Forex trading strategies are used by forex traders to make better decisions on when to enter or exit a trade position at any given point in time. In most cases, these trading strategies entail trading with either technical analysis or fundamental analysis. Trading strategies are made up of trading signals that serve as information that triggers buy and sell decisions. Signals can be developed manually or automatically. The manual system of signal generation involves a trader actively using his/her computer to search for signals and making trade decisions based on identified signals while the automated system of signal generation has to do with setting an algorithm that identifies trading signals and at the same time carry out trade executions.
TYPES OF TRADING STRATEGIES
Technical analysis is a forex trading strategy employed by a group of forex traders to identify trading opportunities by evaluating statistical trends from price movements and volumes. The method of trading instruments based on technical analysis is placing importance on patterns of price movements, trading signals and analytical charting tools to evaluate an assets strength or weakness. A technical trader believes that a security’s past trading activity (historical trends) and price fluctuations/changes is an indicator of the instruments future price movements.
Using this strategy, forex traders forecast the price movements of tradable assets which are subject to the forces of demand and supply. There are certain indicators used in technical analysis to predict future price movements hence, knowing the best time to enter or exit a trade position. Examples of such indicators include support and resistance level, Moving averages, Bolinger Bands, trendlines, channels, and momentum indicators. These indicators generate buy and sell signals and traders use them in the identification of momentum, trends, and volatility.
The trading strategy of technical analysis is based on three assumptions.
- All possible information embedded in a security is a reflection of its price. This also includes fundamental factors. This states that as soon as a new information of a security is displayed, it is instantly included in the price. Meaning that market actions discounts everything.
- In technical analysis, the prices of an instrument move in observable trend. This states that after the establishment of a new trend, the future price movement of a security is likely to move in the same direction with the trend.
- Technical analysis is based on studying historical trends with emphasis that what happened to the price of a security in the past will most likely repeat itself.
Fundamental analysis is a forex trading strategy that is used by forex traders to assess the intrinsic value of a security based on the examination of economic, financial and political factors surrounding the instruments. The method of fundamental analysis as a strategy is studying macroeconomic and microeconomic factors that have effects on the price of an instrument. The goal behind this strategy is in the production of a quantitative value which can be compared with the current price of a security and further indicates if the security is undervalued or overvalued.
In conclusion, in other to make profits and returns in trading forex, the development of a functional strategy plays a crucial role in making valuable decisions on when to enter or exit a trade. Whether is working with technical analysis based on chart patterns or fundamental analysis based on a news release, the most important factor is following it with a great consistency.