One of the most effective high probability trading strategies combines technical and fundamental analysis to make profitable trades. Technical analysis involves looking at the past behavior of exchange rates in order to determine possible future movements. On the other hand, fundamental analysis studies political and economic developments to determine their impact on prices. While traders usually swear by one or the other, the best ones combine both approaches to create a powerful trading system that benefits from the strengths of both.
The key to creating a high probability trading system that uses both approaches is to appreciate how both work at predicting price action. Fundamentals are good at detecting whether the markets will be bullish or bearish while technicals are effective at finding specific entry and exit points for trades. For an example of how these two approaches can be combined, let’s assume that you’re trading the GBP/USD currency pair. The Bank of England is set to announce a hike in interest rates. This will create a bullish climate for the UK pound as investors will want to invest in the country to take advantage of high interest rates, strengthening the currency. You can then study the price charts to determine when to buy as well as when to close your position.
The first step in creating a high probability trading strategy using technical and fundamental analysis is to appreciate which economic developments create the highest volatility in the currency markets and thus, a bullish climate for trading, particularly for your chosen currency pair. Some of the most important economic news include balance of trade, Gross Domestic Product, Consumer Price Index, Retail Sales and PMI. You can refer to a forex calendar to see when these developments are set to be announced as well the market anticipation towards them and how they would affect the markets.
The next step in a combined high probability trading strategy is to look at price charts for your currency pair. One important trend to detect is support and resistance levels. Resistance levels are a price beyond which the currency price will not rise above while at support levels, the price will not fall below a certain level. Once you’ve identified these two levels, you can choose to buy at the support level and sell at the resistance level. Or you can short the currency, buying at the resistance level and then selling at the support level.
Finally, when creating a high probability trading strategy, no matter what approach you use, you also have to consider other factors such as how to effectively use margin and leverage. Trading with high amounts of leverage can greatly increase your profits but also correspondingly boost your risks, so consider your trades carefully and use only as much leverage as you think appropriate based on the risks involved in a particular trade. Trade using the system that you’ve created, taking emotion out of the trading process to ensure that you won’t get caught up when trading, and make costly mistakes.