What is forex trade?
Forex trade means trading in foreign currencies of various countries against one another, in a decentralised and a global market, called the foreign exchange market. The foreign exchange market is also called as currency market, forex market or FX market. The acronym for foreign exchange is forex.
Forex trade involves the aspects of buying, exchanging and selling the foreign currencies at the determined price or the original price. This is the world’s largest market because of its volume.
The major participants in the market are the large international banks while the financial institutions in the world act as anchors in the trade between the buyers and the sellers of forex.
Insights as to how the trade is carried out
Forex trade is carried out in currency pairs. Forex trade takes place when a currency is bought and another currency is sold simultaneously. For instance, let’s take a forex trade which involves buying Euros and selling US dollars. In this two currencies are traded simultaneously. One currency is sold and another is purchased.
Forex trade is carried out through a market maker or a broker. You can choose the currency pairs and start your trade by placing your orders with your broker who in turn places the orders in the Interbank Markets. As you end up your trading session, the broker also ends up the trading session in the Interbank Market.
The gain or loss you make in the trade is automatically credited to your account at the end of the day. All these actions take only a few seconds.
The major factors that lure the investors in forex trade are as follows:
- The market is open 24 hours, 5 days in a week. This provides a non-stop access to the forex dealers, globally.
- It is a highly liquid market which facilitates trade in most of the currencies.
- There are many standard instruments which control the exposure of the investors to risk.
- It is a highly volatile market which offers great profitable opportunities.
- The margin requirements in this trade are low with a high leverage to yield.
- There are several options available for trading with zero commission.
All these factors contribute to the attraction of investors to the trade.
What is forex trading strategy?
Trading strategy, in finance, means a fixed trading plan for trading financial instruments to attain profitable returns either in long term or short term markets. Each binary option has its own peculiarities. So, different strategies have to be formulated for every market situation.
Researching and formulating proper strategies helps in verification, quantification, objectivity and consistency during forex trade. Developing and applying successful trading strategies is done in the following steps:
- Specifying them in computer testable format
- Preliminary testing of the strategies
- Optimisation of the strategies
- Evaluation of the performance
- Utilising the strategies for trade
- Monitoring the trading performance
- Refinement of the strategies
Why forex trading strategies?
As it is known that the forex trade is very volatile and vulnerable to great risks, it is very much necessary to follow a strategic approach while trading. Even though the profits from the trade can be large, it requires a lot to be put at stake. Hence, without proper strategies, forex trade shall result in irreparable losses.
A solid strategy is necessary for forex trading because:
- Sticking to the trading strategies in all circumstances shall keep the trader focussed at all times on the trade. This shall avoid the trader to react impulsively to all the news inflow and the economic data, impeding the analytical thinking of the trader. Mostly the novice traders lack the knowledge of price characteristics of the assets or the asset class, to carry on trade according to the news inflow. For this reason, a predetermined trading strategy is required to trade according to the price action which shall help in earning profits. This way, a trader can analyse the performance and can make efforts to improve them.
- Using a predetermined and reliable strategy for a longer duration shall enable the trader to build a statistical database. The trader can change few parameters and observe the change in the new results in comparison to the existing data.
- The main aim of a reliable strategy is to keep the emotions at bay. It is very tough to overcome the emotions like excitement and greed when there are good profits and sorrow and fear when the hard earned money is lost in the forex trade.
- When the profits become consistent then the greed kicks in. The trader starts opening too many positions or bets too much of money. Similarly, in the case of losses, fear grips in and the trader shall recede from opting new positions or bet less amount of money than it should be thereby missing good profits.Hence, adopting a consistent trading strategy shall rule out the emotional factor, stabilise the performance and ensures success in the long run.
- Several bombarding news, tips from near and dear ones, professional advice etc., shall tempt the trader to open frenzy positions. This shall result in over trading and even lead to huge losses. A good trading strategy shall enable the trader from over trading.
Types of strategies
The forex trading strategies can be classified broadly as follows:
- Trend strategy
- Range strategy
- Counter trend strategy
This is the most simple form strategy employed by the traders in the forex market. This strategy employs an oscillator and moving average for comparison. The main aim of using this kind of strategy is to ensure that the trade is carried out in a particular trend. For instance, buying the dips when the market is in the upward trend and selling the rallies when the market is trending downward. There are several variations found in this strategy.
In this strategy, several oscillators are used. Fixed stop loss is usually used to take the profits. Range strategy is further divided into 2 kinds. They are:
- Trading as per break out
- Trading as per range
Trading as per breakout is a type of strategy where the trader develops their system in such a way to identify the price action in sideways or the range so that they can successfully capture the big moves that arise after the sideways trading period. Irrespective of the types of range strategy, the system uses oscillators and tools that identify the price range actions.
Trading as per range is a type of strategy which is used during intra-day trades for a period of 5 to 15 minutes charts. In this kind of strategy, the trader uses fixed-take profit level and tight stops during the bids to take advantage of even the change in the small range that occur in the forex market.
Counter trend trading strategy:
This type of strategy is little risky because usually the positions are taken in contrast to the existing trend. The traders also come across certain trading concepts like corrections or divergences. The traders are expected to possess a good knowledge of some trading concepts in counter trend trading strategy like price actions, resistance/support and divergence.
It is important for the traders to analyse and understand the differences between all the types of forex trading strategy specified above. This shall help them in understanding whether the strategy they are using is similar or a different one. A good trader is one who can analyse the existing trend and adopt a strategy relevant to the market conditions.
