When an investor decides to begin trading Forex, there are some very important steps to follow. Understanding the basics of how the Forex market works, and then understanding the possible strategies to consider are among those first crucial steps. Forex trading strategies fall into a few different categories and which basic category to choose depends largely on your comfort level in terms of risk, your personality and available trading hours and your understanding of how to use each strategy type. After choosing a basic strategy type, conduct research into the specific strategies within each type and formulate your own plan based on existing strategies and your own personal thought process. Here you can get an overview of the basic categories and types of trading strategies.
Technical analysis strategies are based on what has happened in the market as opposed to what someone might think will happen. It means your trading decisions are based on facts on the ground rather than predictions of what might be about to affect currency prices. A trader using technical analysis relies heavily on charts and understanding specific indexes. Repetitive patterns and the belief that they will continue is the basis of this type of trading strategy.
The reasons for the patterns and the price fluctuations are not considered when looking at the technical indicators. That means that a trader using a technical analysis based strategy will not be worrying about the news, or the political climate that may or may not affect currency prices, rather he will focus on what has happened to the prices. The numbers are what he is concerned with not the reasoning.
One of the main charts and indicators that is used in technical analysis is the Relative Strength Index. This chart will tell a trader the ratio of movements in each direction over a period of time. There are chart patterns which are commonly used to formulate Forex trading strategies. This is where the individual trader can decide which pattern he is looking for based on the time frame for trading, the hours that he can dedicate to Forex trading and his personality.
There are various number theories used in technical analysis trading, most commonly the Fibonacci theory and Gann. Both of those theories can be studied to determine if they are the right fit for you.
Strategies focusing on Fundamental Analysis focus on the why. This type of trading is more about prediction and inference than about past performance. The Forex market is affected by many things such as political climate, unemployment, and major business news. A trader who studies these factors will be able to understand the movement of the Forex market in a completely different way than one who uses the technical indicators.
One of the best ways to determine which type of strategy is best for you is to know your personality. Do you operate based on numbers or do you look for the why and how? Most people use technical analysis because it is more concrete. The most important factor when formulating a strategy is knowing that you will adhere to your plan. The only way a strategy can work is if you use it even when emotions might drive you in a different direction.