An Overview of Forex Trading Strategies

Posted: 1 March 2008

Forex investing is growing in popularity – if you’re new to the market it’s important to understand the two main forex trading strategies used to trade foreign currencies.

Technical analysis is the first of the two main forex trading strategies. If you’re a small-time investor, this is the type of strategy you’re most likely to employ. Technical analysis forex trading strategies take real market factors into consideration, instead of predicting what factors may have an effect. Any price quotes arrived at via technical analysis are based entirely on real factors of influence. Keep in mind that with this strategy, only facts related to the market are considered – human factors are not included in the process.

Technical analysis forex trading strategies are a reflection of market movements, so the prices come from supply and demand figures, and other related factors. Real changes are accounted for with this type of analysis. Technical analysis is pretty straightforward because it only looks at price as moving in one of three directions – up, down, and sideways.

The market patterns taken into account with technical analysis are the ones thought to be most significant to price fluctuations. Forex trading strategies such as this one are concerned with repetition of results for a reliable analysis. The basic idea upon which technical analysis is based is that history always repeats itself. Technical analysis searches for patterns in historical data and attempts to apply them to future trends. This strategy can be very effective if you conduct a good amount of research and have a solid head on your shoulders. This strategy sees the movement of the market as predictable based on historical precedent.

Forex trading strategies of a technical nature take into account the relative strength index, charts, gaps, numbers, and stochastic oscillator.

Fundamental analysis is the second of the two forex trading strategies. This strategy takes into account more than just the technical data of past events – it factors in other influences that can manipulate the market, such as economic, political, and financial situations around the world. The economy and political reality of a certain country is based on interest rates, employment levels, exports and imports, per capita income, poverty level, inflation, trade relations and tax policies.

Someone using this strategy researches all the various outside factors that may influence the forex market, and then comes to a decision. Forex trading strategies that take fundamental influences into account look to the long term to make short-term profit.

There are several indicators for fundamental forex trading strategies, such as gross domestic product, retail sales, consumer price index, business cycle, and monetary policy. The gross domestic product reflects the total market value of the total goods and services produced in a country during a period of one year.

Retail sales numbers are an indication of all the receipts received by retail stores in a specific country, while the consumer price index is a reflection of changes in the price of consumer goods. The monetary policy looks at the supply and control of money in a particular economy.

To employ successful forex trading strategies, you have to understand the differences between technical and fundamental analysis. Once you’ve mastered the terminologies and strategies, you can choose the approach that works best for you.