This article will look at the two types of general currency trading strategies that forex traders use to make a profit. Currency trading strategies are no different in nature than from any other investment strategy or even poker and sports betting strategy, where there is a factor of random happenings. The currency market has a huge variation, that is, it’s very volatile and sometimes very unpredictable. The key to making money is to use currency trading strategies to deal with the chaos in a systemic approach. There are generally two types of currency trading strategies used by traders: Technical Analysis and Fundamental Analysis and they are very different beasts to master. Both have their pro’s and con’s. Which strategy you choose depends on what kind of person you are and how that relates to forex trading. Fundamental Analysis is popular with more analytical traders who have good deductional skills and are able to follow news releases and understand the big picture. Technical Analysis is good for traders that have good intuition and a good understanding of trading psychology.
- Technical Analysis.
Technical analysis uses charting data to look for patterns in trading and predict the future price by analyzing market movements and price trends. Traders use tools such as candlestick graphs to see the volume traded and the variation in each time period. By putting it all together they attempt to make a qualified ‘guesstimate’ of the current market sentiments. Technical analysis uses the assumption of repetitions trough history, that trading psychology stays the same over time even if the circumstances change. So by comparing the current market with known patterns in the past, the technical trader tries to make more true projections than false ones. Technical analysis is a very important skill to learn, if you want to be a successful forex trader. Currency trading strategies based on technical analysis may seem confusing at first, particularly if you do not have a mathematical background, but luckily there’s a big market for tools that help the trader. Most of the hard grunt work can be done by software today.
- Fundamental Analysis
Fundamental analysis is the conservative approach to forex trading. It’s similar to fundamental analysis of stocks and shares. In the stock market the fundamental trader will look at the books and key figures of a company to figure out if the company is sound and performing up to the price. In forex trading the process is essentially the same, except there are many more factors to consider. In stock trading, you can do well by only knowing the company and the field they trade in, but in forex trading you must consider a nation as a whole and everything that affects the price of it’s currency. These factors can be economical (GDP, Inflation, Unemployment) or political (leadership, elections, government stability). You must also consider geopolitical developments and central bank policy. The backbone of currency trading strategies based on fundamental analysis is an interactive forex calender that lists all releases of economic data and key figures.