The foreign exchange market is a good place to consider investing in. One of the interesting things about this market is that it’s open 24 hours a day. It is closed on the weekend. The huge trading volumes and the large amount of traders in the currency market make it a very liquid investment. By being a knowledgeable investor and with a little experience you can make a good amount of cash in this currency world market.
There are a couple of trading strategies in the forex market market which is, fundamental analysis and technical analysis. Let us take a look at each of these strategies.
Fundamental analysis, as the name says, deals with the social and political factors, government policies, GDP reports, employment, various industries, the business cycle and the economic indicators. Using the above data, the analyst can predict the future of the currency. The stronger the above mentioned factors of the country, the better future its currency has. This method is the prominent amongst the long term traders. However, it is quite difficult to predict the market during silent activity when analyzing fundamentally. This particular trading strategy is itself divided into two minor strategies, i.e., capital flows and trade flows.
Capital Flows: This is the flow of money (through buying and selling) through foreign direct investments, joint ventures, third party licensing agreements, equity market investments, and fixed income market investments. The first three investments reflect the economic growth and financial stability of a country. On the the other hand, the other two are common portfolio investments and government bonds. Trade Flows: Trade Flows are the international imports and exports carried out between the countries. It plays important role in FX market as the importer needs to sell his currency in order to purchase the goods from the other country. Thus, it is the most satisfying example of currency exchange and probably the best way to predict the currency’s future. Last but not the least, global as well as country specific happenings also affect the forex market. Thus, it is always good as a fundamental analyst to keep a track of the world news and country’s relations when investing in its currency.
Technical Analysis is another trading strategy used in the forex market. This analysis predicts the future movements of the currency by having a look at its past performance. A technical trader studies past graphs showing the up and down movements of the currency.
The key tools of a fundamental analyst are: Relative Strength Index (RSI): RSI measures the ratio of up and down movements of a currency and equates it to a scale of 0-100. If RSI is above 70, it means the currency is overbought (time to sell), if it is below 30 it means that the currency is oversold (time to buy)Fibonacci numbers theory: The Fibonacci number sequence (1,1,2,3,5,8,13,21,34…) is constructed by adding the first two numbers to arrive at the third. As a forex trader, one may use them to calculate profit targets and price retracement levels. The ratio of any number to the next larger number is 62%, which is a popular Fibonacci retracement number. The inverse of 62%, which is 38%, is also used as a Fibonacci retracement number. Elliot Wave Theory: It is based on wave patterns and fibonacci number sequence. Ideal Elliot wave pattern shows a five-way advance followed by a three way decline.
We have looked at two trading strategies used in trading in the forex market. Each has its good and bad points so it’s up to you to chose which one you wish to trade with. Trading strategies harm only when you apply them without the sufficient knowledge.