Forex Trading Strategies
How to Know What to Pair and What to Trade
Forex trading begins and ends with the forex pair. Other forms of trading begin and end with a particular asset or group of assets. When you buy a stock or commodity or tie your investment to an index, for example, you do so because you presume that its value will rise until you decide to sell it off. Forex works differently. You choose not one but a pair of currencies, under the assumption that the value of one will rise with respect to the other. Moreover, you do not actually own any asset. You are instead investing in the relationship between the two currencies over the course of a pre-determined period.
Forex Trends and Trading
To make a wise forex trade, therefore, you have to first brush up on how the two currencies interact. There are several strategies to rely on. In most cases, you will want to take all of them into consideration before making your decision.
- A trending market is one in which the price is generally moving steadily, or relatively steadily, in a single direction. A trend-based strategy is typically valuable for trading the world’s major currencies, since they are exchanged far more than the others. That means the competition between them is most likely to yield clear, identifiable trends. The major currencies are the U.S., Canadian, Australian, and New Zealand dollars, the euro, the Japanese yen, and the Swiss franc.
- Trend following (sometimes called trend trading) argues that the best strategy is to buy when a trend is picking up speed and sell when the trend is losing speed. This strategy tends to be predominant among technical traders.
- Range trading is particularly useful when the market is steady and no clear trends are evident. The traditional assumption behind range trading is that the forex market trends only 20% of the time and vacillates between a high and a low approximately 80% of the time. “Ranging,” therefore, is to move up and down between those two price levels.
But strategies themselves are just vehicles for getting you where you want to be. By themselves, they are not enough to maximize timely buys and timely sells. What fuels them are market conditions. To fully understand how market conditions affect your decisions, you will have to rely on one of three basic types of forex market analysis:
- Technical Analysis, which seeks to match current conditions to similar patterns from the past, on the assumption that what happened before will likely happen again
- Fundamental Analysis, which stresses the diplomatic, economic, political, and social factors that may affect the supply and demand of an asset and, in so doing, influence its value
- Sentiment Analysis, which is basically the trader’s own gut feeling
The New York Indicator
Keep in mind that forex trading never stops. It continues 24/7. There’s always a forex market that’s open for the simple reason that the globe rotates. A particularly strong or weak opening in New York can easily influence London five hours later, and those two markets in turn can influence Tokyo and Sydney once they open the next morning. Generally speaking, the market can oscillate in one direction or the other in New York and London while remain less volatile in in Tokyo and Sydney. The influence that the New York market has over the others is what is often called the New York indicator. It’s the first bit of data that has to be analyzed every morning.
That being the case, an astute trader will need to apply different strategies at different hours of the same day.