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.
If the currency pair we want to trade is in a downward trend. We can look on the chart to see if there is an area of support and the more times we see that the market has turned at a set price the stronger the support will be. By using this knowledge we can look to open trades at these support and resistance levels.
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.
We have been looking at different processes for selecting trades. We now must look at how we open and close our trades and we can do this in 2 ways, the first is by doing it ourselves and this is called manual trading and the other option is to use a computer to trade for us.
By trading manually we have to select our trades ourselves. We must click the buy or sell button and decide our position size, stop losses etc. We do this by using an interface provided by our forex broker. This interface provides a live feed of currency prices. To open a trade we must watch the live feed and wait until an opportunity appears and once we have opened our trade we must decide when we wish to close it.
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.
When we use a trading robot the computer will open and close trades for us depending on the trading rules programmed into it and because a trading system is automatic it does not suffer from emotions like a human would when trading. However markets always change with time and some trading robots may not be able to cope with changes in the market.
Everyone is different in how we react to trading. To be able to trade successfully we must learn what works for us and only then will we be successful in our trading.
Whether we trade automatically or whether we select our trades ourselves does not matter. Only that we trade in a way that is right for us and by trading in a way that is compatible with our own self will we have found our own successful trading strategy.
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.
If the currency pair we want to trade is in a downward trend. We can look on the chart to see if there is an area of support and the more times we see that the market has turned at a set price the stronger the support will be. By using this knowledge we can look to open trades at these support and resistance levels.
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.
We have been looking at different processes for selecting trades. We now must look at how we open and close our trades and we can do this in 2 ways, the first is by doing it ourselves and this is called manual trading and the other option is to use a computer to trade for us.
By trading manually we have to select our trades ourselves. We must click the buy or sell button and decide our position size, stop losses etc. We do this by using an interface provided by our forex broker. This interface provides a live feed of currency prices. To open a trade we must watch the live feed and wait until an opportunity appears and once we have opened our trade we must decide when we wish to close it.
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.
When we use a trading robot the computer will open and close trades for us depending on the trading rules programmed into it and because a trading system is automatic it does not suffer from emotions like a human would when trading. However markets always change with time and some trading robots may not be able to cope with changes in the market.
Everyone is different in how we react to trading. To be able to trade successfully we must learn what works for us and only then will we be successful in our trading.
Whether we trade automatically or whether we select our trades ourselves does not matter. Only that we trade in a way that is right for us and by trading in a way that is compatible with our own self will we have found our own successful trading strategy.
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