Forex Trading Strategy

All Forex trading strategies begin with analysis such as technical and fundamental. Here are some explains why this analysis is really important for building a solid forex trading strategy:

Fundamental Analysis

We mainly do fundamental analysis to get better information of a long-term trends in the currency market. There are a number of factors that determine the value of a country’s currency. In a fundamental analysis, the primary issues, that are measured are the economic, overall political and social climates of a specific country. It can be difficult measure how these issues affect one another. Before forex trading, every single trader should be aware of the affects of political events, central bank news, non-farm payrolls, consumer price index, imports, exports etc. on the value of currency.

Technical Analysis

Charts and graphs are the main stuff, which is produced by the technical analysis and scrutinizes past data on volume and price. “Fibonacci retracement” is one of the latest buzzwords in this approach to currency trading analysis. Fibonacci was an Italian mathematician, lived in 12th century, who contributed to a modern forex trading strategy consists of his retracements, fans and arcs. The basic - the lines in these mathematical studies are currently used to anticipate a trend change as prices near the lines created by these arcs, fans, and retracements. So Candlestick Formations, Fibonacci Sequence, Financial Breakouts and Trend Lines are some of the more popular forms of technical analysis used in forex.

Successful forex trader will develop a personal forex trading strategy, which will make it perfect with the time. Some traders will use broad spectrum analysis as a means of determining their trades, while others focus a specific study or calculation. If you want to make long-term projections and also determine entry and exit points, most of the experts suggest that you try using a combination of both fundamental and technical analysis. But as we know the final decision is yours, and in this point - trading is a discipline that requires preparation and hard work. You should also know that your overall personal forex trading strategy has to include three vital ingredients:

1. Sound money management.
2. The currency pair you decide to trade.
3. What technical indicators you use for entry/exit plans.

Strategy 1 - Simple Moving Average

Profitable and/or successful trading is mostly described as optimizing your risk with respect to your reward, or upside. Any trading strategy should have a disciplined method of limiting risk while making the most out of favorable market moves. We will show you one decision making model which uses a Simple Moving Average (”SMA”) technical study, based on a 12-period SMA, where each period is 15 minutes. It is one example of a trading decision making strategy, and we encourage any trader to research other strategies as much as possible.

Here we will use a simple algorithm: it will be taken as a signal to buy at the market, when the price of the currency crosses above the 12-period SMA. When the currency price crosses below the 12-period SMA, it will be a signal to “Stop and Reverse” (”SAR”). In other words, a long position will be liquidated and a short position will be established, both with market orders.

Thus this system will keep the traders “always in” the market - he will always have either a long or short position after the first signal. In the chart below, the white line represents the price of USDJPY, the purple line represents the 12-period SMA of USDJPY, and the red line indicates where USDJPY crosses above the SMA, generating a buy signal at approximately 129.90:

The given method is a simple example of technical analysis applied to trading. Many strategies used by professional traders make use of moving averages along with other indicators or “filters”. Note that the moving average method has an element of risk control built in: a long position will be stopped out fairly quickly in a falling market because the price will drop below the SMA, generating a stop-and-reverse signal. The same holds true for a sell signal in a rising market. Note that the SMA is generated automatically by GCI’s integrated charting application.