subject: Devising A Sound Forex Trading Strategy [print this page] As you begin your tryst with the foreign exchange markets, you will need to focus on evolving your own personal forex trading strategy. Various market players adopt their own strategies, according to their expectation from the markets and according to their personal risk appetite. To each, his own. In order to devise a sound forex trading strategy, it is essential that a fundamental analysis be performed, followed up by a technical analysis.
By fundamental analysis, one refers to the external business environment, political and economic conditions that affect the movement of currency prices. Fundamental analysis is driven by news reports of inflation, growth rate, unemployment rate, national policy, etc. that bear influence on forex trading strategies.
However, fundamental analysis is limited to providing a broad overview of price movements, and to form a basis to go heavy or otherwise, on a specific currency. Professional forex trading typically involves technical analysis in order to determine the entry point to open a position and the exit point to square it off, while supplementing these findings with fundamental analysis. Often, one loses potency without the other.
The success of failure of a forex trade largely depends on a correct assessment of supply and demand of various currency pairs, which are in turn determined by broader economic conditions. It is important to understand the underpinnings and dynamics of currency markets. For instance, a familiarity with underlying concepts such as the gross domestic products of various economies, foreign investment levels, trade balances, and so on is a prerequisite to make a holistic assessment of currency price movements.
Reports of economic indicators are regularly released by government agencies and private organizations, detailing the status of a nation's economic performance. These reports, released on regular schedules, provide the market with data on the state of economic affairs. Your forex trading approach also needs to be based on a number of other parameters such as SEC filings, earnings reports and other releases. Forex trading is not very unlike equity trading. Any methodology or approach needs to be backed up by adequate research and understanding, rather than pure momentum play based on speculative positions.
