If you are going to become a successful online Forex trader then we recommend that you define your trading strategy. To avoid your trading becoming gambling, you are advised to understand the markets you are trading in and have a clear idea of your trade entry and exit points.
Here are some key points to consider when defining your strategy:
1. Fundamental Analysis
When share dealing, typically there are two types of traders, technicals and fundamentals. The former trades off analysis of charts and the latter trades off the valuation of a company based on economic health factors. With forex, there is no underlying company to assess revenue or asset value therefore fundamentals in this sense won't work. You could however assess the economic health of a nation’s currency through its productivity and government debt.
2. Forex Technical Analysis
In technical analysis there are many indicators that traders can use and each have their own preferred method. There are resistance levels where a price has been shown historically not to fall below or move above i.e the price appears to show resistance. Or there are statistic bands where a price will move between the bands and if the price breaks out of the top, then this may indicate an upward trend and if the price breaks out of the bottom then a downward trend may be indicated. There are many books and research papers on the topic and it is down to you if you trust these indicators and if so how you might want to use these in your strategy.
Some countries can depend on others, in some part, for their economic stability. E.g. A large industry built on the necessity for oil could have a dependency on a country known for oil reserves. Or countries with similar economic profiles may find that if one drops in productivity then the other may be likely to follow. Some forex traders look for these interdependencies between countries that could then have an effect on their respective currencies
4. Back testing
Once you have defined your forex trading strategy it is possible to look back over the history of a currency pair and just test it to confirm that it would have worked to date. If your strategy is defined well enough you would have a clear idea of entry and exit points for trades. Therefore you can pull up a one year or two year chart and look back to see how many times your strategy would have won or lost.
5. Fine Tuning
Once you have started trading and you find your strategy starts to work for you, don't be shy of refinement. It will be possible, looking at your previous trades to determine if you have a habit of riding loses too long or not riding winners enough. Fine tune your approach and don't be afraid of changing it if it does not work for you. Continue to review your strategy, execute on it and review again after a period of trading.
If you found this useful you might also be interested in our other guides within spread betting and CFDs. A successful trading approach is not always product specific and these articles may also be useful for your Forex trading.
Once you are ready to trade, apply for a live account with us and we'll aim to have you up and running within 24hrs.
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