If you have already started trading on an actual foreign exchange market platform, it is safe to say that you have already understood the basics. A trader usually has to undergo a great deal of preparation by using a forex training account for around a month. After this grace period, you are definitely ready to develop your own forex trading system. However, you should have a grasp of the basic forex strategies so that you can do this properly.
Types of Trading Systems
Take note that most strategies are established with the primary purpose of predicting the future of a certain exchange rate.
There are two types of trading systems:
- Long trade: The process in which a trader foretells that a certain currency is going to increase in terms of value. He buys the currency now and sells it in the future to gain profit.
- Short trade: The situation wherein the trader predicts a downward shift in the value of the currency. Due to this, the trader sells it right there and then to avoid incurring any loss in the future.
By getting familiar with these systems, you can have a better idea on how to employ forex strategies on the larger scale. At the end of the day, the goal is simple: set up a single or a series of strategies in such a way that the entire strategy for forex trading can be deemed as something that is truly profitable.
Trend Trading versus Range Trading
A clearer and deeper understanding of the different forex strategies should be gained if a trader aims to become better in the trading market. In general, all strategies can be classified into those which are only applicable for trend trading and those that can be used in range trading.
- Trend Trading: Simply put, a trend describes the over-all direction of the financial market under question. As a rule of thumb, a wise trader should buy a certain currency when its price is going up and then sell the currency the moment the price goes down. This way, the trader will be able to gain something out of the differences in prices.
- Range Trading: Forex strategies give premium to periods or division of time into several phases. Here, you can observe that the exchange rate somewhat fluctuates or changes with time. The changes can be clearly observed within a given channel or range. Here, a trader should sell a certain foreign currency once it reaches the top of the range. On the other hand, the trader should buy if the foreign currency reaches the bottom of the designated range. Trading a range can be a tricky activity, this is why many traders choose to sit aside while the market is in a range.
Modes of Analysis
There are two popular types of analysis: technical analysis and fundamental analysis. For most small scale traders, they are more accustomed to using technical analysis. On the other hand, more experienced traders use the fundamental analysis in evaluating their forex strategies. Here are the basic differences:
- Technical analysis: This mode of analysis gives due importance and credit to mathematical models like graphs and equations based on previous price values. Using these models, a forex trader might be able to predict the future exchange rate of any currency. It takes into account the present and past values.
- Fundamental analysis: It takes a lot of experience to employ this effectively. Even veteran traders still find it challenging to use fundamental analysis in trading. This strategy recognizes the fact that the market direction cannot be dictated by mathematical by studying past price values. It looks into other clues like economic indicator, trading news, among others.
With these basic bits of information and knowledge in mind, you will have a better understanding on forex strategies. Working hard to make these better will help you in surviving the harsh tide of trading.