Nadia Jenkins

Forex Strategy – Understanding How to Trade Effectively

A Forex trading strategy can be best defined as rules and conditions as well as trading tools, which are essential for traders to use if they are to trade the currency markets successfully. A profitable Forex strategy is based on considering a collection of conditions that include, for example: When is it the best time to enter a trade? What are the best currency pairs to trade at a particular time? When is it most profitable to close a position? With so many elements to consider when trading forex, it is important to note that all of the best trading strategies for the currency market rely on a combination of following the market sentiment and analyzing historical price charts.

What Makes a Good Forex Trading Strategy?

A good Forex strategy is one which works independently of the natural human tendency to depend on the trader’s ‘gut feeling’ or judgment, therefore lessening the influence of emotion on trades. In addition, an effective Forex strategy is the one that aims to help the trader to make the right decisions with regard to analysis of a potentially profitable trade and lets them know the optimal time to execute the trade. Some of the trading strategies that are used in other forms of financial trading can often be adapted to work as excellent Forex trading tools, as long as a trader has a good grasp of technical tools and the analysis of price charts.

Trend Spotting Forex Trading Strategies

As indicated before, there are many Forex trading strategies and systems, but among the most popular are those which rely on spotting trends. Trend spotting Forex strategies depend on an indicator tool known as a Moving Average Convergence / Divergence (MACD). This is an extremely useful and accurate tool when trying to identify the beginning or end of a trend. While this strategy is highly effective at isolating asset price trends, it still requires the trader to know how to identify short-term and long-term trends in the Forex market.

What it effectively means is that the Forex trader who uses a trend spotting strategy will also need to know whether the market will maintain its bullish or bearish trend, by analyzing the currency’s chart over several days to gain an understanding of its future patterns and behavior. For a trader interested in investing in the currency market for the long haul on stable currencies with low volatility, a trend spotting Forex strategy can be an incredible moneymaker.

Crossing Averages

This is a simple strategy for Forex traders to master and use, since it only depends on the use of one technical analysis tool: the moving average. What makes a strategy based on Crossing Averages an excellent choice when trading Forex is that, in this often-complex business, it makes it easy for even new traders to identify where trends begin.

This kind of Forex strategy works by creating an overlay of two moving averages, each indicating the currency rate over two different time frames: short-term and long-term. The strategy helps Forex traders to monitor and analyze the evolution of a market trend, to determine the direction of the trend and to isolate an entry point. Because the moving averages eliminate the ‘background noise’ that could be created by bars in an opposite direction to the trend, it is a Forex strategy that makes for more precise and calculated trades.

Conclusion

Similar to stock and commodity trading, the Forex market requires a trader to know various strategies that they can employ to improve their odds for long term gain. The most successful strategies in currency trading often rely on a combination of technical and fundamental analysis. Any strategy that can bring the best aspects of these two principles is sure to earn a trader a profit in the Forex market.