined with the demand by forex traders on the forex market will determine the value of a currency pair for example Australia Dollar vs Japenese Yen.
A Universal Law
Fundamental analysis helps Forex traders remain focused on the laws of economics. While a price change may appear to be “unpredictable” in the short-term, it should return to a “predictable” price based on fundamental analysis. Adhering to fundamentals enables Forex traders to earn consistent profits.
Furthermore, nations do not trade for the sake of being kind or benevolent. They trade products and services to gain a comparative advantage. When Forex traders realise that one nation can gain an advantage by undertaking a certain action, then it might be time to execute a trade. The national debt is a primary example.
When a nation has a higher risk of defaulting on its national sovereign debt, then its sovereign bonds should offer a higher interest rate. Forex traders can profit when a nation’s chances of defaulting increase or decrease.
Fundamentals establish that marketplaces have a natural tendency to reach an equilibrium based on the invisible hand. Unsustainable national economic policies should lead to a reduction in the value of its currency. Everything works itself out in the long term.
Monopoly Versus Competition
The microeconomics concept of “perfect competition” is also operative for Forex trading. Many economic precepts are formed based on the concepts of “perfect competition” and “perfect information.” If everyone has the same information at the same time and has the option to choose different currencies, then a certain result should occur. The opposite of perfect competition is a monopoly.
With perfect competition in supplying something, the price structure tends to be elastic. A good example is wheat – there are many nations producing this grain; thus, a shortage in one country does not dramatically affect the overall price. A scarce commodity – like oil – has an inelastic price curve.
OPEC has created a consortium to control energy prices. A fundamental Forex strategy could concentrate on how supply bottlenecks could impact an OPEC member’s currency.
Some advanced traders might use overlapping Forex trades for nations that have close relationships. The AUD, CAD, GBP and USD might see similar Forex moves due to numerous cultural and economic similarities.
Forex Fundamental Analysis Strategies
While technical analysis involves the “tale of the tape” in gauging short-term price movements, the fundamental analysis seeks to find a “reason” for a price change. This could include unemployment figures, productivity reports or interest rate hikes. You can view our review of AxiTrader with the forex broker having an in-depth forex fundamental section. Each of these fundamentals will impact the value of a currency used for international trade. Here are other common Forex fundamental analysis strategies:
The Indian Hindu calendar has many different festivals, which could impact your trading of the Indian Rupee (INR). The West basically shuts down around Christmas. Holiday seasons could lead to more international Forex trade as gifts are imported from abroad.
Arbitrage is a guaranteed profit due to the same asset being priced differently in different markets. This is a very popular fundamental analysis strategy made more effective due to fast computer automated trade execution. The software programs can find arbitrage opportunities for you.
Raising interest rates or higher interest rates will affect the price for goods and services of a particular nation. Most nations try to devalue their currencies to increase exports.
Australia is primarily a raw materials exporter with much of its national income based on commodities. Thus, dramatic commodity price changes will impact the AUD more drastically.
Frequently Asked Questions (FAQ)
Generally, Forex fundamental analysis strategies are looking at the long-term causes and effects that determine prices. This can be combined with technical analysis to create a comprehensive, diversified plan. Here are a few of the frequently asked questions concerning fundamental analysis:
Isn’t Fundamental Analysis Old School?
Some of the fundamentals, like supply and demand, never change. In the long run, Forex must adhere to the fundamentals, just as water must adhere to the law of gravity.
What if I want quick returns?
You can still earn fast returns when currency trading while following the fundamentals. The fundamentals simply explain why a price changed.
How Can I Use Signals for Fundamental Analysis?
Trading signals can be programmed to execute trades when certain fundamentals occur (i.e. gold price equals a certain amount).
Does Fundamental Analysis Include Risk Management?
Fundamental analysis as a trading strategy is a form of risk management, where you never forget the laws of economics.
Forex traders should understand all of the basic rules of economics in order to create the best strategies to earn ample profits. Traders can use technical, charts and high-frequency trading (HFT), economic data with a range of financial instruments to make more money. All successful traders and forex brokers in Australia remember that in the end, the fundamentals always win!
View our technical analysis page for more details on that perspective of forex markets.