Forex glossary of terms
Forex trading strategy
In adapting A good Forex trading strategy one must pay close attention to both fundamental and technical analysis. Lets take a closer look at why both these analysis are crucial in implementing a strong Forex trading strategy:
Fundamental analysis is important because it helps users gain a greater understanding of crucial long-term trends which exist in the currency market. Several factors must be taken into consideration when surmising the value of a country's currency.
Important issues measured in fundamental analysis include the overall economic, political and social climate of a specific country. Measuring how these issues affect one another is a complex process.
It is vital that every trader be in tune with the affects of many factors such as central bank news, political events, non-farm , consumer price index, payrolls imports, exports etc. and their affects on the value if any given currency before engaging in Forex trading.
Technical analysis is used and produces graphs and charts following analysis of past data on both price and volume. A common way of calling this application of analysis of currency trading is the Fibonacci retracement. Fibonacci was a mathematician who lived in the 12th century in Italy. He made significant contributions towards todays Forex trading strategy via his fans, arcs and retracements. These mathematically significant lines are used today in attempts to predict change in trends. This is done when market prices approach the lines detailed by fans, arcs, and retracements. In addition to the Fibonacci retracement, other popular technical analysis commonly used in forex include The Fibonacci sequence, Candlestick Formations, Financial Breakouts and Trend Lines.
Traders who make profits typically discover their own Forex trading strategy or system and spend time perfecting it to the last detail. Some people use many different types of analysis when determining their trades while others choose to zone in on one specific analysis that works best for them.
A large amount of Forex professionals advise utilizing a mix consisting of both fundamental and technical analysis in order to determine good points to enter and exit in addition to making longer term projections. Regardless of the chosen strategy the most important qualifications for success are preparation and hard work.
Three crucial ingredients to a successful Forex trading strategy are; 1) The indicators one uses for both entry and exit points with a given currency 2) the currency pair one choses to trade and 3) solid management of money.
Strategy 1 - Simple Moving Average
The key to trading successfully is often said to be taking the least amount of risk with respect to reward to be returned, or upside. Any good strategy for trading should be meticulous in limiting risk while making the best, most favorable market moves. The following example will take a look at a decision making model which incorporates a Simple Moving Average ("SMA") over 12 periods, where each elapsed 15 minutes constitutes a period. Bear in mind that this is merely one example of trading decision making strategy. Any trader should thoroughly examine other strategies in addition to this one.
Consider the following simple strategy: When the price of a currency falls below the 12-period SMA this should be taken as a sign to Stop and reverse, SAR for short. When the price of a currency rises above the 12 period SMA this should be taken as a sign to buy. This allows for a short position to be established in addition to a long position to be liquidated both with market orders.
This system is one that will consistently keep traders involved with the market considering that following the first sign, the trader will always either have a short position or a long position. In the following chart, the price of USDJPY can be depicted by the white line, whereas the 12-period SMA can be depicted by the purple line and finally the place where the USDJPY rises above the SMA is denoted by the red line which deems it appropriate to buy at 129.90:
What we just went through is actually a rather simplistic example of how technical analysis pertains to trading. Strategies undertaken by professional traders incorporate moving averages in addition to other indicators also known as filters. It is important to realize that the moving average method incorporates a built in element of risk control: Any long position will be halted rapidly in a falling market due to the fact that the price will soon fall below the SMA, thus facilitating a SAR signal. The same can be said in the opposite situation of a sell signal in a rising market. GCI's integrated charting application yields The SMA automatically.
Strategy 2 - Support and Resistance Levels
Another important usage of technical analysis comes from acquiring both support and resistance thresholds. Generally speaking, the market tends to trade below its resistance thresholds and above its support thresholds. When either a support or resistance threshold is breached, the market is expected to assume the appropriate action. Support and Resistance thresholds are formed through analyzing charts and then deciding where the market has come head on with unbreached threshold levels of support and resistance in the past.
In the following chart we can see that the EURUSD has built a resistance threshold at around .9015, meaning that the EURUSD has ascended to .9015 several times without assending further beyond that point:
A wise trading strategy in this event would be to sell EURUSD any time it approaches the .9015 mark perhaps with a stop inserted just above the mark, perhaps somewhere around .9025. Supposing that history would repeat itself, this would qualify as an excellent trade as EURUSD would as usual, commence a steady decline without breching the familiar .9015 resistance threshold. Thus one can achieve solid upside while maintaining minimal risk (only 10 or 15 pips; .0010 or .0015 in EURUSD).
The Following are 4 good rules for trading strategy:
1. Trading is an investment not an income
It is vital to that one has realistic expectations of possible financial gains that can be obtained through Forex. Forex is a long term game meaning that in a year you may see good profits in an initial capital, however in the short term there may be some losing months where money is not made.
2. Forex markets are unpredictable
There are thousands of variables that influence the forex markets including billions of traders in addition to economic and political events which will probably be out of your control. Thus, so many variables makes the way in which the market will move extremely unpredictable. While both technical and fundamental analysis can help improve your odds by helping an investor making more educated guesses, these techniques are not bulletproof and do fail occasionally. Occasional failure is inevitable and there will certainly be times when an investor's loses will outweigh his gains .
3. Do whats working and stop whats not: Let profits ride and cut your losses
Logically speaking it makes sense that the only way to make money in forex trading is if the money one makes on his wins outweighs the amount of money lost in addition to providing increased capital to be used by the investor. Cutting your loses when your down and staying in the investment when you're up, may seem easy in theory but are actually much harder in practice as people have strong tendencies to get attached to their trades in hopes that a losing trade will turn around. Additionally when trades are going well people have tendencies to grab profits too soon before they are maximized.
4. Perform trades in accordance with a proven system
This principle is one of the most important in order to be successful in Forex trading. One must do this in order to eliminate emotion from the equation in favor of a more calculated approach that has been developed, tested and proven in the market already. By doing this one does not have to beat himself up for making costly errors as important trade decisions have already been made. This is less time consuming and also less stressful for the trader.
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