Traders follow a constellation of forex trading strategies. Each strategy can be customized or tailored to the trader’s specific needs, and can also be combined with other strategies.
When considering choosing the best trading strategy for you, you should look at your personal goals, risk tolerance, experience and other trading matters. Before navigating different trading strategies, we will first identify two main trading methodologies: fundamental analysis and technical analysis.
Comparison between fundamental analysis and technical analysis
Traders generally follow one of the two categories, either basic analysis or technical analysis.
Traders who follow the fundamental analysis may look for broader economic variables to determine whether the currency pair is worth trading on. Let’s take a prime example: If a strong economic report is issued, this may indicate that the currency may rise against another currency. However, if all traders expect that the economic report will be strong (before the report is released), the impact of the report will already be strong on the market.
On the other hand, indicators and chart patterns are used to analyze the currency pair in the past to determine whether the EUR/USD is in the overbought or oversold area. By relying on these statistical trends or patterns, such as the movement of trading volume and price (currency appreciation or depreciation), it will be possible to predict how the currency pair might swing. Of course, traders can use both technical and fundamental analysis to assess potential investment opportunities.
In light of the above trading methodologies, we will talk about the outlines of a number of approaches and indicators that can be followed when trading Forex.
Position Trading Strategy
It is a long-term strategy where traders hold trades for longer periods of time, up to weeks or months. The followers of this strategy generally use fundamental analysis and economic data. However, when they open a new deal, they use technical analysis.
Policy followers may wait until the currency pair reaches a specific (predetermined) support level before making a purchase and holding it for a few weeks. This pattern of trading is supposed to be associated with a kind of slowdown, as traders do not necessarily care about prices during the day, and generally open a few trades (compared to other trading strategies). However, as with any type of trading, traders need a deep understanding of the fundamentals of the market, so the followers of the troll strategy rely largely on fundamental analysis.
Simple Moving Average (SMA)
A simple moving average (SMA) is an important technical indicator and one of the most used trading strategies. The SMA is used to determine whether the asset will move up or down. The asset transaction is calculated by taking the daily closing price of the asset and dividing it by the total days to get an average. The font created by the SMA indicator, together with other technical indicators, is used to measure price movements. The SMA indicator can be used with different durations, however technical traders tend to follow moving averages for 50, 100 and 200 days. You can test different strategies using our charting system.
Exponential Moving Average (EMA)
The exponential moving average gives greater importance to recent closing prices. When using these lines, it is advisable to take into account late indicators that may not respond quickly to sharp changes. There may be no reliable price indices for short-term trades, however, they give a clear visual picture of general trends and can be very useful in currency trading. EMAs are more important for recent data than older data, so they tend to be more interactive with price changes than SMAs. This makes EMAs results more efficient and is one of the reasons why it is the preferred average of many traders.
Relative Power Index (RSI)
The RSI is used side by side with the SMA index line to further illustrate the potential direction of the tool. The RSI shows whether the asset is in the overbought or oversold area, based on an index from 0 to 100. The asset under 30 is usually seen as at the peak of sale, while an asset over 70 is considered to be at the peak of purchase. Therefore, if the asset is under 30 years old, it may be a good time to buy, and it may be a good time to sell if it’s over 70 years old. Remember that this is just a general indicator and you will often need to adapt forex trading strategies to the asset to be traded.
Like the RSI, bollinger lines with SMA lines are often used as one of many trading strategies. But the Bollinger Band index cannot be separated from the SMA index line. It is generated by calculating the standard deviation from the SMA indicator line. The standard deviation is merely a measure of currency fluctuations. When the difference widens, this is a sign that the market is becoming more volatile. When the difference shrinks, the market becomes more stable. Bollinger Bands are the upper and lower limits of the SMA index line. In some cases, the SMA index line is a midline for the Bollinger Bands.
These are just four of the many different forex trading strategies that traders pursue to help enhance their trading success. There is a large constellation of currency trading strategies and there is no maximum number of technical indicators that you can use.
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This article contains general information that does not take into account your personal circumstances.