The Major Elements Of A Forex Trading Strategy

Forex trading used to be limited to fairly well-off, long term investors and all trades had to be carried out manually by a broker, which might or might not have been your bank. The client had to telephone his broker, who would pass on any information the company had about latest developments in the currency markets and the client and the broker would come to a decision whether to buy a new position, or sell or hold an existing position on the strength of that intelligence.

It followed then that the best brokers were those with the most pertinent and up-to-date information. In addition, trading was not cheap, so it was better to trade only several times a year for long term growth in order to keep overheads (fees) to a minimum.

This set-up has been drastically changed by the Internet. Nowadays, most Forex trading platforms have been computerized, so, although charges do differ, they are a lot lower than they used to be because there is less human involvement and there is more competition. The knowledge of the markets that brokers defended zealously from other brokers is now common knowledge for those who want to find out, as all key stories are sent around the world by the press agencies.

The two main strategies in investing of any kind including foreign currencies are fundamental analysis (keeping up with the news) and technical analysis. In combination these two research strategies can be called ‘due diligence’. Due diligence is the investor’s main protection against big losses so it should be studied from the outset.

Technical analysis includes interpreting charts. There are literally hundreds of different charts which try to forecast a currency’s future movement (up or down) by analysing historical data or what it has done in the past. Some investors swear by charts, others say that past performance can not have any effect on the future proceedings that might affect a currency’s movement.

For instance, the GBP (British Pound) may have been doing very well for months and the trend is up for the long term, but then terrorists explode a series of bombs in London and the GBP nosedives, That could not have been predicted by charts.

Having said that charting is fascinating and almost certainly has its uses, not least in forecasting highs and lows. For example, say the Thai Baht has historically been around 40 B to the USD, say for 15 years and Thailand is a very popular holiday destination. If the Thai Baht (THB) strengthens to 30B / USD, people will stop going there which will hurt the THB and tend to bring it back towards 40:1 again. Charts can propose acceptable highs and lows based on historical data.

A common way of predicting these highs and lows is the use of Fibonacci retracements. Do not worry about all these charts, they usually come built into any charting software you use, whether you buy it or use the Forex trading company’s free software.

Fundamental analysis is the other element of successful analysis or due diligence. Every week, figures are disseminated to make public some economic detail of a particular country such as non-farm payrolls or unemployment figures that can perhaps have an erratic effect on the Forex markets Sometimes it is clever to stay out of the markets when significant announcements are being made.

Owen Jones, the writer of this article, writes on many subjects, but is presently involved with Forex dealing. If you are interested in dealing with an FX Trading Account, please go over to our web site.