How do you choose the best forex trading strategies? Obviously, the answer to that is there is no one strategy that is good for all traders and the best strategy is the one that most comfortably fits your particular trading personality. There are generally two types of forex traders – those who pursue short-term profits and those who are content to follow long-term trends in the expectation of earning bigger revenues. Once you’ve determined which type of trader you are, you can decide which approach best suits you when creating trading strategies.
There are two methods of creating forex trading strategies, using fundamental analysis or technical analysis. Fundamental analysis involves using economic and political developments in order to predict the movement of the exchange rate of a particular currency. For example, if you are trading the USD/EUR currency pair and there is news of an interest rate hike by the Fed, you can expect that the US dollar exchange rate will appreciate against other currencies since more money will be entering the US markets.
Fundamentalists, as these traders are called, use forex calendars to monitor impending developments. These calendars list upcoming economic and political news and which country or currency is affected, as well as when the news will be released, the expectations of traders regarding the news and their expected effect on the markets (whether high, medium or low). If you have the patience to surf long-term trends, you will be more comfortable using fundamental analysis in your trading strategies.
Technical analysts, on the other hand, create forex trading strategies purely based on price movements on currencies. The underlying theory behind technical analysis is that price movements in the past can help analysts predict their movements in the future. The main tool that technical analysts use are forex charts, which present currency price data in a visual manner to help detect trading signals. The most popular chart type used by traders is the candlestick chart, which uses colored bars to display opening and closing prices during a particular trading day, as well as the direction in which the price is moving. The bars also have wicks on either end which display the trading range in which the currency has moved. However, many traders may prefer the simplicity of a forex line chart, which only charts closing prices since these are generally considered more important compared with other price data. If you are a scalper who likes making profits from a series of short-term trades, technical analysis will probably be more suitable for your trading style.
Is it possible to combine both methods in your forex trading strategies? While it might seem that the two approaches are diametrically opposed, many traders have successfully used both to make winning trades. One way you can do this is to use fundamental analysis to help you identify whether there is the possibility of a trade and then use forex charts to help you find the price movement of the currency and identify trading signals. While it may be difficult at first, by learning how to blend both approaches into a single trading strategy you can greatly improve your earnings in the forex markets.