You Have To Have A Strategy Before You Start To Trade In Currencies

If you are new to the world of Forex trading then, before you open your first trade, you have to develop a strategy. The Forex market is one of the most exciting and lucrative markets in the world, but it is also extremely volatile and, while you can make emormous profits, you can also make large if you do not have a very clearly defined plan of action.

There are a number of different currency trading strategies which you can adopt and you will have to come up with a strategy which suits you. At the end of the day, exactly what sort of strategy you decide to adopt is largely immaterial but, what is important, is that you pick a strategy before you start to trade.

A lot of traders nowadays elect to base their strategy on a technical approach to trading while others choose to follow a fundamental approach. Both approaches are fine but the really successful traders would say that the key lies in not selecting either but in combining the two.

The principle behind technical analysis is that prices follow trends and markets possess clearly identifiable patterns which you can recognize if you know what you are looking for. experience and knowledge play a key role in technical analysis but here it is a case of knowledge and experience of not simply the patterns in the market but of working with the barrage of tools that are available to the technical analyst.

A lot of traders and technical analysts like to make use of what are referred to as support and resistance levels. In this case a support price is a low price to which a currency frequently returns, effectively representing the bottom of the market or the price at which it supports the market. A resistance price by contrast is the high price which a currency reaches at times but above which it tends to resist rising.

These two levels are considered to be important because once the price of a currency drops below its support level it will generally continue to drop and, similarly, once the price breaches its resistance level it will continue to rise.

It is also common for technical analysts to use moving averages which show average currency prices over a given time period within a longer period of time. This is very helpful for removing short term fluctuations in a currency price and providing a clearer picture of currency price movements over time.

These of course are just two of the tools available to traders who choose to follow a technical approach and there is a wide range of far more complex and powerful tools available today.

In addition to technical analysis, a lot of traders also have a string belief in fundamental analysis which says that currency prices rise and fall in response to a wide range of factors including political events, changes in trading patterns and trade agreements, economic numbers, interest rates, employment figures and a great deal more.

Fundamental analysis is complex and requires considerably knowledge and experience to master, which is certainly one reason why many new traders are fairly easily drawn towards technical analysis and only tend to use fundamental analysis to a limited extent at first while they acquire the knowledge and skills needed to put it to work effectively.

Both fundamental and technical analyses are of course not in themselves trading strategies but are the base on which you must build your strategy. Your starting point must be to select the base on which you are going to analyze the market and thus upon which you wish to make your trading decisions. Once this has been done you then have to look closely at the mechanics of your trading and it is detailing just how you are going to to trade which forms your currency trading strategy.

Finally, remember that developing your trading strategy is something that has to be done at the start of your trading career and you have to take full advantage of the ability to operate a simulated Forex trading account and a mini Forex account to develop your strategy.