Understanding Forex Trading Strategies

Forex traders rely on Forex trading strategies when attempting to determine whether or not a currency is going to strengthen or weaken against other currencies. There are two main principal schools of thought. On the one hand, there are those Forex traders who rely on the fundamental analysis strategy. On the other hand, there are those who believe in a technical analysis strategy. As a successful Forex trader you should integrate both of these techniques in your complete Forex trading system. Below I take a quick look at the fundamentals of both of the main types of Forex trading strategies.

Fundamental Forex trading strategy

A Forex trader who relies on the fundamental Forex trading strategy to determine whether or not their elected currency is going to appreciate or depreciate believes in the underlying factors that help determine a foreign exchange rate. Thus, to a fundamentalist such factors as unemployment figures, what rate of interest the central bank is offering, gold prices, consumer confidence, national debt, the stock exchange index, are all crucial elements in helping them determine whether or not to buy or sell. Moreover, every time one of these figures changes, they need to reassess whether or not they should continue to hold that currency, or whether the time has come to sell.

This technique pertains to the economic and political conditions that may affect the currency prices. Forex traders use fundamental analysis to research information about economic policies, inflation, growth rates and unemployment rates. Traders accomplish this by using news reports about the areas where the currency they will be trading on. This information helps to provide a big picture of the economic conditions that will affect specific currencies. When dealing with fundamental analysis you will come to learn that the two more important fundamental indicators are international trade and interest rates. Other indicators will include, Durable Goods Order, Producer Price Index, Purchasing Manager’s Index, and retail sales.

Fundamental Forex trading strategies are popular amongst professional Forex traders.

Technical Forex trading strategy

As the name might indicate, a technical Forex trading strategy relies heavily on technical equipment, such as computers and computer software programs, to help them decide whether the time is right to buy or sell. Included in most technical analysis strategies is a belief that currencies are predictable by way of their previous movements and that if a Forex trader studies past currency movements, this can help them to determine where the currency should be going in the future. A technical Forex trading strategy is most popular among online Forex day traders – it involves the use and mastery of technical indicators like moving averages, MACD, stochastic, bollinger and more.

Technical trading actually takes into account the fundamentals. Technical analysis also factors in the greed and the fear of the people who will influence currency prices. Technical analysis looks at both inputs that make up the price, simply looking at the Forex charts and lets that tell them where to execute their trading signals. When traders use technicals for plotting the entry an exit target prices into the Forex market, they will supplement their findings with fundamental analysis. The upside to Forex technical trading is that it’s much less time consuming and you are more likely to keep your emotions out of your trading. Technical analysis let’s you trade on reality, you will trade on the truth of the market price and not what your feelings say the market price should be.

The most successful Forex traders combine both fundamentals and technicals when trading. As a technical trader, you should understand what news events are being released and how they could potentially affect your trades. A good example would be if a currency appears to be heading into resistance on a currency chart and one of those countries are expected to make a major news announcement, it would be good practice to stay out of the market until after the news event. Then once price has settled down, you can analyze what this data means to your bias and take the appropriate action.

Which strategy should you use?

While you will learn that both types of Forex trading strategies are important for profitable and successful trades, you will also learn that traders tend to lean towards one or the other type more or so. When you incorporate the technical style of trading, you must be prepared to deal with mathematical concepts that are necessary to manipulate currency pricing data and when you incorporate fundamental analysis you must be ready to deal with many economic factors that will be necessary to base your trades on.

A lot of good and bad things could be said about both systems. Truth is, it is probably sensible if you use elements of both systems in your day-to-day Forex trading decisions. A general comment that can be made about the two systems, however, is that if you consider yourself a long-term investor, i.e. more than 3 to 6 months, in a currency, then it is probably sensible if you make more use of the fundamental Forex trading strategy than the technical. Conversely, if you are a short-term Forex trader, such as a day trader, then it may be more beneficial for you to adopt the technical Forex trading strategy, as the underlying principles of the fundamental approach would take too long to come through the system, by which time you’ll most probably have traded the currency several times.

In an ideal world, of course, you would be making use of both Forex trading strategies at the same time to create a hybrid strategy that would give you better insight into how to make a profit Forex trading. And remember, anything that can give you a bit of leverage and help you to make a profit should be given serious consideration.