Before venturing into the world of Forex trading it is vitally important that you stop and think carefully about the trading that you are going to adopt, because Forex trading strategies are the key to success in currency trading.
Some Forex traders choose to use a technical approach when it comes to trading while others are more at home with a fundamental approach. Both approaches are of course sound, but in reality most successful traders use a combination of the two to give them both an overview of the foreign exchange and to permit them to plot specific entry and exit points for each currency trade.
Many traders also rely on what are known as support and resistance levels. Here support refers to a low price which is repeatedly seen as being the bottom of the market and from which there is a tendency for prices to rise. A ‘resistance level is a high price beyond which a currency is rarely traded.
The principle here is that, should a currency break through either its support or resistance level, its price is likely to continue in that direction. So, if the price of a currency rises above its resistance level it is considered to be bullish and the price can frequently be expected continue to rise.
Another commonly used tool in foreign currency trading is that of moving averages. A simple moving average (SMA) shows the average price in a given time period (say 7 or 10 days) when the price is plotted out over a longer time period. Forex traders use moving averages to eliminate short term fluctuations in price and to provide a clearer picture of the movements in currency prices. A SMA can be plotted to indicate when prices are displaying a tendency to rise or fall. Prices which rise above the average will frequently continue to rise and, similarly, prices which fall below the average will often continue to fall.
These are just two of the many trading tools that can be used either in isolation or in combination and it is recommended that traders make use of several trading tools to analyze the market. If you are relying on just a single trading tool then trading can often be risky but, if the results from several different tools show that the market is moving in a particular direction then trading can be conducted with a fair degree of confidence.
In many ways it does not matter what trading strategy you adopt as long as you are happy that it can provide you with clear expectations in the market and indicate to you just where you should be trading and when you should enter and exit individual trades.
A sound knowledge and understanding of fundamental and technical analysis should be every currency trader’s starting point when it comes to building a Forex trading .
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