Two Basic Forex Trading Strategies Every Beginner Should Master
Fast and engrossing, foreign exchange trading, or forex, is more popular than ever. Beginning traders typically find forex mechanics easy to get a handle on. When it comes to formulating and enacting profitable forex trading strategies, on the other hand, the going can be a little rougher. With a little planning and preparation, though, it is easy to chart a course that will serve a novice trader well.
Getting a Grounding in the Fundamentals
Just as with equities, most new forex traders do well to learn to trade by mastering the fundamentals. Because foreign exchange rates reflect the economic outlooks of whole countries, this means studying and predicting broad indicators like unemployment and inflation rates.
Since the foreign exchange markets generally react quickly to economic developments, traders often find returns in places where this has not yet happened. A currency pair including two especially influential countries like the United States and the United Kingdom, for example, will be extremely responsive to economic news. Forex traders are more likely to discover attractive opportunities if they instead focus on the currencies of countries that fewer active investors pay attention to.
This does not mean that it is necessary to master the intricacies of trading the Burmese kyat against the Burundi’s franc, though. In fact, most newer traders find that it makes sense to a use a well-known, highly liquid currency like the U.S. dollar as a standard half of each trade’s pair.
Squeezing Returns from the Charts
Technical trading is even more common in the world of forex than on the stock markets. A great many of the most popular forex trading strategies fall under this general heading, and beginners will find that getting their feet wet here opens a lot of doors for them.
Broadly speaking, this style of trading means ignoring fundamental indicators and trading on the basis of price movements. The idea is that trends and individual price movements often portend future developments, regardless of what is going on economically in the world.
Gleaning everything possible from a given currency pair’s price charts is something that takes years of experience. Less-advanced traders can benefit from simplifying things, stripping down the complex charts that veterans make so much of.
With what is known colloquially as a “naked” price chart, for example, beginning forex traders can attempt to respond directly to price action. Spared the cluttering influence of trend lines and other derivative features, traders with less experience can focus on cultivating their instincts and returns.
Price action trading generally means going along for the ride as a currency pair ventures relatively briefly in one direction or the other. Traders will study charts to develop a feeling for the typical magnitude of these surges, and then try to get in early on subsequent ones, unwinding positions as appropriate.
Building on and Combining the Basics
Between fundamentals-based trading and basic technical approaches like this, new forex traders will have plenty to keep them occupied. Each of these starting points leads to a whole wealth of other, more advanced forex trading strategies, and they can also be combined in ways that produce even greater returns.
A trader who is bullish on Thailand’s unemployment rate, for example, can use technical trading to supplement the expected returns. Instead of merely staking out and holding a position that predicts the future strength of the Thai baht, the trader can use technical approaches to eke out even more gains as the currency continues to rise. Opportunities like this for being creative and resourceful abound in the world of forex trading, which is part of why it is increasingly popular.