The foreign exchange market is the largest and the most liquid one when compared to bonds and equities. The daily trading volume in the worlds largest financial market is about $6.6 trillion. This marketplace is unique and might carry a few surprises for new traders.
While there are more than 180 different kinds of fiat currencies in the world, the majority of the trades and payments are made using the most popular currencies including the U.S. dollar, the Euro, the Japanese yen, and the British pound.
Other currencies that are popular include the Canadian dollar, the Swiss franc, and the Australian dollar. You are allowed to trade these currencies via forward, swap, spot, and options contracts.
An overview of forex trading
When you trade, you need to follow an underlying strategy that can be leveraged to determine the movement of the particular currency pair. There are fundamental and technical trading strategies that you can follow. The ideal strategy will help the trader analyze the forex market and derive outsized returns while focusing on a robust risk management framework.
If you are a fundamental trader, you will look at the macro-economic data thats driving the value of a currency pair. For example, in case the U.S. Federal Reserve increases borrowing rates, institutional investors will withdraw money from equities in developing markets and park their funds in corporate bonds or treasury instruments that have a higher credit rating.
So, there is a good chance for the Indian rupee to lose ground against the U.S. dollar in such times. Alternatively, if the U.S. government continues to expand its stimulus program, the increase in money supply will lead to inflation and result in a depreciating dollar.
A technical trader on the other hand looks to take advantage of historical trends while trying to analyze the future movements of the currency pair.
Technical traders can also follow forex platforms that deliver real-time alerts on multiple currency pairs as well as in-depth analyses that support the trading ideas or recommendations.
For example, there are online publications that provide comprehensive news and analysis as well as recommendations. Beginner traders can look at the free forex signals by FXLeaders that are provided by experts to benefit from spot market opportunities.
Keeping this in mind, we take a look at a few technical strategies that are popular among forex traders.
Price action trading
Here the trader analyzes the historical prices of currency pairs over a period of time which can be short-term, medium-term, or even long-term. The most experienced traders will be able to utilize various time frame scenarios before making a trading decision.
There are numerous methods that will help to govern the support or resistance levels of a currency pair. You can use candle wicks, oscillators, and even Fibonacci retracement to determine the entry or exit points of a trade.
Most of the other trading strategies discussed here can be considered a part, or a subset of price action trading.
One of the most popular tools of traders all over the world, candlestick patterns enable you to identify bullish and bearish trends. The trader will be able to look at reversal points, making it one of the most effective patterns in the forex industry.
For example, a bullish engulfing pattern might indicate that the bulls are now in charge and you should be ready for a trend reversal.
Another long-term technical trading strategy is the Fibonacci indicator which uses the Fibonacci sequence. This trading strategy depends on concepts such as trends and pullbacks. A trend is basically a move in the price of an asset class that follows a distinct pattern. Most price trends are identifiable after which you can implement the Fibonacci strategy.
There are bullish trading periods followed by a broader market pullback. However, its not easy to identify pullbacks as you may treat them as a trend reversal. Here, you can use Fibonacci trading strategies to analyze market data and price movements before coming to a trading decision.
Position trading strategy
Another long-term trading strategy that is based on both fundamental and technical factors is position trading. Here, you ignore price fluctuations if they do not reflect the broader market. Position traders have a long-term outlook allowing them to deep dive into economic factors as well as judge entry and exit points based on technicals.
This strategy is not time-consuming and generally has a much better risk-reward ratio. However, here the trader is exposed to few trading opportunities which might limit overall upside potential.
The key takeaway
Whether you are a fundamental trader or technical trader or even subscribe to an advisory platform, you need to make an informed decision before you trade in the highly volatile forex market.
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