To trade Forex you need to have a strategy to take advantage of the rapid changes and market conditions. There is no short way to develop a strategy because it is necessary to test it in different situations. This means that every trader must invest considerable time analyzing charts, reading news and keeping updated with the economic announcements.
Like any profession, it is important to be aware of the prices of currency pairs in which you are interested in trading and do some research on the subject. Before you start trading at any particular pair, it is important to make a questionnaire with some questions and try to find the answers. Some of the questions might include this questionnaire are:
- How strong is the economy of the country A relative to country B at this time? This question can be answered by looking at the current gross domestic product, unemployment and production indicators, among others.
- Is one of these currencies seen as a safe haven? Historically, the dollar was always considered a safe currency but this may change for various reasons as the debt ceiling crisis in the United States. Other safe havens are the japanese yen and the swiss franc.
- How have reacted the currency against various news in the past? Investigate the behavior of the currency allows traders to make a prospective analysis on how the currency would react.
Once you have identified what moves a particular currency, is essential to follow the news. There are multiple resources, from finance web sites to specialized newspapers, which may vary by country. If you choose to trade in a given pair, it is always advisable to stay updated on the economic situation of both countries.
There are some economic announcements that are fundamental to note because they can impact on the market, as the unemployment rate in the United States or the European Central Bank announcements regarding monetary policy, for example. In all cases, you should always be careful in how it impacts the pair you trade.
Fundamental analysis is always key for Forex, but so is the technical analysis. Price charts allow to understand how different news has impacted the currency cross historically, view points of return, identify support and resistance levels and spot trends. Once you have done this analysis, it will be easier to learn to interpret market behaviour and its position for the future.
Trading can be exhausting at times, so traders should be selective. Every trader should choose a specific currency to start and learn what to do and what not to do. Each pair is correlated to some extent with the financial markets. For example, the USD/JPY may have some correlation with the Nikkei. To identify correlations, it is best to see the price charts as the visualization process can always help eliminate doubts.
When the market moves quickly, more experienced traders know they must rely on their strategies. However, what a trader should never do is get carried away by emotions and change the strategy once it has been developed and implemented (the typical mistake of inexperienced traders).
It is best to use a limited number of indicators, since many can cause much distraction. There are many traders trading in Forex using only one indicator, such as support and resistance. It is important to analyze which indicators are more suited to our needs for trading.
Finally, develop a balanced strategy incorporating fundamental and technical analysis, with a limited number of currency pairs can lead to a successful in Forex trading.