Major Components of Forex Trading Strategy
Before, the forex market was limited only to long-term investors, banks, and people who have greater capital. The trading occurs via an agent or voice broker who will inform clients of what is going on. Later on, it was been replaced by a computerized automated system. This was the early form of forex trading strategy.
The trader which is either home-based or office-based or retail investor can trade in real-time with different banks with an aid of a broker. The broker then uses the computerized platforms of trading. It contains traders on live desks which places the trades on the broker’s books or real investors. However, when the trade was placed in the broker’s book, 95% of the money will be lost by the traders. So the brokers take this as an advantage on them.
Forex trading strategy comprises two major components. The first component is technical analysis. The technical area is based on the charts. It uses a mathematical formula to observe the market movements. The traders learn about announcements and news on economics which influences forex markets. Its fundamental side is helpful in the proper identification of the dos and don’ts.
Technical analysis uses chart indicators. It helps determine the areas of resistance and support. The situation where the price reverses, stop or get stuck is revealed. The method that is very accurate and popular in calculations of the levels of resistance and support is the Fibonacci. Seven hundred fifty years ago, Fibonacci discovered a sequential number form. Its proportions are also found in nature such as sunflower seeds, and pineapple rinds. This method is commonly learned in mathematics during your high school days, called as Fibonacci sequence. It says about finding the next number given with a series of numbers.
If Fibonacci numbers are put adjacent to each other, the percentage ratios are obtained. It can then be plotted on the chart. However, you don’t need to become a math wizard just to do this. The charting forex software can do the Fibonacci sequence for you. The key areas of resistance and support are potentially revealed to you as you move along the charts. The Fibonacci sequence combined with proper indicators can show the strength and momentum of the latest market condition. It will help you create a strategy that will be most profitable to you just by basing on this mathematical rule. The rules clearly state that history can really be repeated, as what has happened before in the forex market can still happen in the future.
The second component is the fundamental analysis. Each day, figures are being disseminated to reveal some economic circumstances of a particular country. Take, for example, non-farm payrolls that can bring unpredictable effects on the forex markets. The impacts will depend on the previous data and the implications of the figure. The most important rule for beginners even for veterans is to keep away from the market when important announcements take place.
Forex trading profits are being made almost similar to a traditional business. The procedure is very simple. You are going to buy something at a lower price then sell it at higher prices. The only difference is that in forex trading this can be reversible.
The process is very easy. Trade is being placed either in the sell or buy categories. Then the base currency will automatically buy or sell its opposite currency in pairs. The price will lively change every second. Take for instance; you purchased the GBP/USD pair. It means that you have purchased the pound currency and sold the dollar currency. You want a rise in the pound’s value which will, later on, have a higher price when you resell it in the forex market. That would make a profit on the value difference.
If the brokers allow you to have 200:1 capital leverage, then you can control a lot of money than what you have. It is because you have bought one currency and sold the other. So, your capital can stay unmoved. The only crucial part which should be considered is the proportions that can be either gained or lost whenever changes in currency pair values occur. Other than that, the basic forex trading strategies are great.