Profitable Forex Trading Strategies
Trading on the foreign exchange (Forex) exchange can be expeditious and exciting. On the other hand, the fast-paced nature can be stressful and challenging, especially with red and green numbers flashing all the time and green and red candles moving up and down on the currency pair’s associated graph.
The rapid price movements can be seen when you look at a trading graph of any CFD trading asset such as a currency pair, especially a minor currency pair like the USD/TRY (US Dollar / Turkish Lira). The price can move (and often moves) up and down in small increments 24 hours a day, five days a week. As a result, it can be challenging to place profitable trades.
Additionally, it is important to note that these volatile price movements are a primary cause of high exposure to risk when trading on CFDs and Forex. Therefore, to trade successfully, it is vital to implement tried and trusted trading strategies.
The Forex market and Forex trading
Before we look at profitable Forex trading strategies, let’s have a quick look at what the Forex market is and some Forex market statistics:
Succinctly stated, the Foreign Exchange market is a global financial market where currencies are bought and sold. The primary reason for the Forex market is that currencies need to be exchanged for other currencies to conduct international business transactions and travel internationally.
The Forex market is not housed in a central location. It is an electronic market where all transactions are conducted electronically via a linked network of computers. This is slightly different from the stock markets like the London Stock Exchange, Hong Kong Stock Exchange, and the New York Stock Exchange in that each exchange is housed in a physical building in the relative city.
Additionally, 2018 statistics show that the value of the Forex market is four times the size of the global Gross Domestic Product (GDP) and $5.3 trillion dollars (USD) are traded daily on the Forex market. Thirdly, more than 85% of the daily forex market transactions are for the seven major currency pairs (USD/EUR, USD/JPY, USD/CAD, and USD/CHF).
Forex trading strategies
Now that we understand the definition of a Forex market and we are aware of the size and importance of this market, let’s look at how to derive profitable Forex trading strategies.
At the outset, it is vital to be mindful of the fact that the currency pairs’ price movements are impacted by the global, regional, and geopolitical and socio-economic events. Therefore, it’s essential to conduct a thorough analysis of the currency pair before trading on it to find price movement trends.
However, it can be overwhelming for a novice trader to find the trends in the price movements to open and close trades that move with the currency pair price movements. Thus, it is crucial to gain a comprehensive understanding of the different analysis types and how to use them to determine a trading strategy.
In essence, there are two types of analysis: Fundamental and technical analysis. And both of these analysis types are used in conjunction with each other to determine a currency pair price movement trends.
On the one hand, fundamental analysis looks at the socio-economic and geopolitical events that can affect the price of a currency pair. A valuable tool to use in this regard is the Economic Calendar. Additionally, keeping an eye on the daily global news is a critical part of this analysis type.
Secondly, technical analysis is the study of the historical and present price movement data to find price trends. This analysis type is an essential aspect of the ability to forecast price movements. Some of the more popular technical indicators are the candlestick chart, Relative Strength Index (RSI) and the Bollinger bands.
Typically, the candlestick chart indicates price movement over a specific timeframe like a day, hour, and minute. Each candlestick is a combination of a bar and a line chart. The bar depicts the following information for the stated time frame: the open and close prices as well as the high and low prices; thereby, indicating price trends over time.
Both the Bollinger bands and the RSI are also used to show price movement trends. Additionally, the Bollinger bands are used to indicate price volatility over time. It is a very useful tool to determine the possibility of price breakouts.
Lastly, the RSI measures the speed at which the price changes. It is primarily used to determine when a currency pair is overbought or oversold. Under normal circumstances, the currency pair price will swing in the opposite direction when it is overbought or oversold.
Finally, it is vital to reiterate that the primary goal of both fundamental and technical analysis is to be able to predict price movement trends. Without this knowledge, it is virtually impossible to trade successfully on one or more currency pairs.