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.
Traders who use technical analysis are looking for price patterns on their currency charts. Practitioners believe that markets are impacted by human emotions and as a result of this behavioural input the market will repeat itself. This repetition creates patterns that can be used by the trader to forecast where the market is heading.
A profitable pattern is support and resistance as these are areas on a chart where trends have changed direction. When a currency is in a downward trend it will hit an area of support, and when we are in an upward trend we will encounter resistance. Where the multiple trends change direction at a signal price on a chart the effect becomes 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.
Many traders will use fundamental analysis to select which currency pairs they wish to trade and once they have decided they would then use technical analysis to find their entry and exit points for the trades. However some traders will only use fundamentals analysis and other traders will only use technical analysis.
Once we know how we wish to trade we have to decide how we manage our trades. We can do this by manually opening our trades or we can have our computer do this automatically.
When we trade manually we are opening our trades ourselves and we must decide when we open a trade and more importantly when we close it. To do this we watch a live feed of the currency pair we are trading and when a trading opportunity appears on our screen we can open a trade. We must then wait until we decide to close the trade.
When we manually trade we can chose to trade semi manually. In this method we would open our trade manually but we would use our computer to close the trade. This is done by using a stop loss and a take profit order. By using these orders the trade will be closed when the market reaches one of our chosen orders. Our trade will be in profit if the take profit point is reached first and we will have a loss if the stop loss is hit first.
If we don't want to trade manually we can use an automated trading system instead. We can either buy a trading system that has been developed by someone else or we can program our own trading 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.
Everyone has different preferences in life and trading is no different, by identifying our trading preferences we can find a way for us to trade successfully.
Some of us will enjoy the excitement that comes with manually running our trading set-ups while others will like a computer to make the decisions for us. There is no right way or wrong way to trade. Only the best way that works for us as an individual and then we will have found our trading strategy that works.
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.
Traders who use technical analysis are looking for price patterns on their currency charts. Practitioners believe that markets are impacted by human emotions and as a result of this behavioural input the market will repeat itself. This repetition creates patterns that can be used by the trader to forecast where the market is heading.
A profitable pattern is support and resistance as these are areas on a chart where trends have changed direction. When a currency is in a downward trend it will hit an area of support, and when we are in an upward trend we will encounter resistance. Where the multiple trends change direction at a signal price on a chart the effect becomes 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.
Many traders will use fundamental analysis to select which currency pairs they wish to trade and once they have decided they would then use technical analysis to find their entry and exit points for the trades. However some traders will only use fundamentals analysis and other traders will only use technical analysis.
Once we know how we wish to trade we have to decide how we manage our trades. We can do this by manually opening our trades or we can have our computer do this automatically.
When we trade manually we are opening our trades ourselves and we must decide when we open a trade and more importantly when we close it. To do this we watch a live feed of the currency pair we are trading and when a trading opportunity appears on our screen we can open a trade. We must then wait until we decide to close the trade.
When we manually trade we can chose to trade semi manually. In this method we would open our trade manually but we would use our computer to close the trade. This is done by using a stop loss and a take profit order. By using these orders the trade will be closed when the market reaches one of our chosen orders. Our trade will be in profit if the take profit point is reached first and we will have a loss if the stop loss is hit first.
If we don't want to trade manually we can use an automated trading system instead. We can either buy a trading system that has been developed by someone else or we can program our own trading 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.
Everyone has different preferences in life and trading is no different, by identifying our trading preferences we can find a way for us to trade successfully.
Some of us will enjoy the excitement that comes with manually running our trading set-ups while others will like a computer to make the decisions for us. There is no right way or wrong way to trade. Only the best way that works for us as an individual and then we will have found our trading strategy that works.
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