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Saturday, December 22, 2012

What Type Of Forex Strategies Work

By Dean Watt

In forex trading there are many different strategies that will make us money, but to make money we must first understand the basics. The first strategy is how we trade a currency and this can either be by following the fundamentals or trading on a technical basis.

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.

Now let us look at the technical trader. These traders use charts to understand how the market will move in the future and they are able to do this because they believe that our emotions are at play in the market and as a result they show up on our charts. As these emotions are always present in the market they produce patterns on the currency charts and a technical trader is looking to trade these patterns.

One of these behavioural patterns is support and resistance. On any chart you will find areas where a trend will reverse. In an upwards trend this is called hitting resistance and in a downward trend it's called hitting an area of support. When we get areas on the charts where this happens repeatedly it makes the effect is more pronounced.

If we are looking to trade a currency pair that is in an upward trend we can look at our chart to see if there are any areas of potential resistance. We can do this by examining charts with different time frames (giving more weight to the higher frames). By looking for areas where the trades repeatedly change direction we can identify areas of resistance and when the trend starts to reach this area of resistance we can open a (sell) trade. We are expecting the resistance to hold as it has done in the past and the trend to reverse at this point.

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 have decided which approach to use we must make another choice. This is how we want to open and close our trades and we can open trades in 2 ways. The first is by manually opening the trades and the second is by using 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.

Another way we can trade manually is to take a semi-automated approach. In this instance we would use the brokers interface to manage our trades for us and by knowing our opening price and choosing whether we use a buy or a sell order, we select our stop-loss and our take profit points. Then we can let the computer trade for us. Once the trade is open the market will either hit our stop-loss or our take profit orders and this will either give us a loss or a profit.

When we trade automatically with a computer we are using a trading program to open our trades for us. We can either develop our own trading program or we can buy a commercially available 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 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.

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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