The Foreign Exchange (Forex) market volumes have increased at a rapid pace over the years. Hundreds if not thousands of forex trading systems are available online, offering numerous methods of tackling the market. Due to the vast range of trading strategies new forex traders may be initially overwhelmed and struggle in finding the most suitable forex system that meets their expectations.
In this article we would like to share our trading experience in the Forex market that we believe both new and seasoned traders may benefit from. If you are fairly new to the Forex market you may review our extensive forex trading guide.
Your Forex Trading Strategy
Numerous trading strategies are based on the following analytical techniques, technical and fundamental. Technical analysis is based solely on the chart where the system or the trader generates entries in the market. Fundamental analysis is monitoring the economic data flow as well as geopolitical events that may affect the currency market.
Basing trades via fundamental analysis is demanding as the trader must have a deep understanding of the leading financial markets and possess the ability to interpret economic news in real time into trades in the market. Technical analysis is as not as demanding as fundamental analysis as the only the chart is required to determine the trend in the Forex market.
However, technical analysis on its own is split into multiple segments. There are trend-following strategies, trend reversal strategies and range trading strategies. Each type of strategy can be broken down even further, price action, divergence (positive and negative), overbought / oversold levels etc. It is important to fully understand each type of technical strategy that we mentioned and then opt for the one that appeals you the most.
It is essential to understand each strategy as it may provide you with the ability to when your current strategy is under-performing, which we will discuss later. It is important to stress it is not about familiarizing yourself with hundreds of trading systems but to understand the core principals the systems are based on.
Your Forex Trading Style
Once you discovered the trading strategy that you find to be appropriate you must then determine your trading style. The most popular forex trading styles are scalping, day trading, swing and long term.
Some traders may be unable to hold onto trades for several months while some may find the stress of day trading difficult to endure. Scalping and day trading is often carried on short time frames via technical analysis such as 5min, 15min, 30min, 60min and 4hr charts. Some fundamental day traders may react to economic data throughout the day as well as geopolitical events.
Discovering what style is appropriate to your personality may play a critical role in global markets. If you uncertain how to trade in the market it is best to experiment with various styles with minimal trade sizes. Within 90 days you may have a stronger indication on how to approach the Forex market.
Some forex traders nourish the idea that a successful trading strategy reflects in an extremely high success rate with minimal losses, the ‘holy grail.’ Every strategy, technical or fundamental will have phases of losses as well as profitable phases.
The main reason behind those phases are changing market conditions. Certain trading conditions may not favor the strategy at any given time. Even with the forex signals we provide there are such phases. It is essential to acknowledge the existence of such phases as failure to do so may have a fairly negative impact on one’s performance.
As soon as consecutive losses are incurred forex traders have the tendency to opt for excessive risks in order to recoup the lost capital. Ensuring the used leverage is low may allow to surf negative phases without absorbing hefty losses.
Seasoned traders may be already aware of the currency correlations in the Forex market. During risk aversion mode, a phase of negative economic data or outside market events that are deemed as negative to financial markets such as a war between the United States and Iran for example the Japanese yen (JPY) tends to strengthen against a basket of currencies.
As the stock markets dive lower the Australian Dollar (AUD) tends to follow suit. The Swiss Franc (CHF) also benefits from safe haven flows, however, at the time of this writing the Swiss National Bank (SNB) is fairly active in the Forex market, ensuring CHF strength is limited.
What may currently determine the possibility for a rate hike bu the Fed, the Bank of England (BOE) European Central Bank (ECB) is inflation data (CPI). A sharp rise in the CPI mat force the central bank to hike rates. Forex traders are therefore paying closer attention to CPI data.
OPEC may extend the oil output cut by 9 months if not longer, which may affect the Canadian Dollar (CAD). Even if you are a technical trader it is still important to be aware of these events and currency correlations. Understanding the correlations and market events may enhance the decision-making process in trading the market.
Balanced FX Exposure
The net currency exposure must be closely monitored. Holding a large short / long net. exposure to a single currency is often deemed as unhealthy. Should the currency trend against the expectations the loss significantly high due to the market exposure.
For example. holding a short USDJPY, long EURUSD and long NZDUSD means the trader is heavily exposed to the US Dollar (USD). In our forex signals there were several occasions in which we have increased our exposure to a single currency but it is not exercised on a frequent basis due the risk it possesses.
Maintaining a healthy currency exposure may also improve one’s trading performance.
You are welcome to review our trading signals and market strategies we have been providing since 2014, documenting all trades on the website including the charts that were used to derive the signals.