This write-up is a part of a comprehensive series on forex, aiming to gradually broaden the reader's vision. It would behoove the readers to refer to this information that gives an introduction to Forex trading. It is a synoptic overview of forex trading without going into specifics. Understanding the strategies of currency trading would not be a challenge.
Currency Trading Strategies
Fundamental or Technical Analysis
Fundamental and technical analysis are indispensable for making profitable forex trades. Although currency trading hinges on the ability of the trader to determine the price of the currency by evaluating factors that have a direct bearing on its value, this alone will not suffice.
It's important for trader to be conversant with charts, graphs as actual price may be reflection of market information impounded into the price of the currency pair. Identifying patterns is also important since there is a probability of patterns repeating on a regular basis. One cannot ignore forex chart patterns and rely on fundamental analysis.
They depict the range of values for a currency pair for a given time period. One needs to be able to interpret charts to decide on the appropriate strategy, viz. buying or selling.
If the candlestick chart is colored it means the closing price is below the opening market price. If opening price is less than the closing price, the candlestick is hollow (not colored). The colored/hollow portion of the candlestick is the body of the chart while the lines above and below the body are called shadows.
A candlestick with a long body indicates strong activity while one with a short body indicates less activity. The upper and the lower shadows signify that forex trading pushed prices well beyond the opening and the closing price.
A long upper shadow means that buying activity pushed the prices up, but selling outweighed buying and resulted in the price settling at a level pretty much near its opening price.
If the upper and the lower shadows are long, it indicates a market wherein buyers and sellers are uncertain. If the opening and the closing price are the same, the body of the candlestick becomes extremely short and the candlestick starts looking like a cross, an inverted cross, or a plus. This pattern is known as a doji.
A doji signifies a change or a reversal, especially if it occurs after a series of candlesticks with colored or hollow bodies, since it indicates the resumption of buying or selling activity respectively. Hammer (hanging man) indicates that the prices are beginning to bottom out (or have peaked).
When prices start increasing, the lowest point that is reached by the market before it moves up, is known as support level. When prices start falling, the highest price that is attained before the market pulls back, is known as the resistance level. A support is like the bottom of the valley while resistance is like the peak of the mountain.
A line that joins the bottom of the valleys is known as the uptrend line while one that joins the peaks is known as the downtrend line. A pair of downtrend and uptrend lines create a channel that is basically a technical range between support and resistance levels.
Moving averages are used to smoothen out fluctuations in price or volume. They may be simple or exponential, and are used to measure momentum and identify support and resistance. A downward momentum is identified when the short-term moving average crosses below a long-term average, and vice-versa for an upward trend.
One should also know how to calculate pivot points and be proficient with chart patterns before commencing trading.
Considering that manual trading is not everybody's cup of tea, people have started relying on automated trading robots. Hopefully, there are pointers to choose appropriate currency trading strategies. Since a forex trader is highly leveraged, making a small mistake in interpreting the direction of the market can have disastrous consequences.