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Forex Trading Strategies

In this article we describe some of the most widely-used strategies that traders use to try and increase profits and accomplish long term trading objectives. When it comes to trading, research, analysis and planning can prove vital, rather than making trades based on impulsive decisions.

  • 01

    Technical Analysis / Support and Resistance

    Technical analysis, also known as support and resistance, is one of the most widely used trading strategies. This is when traders analyse an asset’s past market trends in order to predict its future trends.

    The peaks and troughs in an asset’s price charts show levels of “support” and “resistance”. Support is the price that an asset will rarely fall below. Resistance is the price at which an asset will not often surpass. In most cases, an asset will trade in the range between the levels of support and resistance.

    Being aware of points of support and resistance can be beneficial to traders, helping them to determine which position to take on an asset. Support and resistance analysis can also indicate when a trend is reversing. For example, if a trader identifies a pattern where a point of resistance has been reached several times, he may decide to close his trade and sell as the asset approaches this point, as he may judge it unlikely based on past experience that it will rise above this level. However, traders should keep in mind that there is no guarantee that just because a product has traded between certain levels in the past that it will continue to do so in future.

    If a product’s price is moving between support and resistance levels, a commonly used strategy is to purchase stock at the support level and to sell at the resistance level.

  • 02

    Fundamental Analysis

    Also known as events-based trading, fundamental analysis is the study of financial news in order to try and accurately predict future market conditions. Investors keep track of news announcements and data releases that typically affect the currency market to guide their trading decisions.

    For example, a country’s strong GDP report suggests a healthy economy, and may motivate a trader to buy that country’s currency, in hope that it will continue to strengthen relative to countries with weaker economies.

    Another element that can have a major effect on currency levels is the level of employment in a given country. For example, reports indicating higher unemployment may cause a country’s currency to weaken, since the assumption is that fewer people will have available capital to spend items apart from the bare necessities, leading to a weaker economy and so a weaker currency too. On the other hand, if employment is increasing, it is likely that there will be more people will have money to spend on items, which will provide a boost both to the economy and the currency.

  • 03

    Keeping a Trading Diary

    One of the keys to successful trading is to learn from both your winning and losing trades. A trading journal can be a good way of identifying the techniques that are helping you as well as those that are holding you back. By reviewing your trading history and decisions objectively, you may be able to improve your future trading outcomes.

    In your trading diary, make sure to note the following:

    - The date and time you entered a trade
    - The currency exchange rate at the trade’s start
    - Why you took the position that you did
    - Your strategic plan
    - The date and time at which you closed the trade
    - The currency exchange rate at the trade’s close
    - Your profit or loss
    - Why you exited when you did

    Also ask yourself: Did I follow through with my initial strategy?

    Through reviewing all of your trades in a similar fashion to this and pinpointing your winning trading techniques, you will be able to refine them and hopefully implement them as strategies which could continue to pay off in future trades.

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