When we look at trading the forex market we have many different strategies to choose from. However there are some forex basics that will help us choose a strategy that will improve our chances of making a profit. There are 2 forex basics that we need to know about. The first is fundamental analysis and the second technical analysis.
The fundamentals are the economic reasons that currencies pairs will fluctuate against one another and this is the big picture of forex trading. One of the things we can look at is the interest rate decisions made by central banks and other economic news releases.
By examining these economic news releases we can understand how this will affect a currency pair and one way of using this data is by looking at central bank interest rates. When we see two countries with different interest rates (one high/one low) a trend will develop in this currency pair and many traders will borrow money from the country with the low interest rate and reinvest it in the country with the higher interest rate.
Now let us look at the technical trader. These traders use charts to understand how the market will move in the future and they are able to do this because they believe that our emotions are at play in the market and as a result they show up on our charts. As these emotions are always present in the market they produce patterns on the currency charts and a technical trader is looking to trade these patterns.
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.
Both fundamental and technical skill can be combined. We can do this by using our fundamental skills to select which currency pairs to trade and then we would then look at the charts to show us where to open and close our trades. Some traders however will favour one discipline over the other and this is fine as long as we get the desired results.
Once we have decided which approach to use we must make another choice. This is how we want to open and close our trades and we can open trades in 2 ways. The first is by manually opening the trades and the second is by using a computer to trade for us.
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.
Another way we can trade manually is to take a semi-automated approach. In this instance we would use the brokers interface to manage our trades for us and by knowing our opening price and choosing whether we use a buy or a sell order, we select our stop-loss and our take profit points. Then we can let the computer trade for us. Once the trade is open the market will either hit our stop-loss or our take profit orders and this will either give us a loss or a profit.
Another way we can trade forex is by using an automated system which will trade for us. This trading system will run autonomously without human interference. We can buy a trading program from a developer or we can choose to develop our own system.
A computerized trading system runs on a set of trading rules. These rules are programmed into the system and they tell our broker when to open and close the trades. This is done automatically and without our input. When humans trade they suffer from the emotional effect of trading. A computer trading system however does not suffer from this and will follow the trading rules exactly. Unfortunately these rules are a set part of the system so if the market changes then the trading system may become unprofitable.
By taking the time to understand our own preferences we can begin to find a way for us to become successful with 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.
The fundamentals are the economic reasons that currencies pairs will fluctuate against one another and this is the big picture of forex trading. One of the things we can look at is the interest rate decisions made by central banks and other economic news releases.
By examining these economic news releases we can understand how this will affect a currency pair and one way of using this data is by looking at central bank interest rates. When we see two countries with different interest rates (one high/one low) a trend will develop in this currency pair and many traders will borrow money from the country with the low interest rate and reinvest it in the country with the higher interest rate.
Now let us look at the technical trader. These traders use charts to understand how the market will move in the future and they are able to do this because they believe that our emotions are at play in the market and as a result they show up on our charts. As these emotions are always present in the market they produce patterns on the currency charts and a technical trader is looking to trade these patterns.
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.
Both fundamental and technical skill can be combined. We can do this by using our fundamental skills to select which currency pairs to trade and then we would then look at the charts to show us where to open and close our trades. Some traders however will favour one discipline over the other and this is fine as long as we get the desired results.
Once we have decided which approach to use we must make another choice. This is how we want to open and close our trades and we can open trades in 2 ways. The first is by manually opening the trades and the second is by using a computer to trade for us.
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.
Another way we can trade manually is to take a semi-automated approach. In this instance we would use the brokers interface to manage our trades for us and by knowing our opening price and choosing whether we use a buy or a sell order, we select our stop-loss and our take profit points. Then we can let the computer trade for us. Once the trade is open the market will either hit our stop-loss or our take profit orders and this will either give us a loss or a profit.
Another way we can trade forex is by using an automated system which will trade for us. This trading system will run autonomously without human interference. We can buy a trading program from a developer or we can choose to develop our own system.
A computerized trading system runs on a set of trading rules. These rules are programmed into the system and they tell our broker when to open and close the trades. This is done automatically and without our input. When humans trade they suffer from the emotional effect of trading. A computer trading system however does not suffer from this and will follow the trading rules exactly. Unfortunately these rules are a set part of the system so if the market changes then the trading system may become unprofitable.
By taking the time to understand our own preferences we can begin to find a way for us to become successful with 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.
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