When trading on the forex market, investors will follow a strategy involving one, or several, techniques that determine when you should buy or sell the currency pair. Traders use various forms of analysis and indicators to achieve this, and essentially expand the potential to profit from the right trading decisions.
If you’re participating in contract for difference (CFD) trading on Plus500 forex trading platform for example, then you can use analysis and indicators to speculate on the price movement of the underlying instrument, in the same way you would with traditional trading. We’ll explore the different strategies, but first let’s take a look at two major trading methods – fundamental and technical analysis.
This can be used as part of a wider forex trading strategy, and is a type of analysis that includes the examination of economic variables, global events and relevant reports to determine whether the corresponding currency pair will rise or fall as a result of said factor.
Compared to the qualitative data of fundamental analysis, technical analysis uses charts and graphs, observing the patterns or using forex trading indicators to conclude from past performance the likely movement of the market in the future. This in turn will determine the position to take on the currency pair.
Here are some of the indicators used for technical analysis:
- Moving Average
Also known as the Simple Moving Average (SMA), this is one of the most commonly used indicators in forex trading strategies. It calculates the closing daily price of a currency pair divided by the total days, to give an average. It is represented as a line on a graph to gauge and determine price movements.
- Relative Strength Index
This is often used in conjunction with the SMA, to clarify further the possible trend of the currencies. The Relative Strength Index (RSI) shows whether they have been overbought or oversold, based on an index of zero to 100.
- Bollinger Bands
Another indicator used with SMA, these are also lines that show the standard deviation from the SMA line, and used to measure the volatility of the market. If the Bollinger Bands widen, this indicates that the market has become more volatile, and likewise if contracted, the market is more stable.
Position vs day trading
Once you have your analysis and indicators in place, you can use these towards several different strategies for trading forex. The main two are position trading and day trading, which cover different periods of investing.
For short periods of time and a standard pace of trading, then day trading is one strategy you can partake in. As the name suggests, it involves one trade and takes place all in one day, with any profit or losses determined by the daily price changes of the currency pair in question.
You will need to continuously monitor the trade throughout the day, as well as have a good understanding of the relevant economies. It is also vital to keep up to date with any major news or events that could break at any point during the day and affect your position.
On the other hand, position trading doesn’t focus on the short-term possibilities, but instead focus on holding a position for several weeks or months, and in some case years. This is a long-term strategy that aims to benefit from the rise in value over a lengthy period of time, and doesn’t require daily monitoring of the market. However, this strategy does require a good understanding of market fundamental factors.
An important thing to remember when forex trading is to choose a strategy that suits the type of trader you are, and your knowledge of the strategies already in place that you can adapt. Note that you can also combine several different techniques and indicators, and develop your forex trading in a way that works best for you.
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