Understanding Forex Strategies: Important Terms for Beginners

Jul 10 • Forex Trading Strategies • 2813 Views • 3 Comments on Understanding Forex Strategies: Important Terms for Beginners

While it cannot be denied that almost anyone can profit by engaging in foreign exchange trading, it is also undeniable that those who truly wish to succeed in such a moneymaking endeavor should learn more about various forex strategies. Many find it surprising though, that most techniques that allow traders to reap great rewards from the smallest opportunities are quite difficult to understand. Simply put, individuals planning to make money by exchanging currencies need to be ready to add a few important terms to their vocabulary to be able to benefit from such strategies.

The Simple Moving Average or SMA is one of the most common terms used by experts in discussing forex strategies. Essentially, the SMA pertains to movements in currency values over a period of time, making it an important indicator of fluctuations. It is for this very reason that the most experienced of traders often spend time watching SMA graphs. Indeed, in most cases, taking advantage of SMA is as easy as waiting for instances wherein both short-term and long-term averages match. It should be emphasized as well that the SMA is ideal for those who wish to avoid the detrimental effects of fake-outs.

At this point, many aspiring traders would surely have one question in mind: what exactly is a fake-out? Simply put, most forex strategies are focused on the goal of identifying whether a new trend is about to begin. While a new trend would of course involve a phase of appreciable increase before hitting a plateau and once again declining, a fake-out is just an anomalous fluctuation. Specifically, a fake-out is identical to a new trend except for the fact that a sudden drop in value follows the initial increase. Due to this, some people tend to avoid relying on the exponential moving average (EMA).

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To explain further, the EMA is an alternative to the SMA. It should be emphasized though, that while both are considered as means of pinpointing opportunities in forex trading, the EMA mainly caters to those who wish to carry out fast-paced forex strategies. As made clear beforehand, those who choose to utilize the EMA face greater risks of suffering from the effects of fake-outs. One should always remember however, that traders who choose to observe the EMA despite such a risk actually benefit from the sheer recentness of data.  As a result, they are able to take advantage of new trends much earlier than those who rely on SMA.

Budding traders should keep three important forex-related terms in mind so as to better understand various strategies. First, such individuals should remain aware that the SMA represents trends in currency values and is synonymous with safety against fake-outs. Second, fake-outs are sudden increases in trends followed by significant declines, often imitating the beginning of actual upswings. Third, the EMA is an alternative to the SMA that boasts of frequently-updated values despite being often associated with fake-out risks. Indeed, after learning of these terms, beginners should be able to understand most forex strategies.

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