Similar to a stock trader, a forex trader is also required to adopt fundamental strategy and approach while trading in the forex market. A stock trader who follows a fundamental approach always targets the relative value for the stocks held. Likewise, a forex trader is also required to find the relative values of the currencies. This is because just as the stocks are affected by the economic events happening around the world, so are the currencies too. The currency of a particular country that is traded in the forex market is influenced by the fundamental aspects of the country.
The currency of a country is affected by many factors like the current and the future social, political and economic conditions of that country. A fundamental approach in forex trade helps in evaluating the relative strength of the currency and the specific direction that the currency shall take depending on the above mentioned factors.
There are several other factors that affect the currency of a particular country like interest rates, trade balance, political events, mergers and acquisitions happening in the country etc. The statistics pertaining to these factors are issued by the government from time to time. It is necessary to keep an eye on the economic calendar.
Now we shall discuss some of the factors to know how each of them impacts the forex trade.
The Central bank of a country alters the interest rates from time to time for various reasons like economic policies, political and economic conditions etc. The changes in the interest rates have a profound effect on the country’s currency. As the interest rates increase the value of the currency also increases thereby creating a demand for the currency in the forex market.
Thus, a forex trader has to review the reports and comments issued by the Central banks to assess whether there shall be a hike in the interest rate.
Political situation of a country is always the driving force for the movement of the currency. A Strong currency makes the price of the goods more expensive for export and vice versa. The political ties of two countries also affect the value of the currencies of the respective countries.
A forex trader has to constantly observe the political signals that impact the currency value.
The government of a country issues reports regularly on the economies of different sectors which provide the info on the economic health. This report creates a large reaction in the forex market.
Consumer price index:
This is an inflation indicator which measures the price change of predetermined good’s basket. Higher the price inflation index then lower is the value of the currency and vice versa.
This is an indicator of the economic activity in the heavy industries which hints the GDP growth.
In fundamental strategy, the traders strongly believe that the currency prices of a country are mostly driven by the country’s political and economic conditions. Hence, they constantly monitor the economic reports that are regularly issued by the governments so that they can evaluate the situation and act to any piece of surprise figure that may arise.
Technical strategy is method of forecasting and analysing the market on the basis of historic price movement. The premise of technical analysis is that the fundamental information is already embedded in the value of the forex currency pair. It does not indicate the future market actions. The technical approach considers the historic price action which is the best methodology for anticipating the future market activity. This also helps in analysing the trader psychology in particular chart types and patterns.
Price Action Strategies:
This strategy describes the movement of the prices of the securities. This is further analysed with the changes in the past prices. This technique enables the trader to undertake a market study and make trading decisions based on the actual and the recent price changes rather than solely relying on the technical indicators.
How to develop your own forex trading strategies?
The basic principles that are to be considered while formulating strategies are:
Analyse your inputs wisely
Before acting upon an advice, firstly analyse the source of advice, its authenticity and the impact it shall have on your trade. This becomes even more important when the information is through internet. Newbies and amateurs should learn to identify the authentic advice.
Experiment with the expert advice
As you start developing your own strategies, you may get lot of recommendations and suggestions. You should experiment with different situations and different advices in your demo account first. You should also try and vary the suggestions and study the impact. This shall help you in formulating your own strategy effectively.
Analyse the strategies of successful traders and analysts
It is very important that you do not follow the strategies of successful traders blindly. You have to thoroughly study and analyse the situations and the strategies applied. This shall help you in tackling future events confidently and successfully.
Always concentrate on long term perspective
Do not get carried away by short term fluctuations and profits. They do not stay for a long period of time. It is always wise to formulate strategies visualising long term goals and success.
Consider different time frames
You should develop strategies for different time frames and situations that arise in the trade. Even if you formulate strategies for long term, you are wise only when you exploit the short term anomalies to your benefit.
Consider both technical and fundamental analysis for your strategies
While formulating your strategies, it is utmost important to consider both the technicalities and the fundamental analysis of the markets. While the technical analysis is based on the market factors like the behavioural pattern of sellers and buyers etc., the fundamental analysis includes the growth of a particular nation, their economic policies, interest rates and changes therein etc. which impact the forex trade.
Wise usage of stops
If you are having open positions in the market, you can use the stops to seal the deal at a specified currency rate. This way you shall curtail your losses and lock your profits
The above list is not exhaustive in nature. You can experiment with your situations and plan your strategies accordingly.
Best forex trading strategies that work:
The best forex strategy that works in the trade are:
- The blade-runner trade
- Daily Fibonacci pivot trade
- Forex dual stochastic trade
- Bolly-band bounce trade
- London hammer trade
- Forex overlapping Fibonacci trade
- The blade-runner reversal trade
- Trading the forex fractal
- The drop ‘n’ stop trade
- The pop ‘n’ stop trade
Fibopips strategy is the best strategy:
Fibonacci trading strategy is a popular strategy that is used by many of the forex traders in the recent times. Basic knowledge of this strategy is very important if you want to be successful in the forex trade.
Leonard Fibonacci invented a sequence of numbers where the ratio of every number to the next one is always 0.618 and the ratio of alternate numbers is 0.382. It is observed that all the ratios are same and they are also called as ‘Golden Mean’.
When such numbers are plotted between Swing low and Swing high, a trend is recorded.The plotting on the chart is called ‘trace’. There are 2 types of traces namely Fibonacci retracements and Fibonacci profit targets.
When the Fibonacci system is combined with the other oscillators and indicators, they give correct results of 50 to 60 percent.
Fibopips is based on fibonacci strategy. Along with Fibonacci, it uses other profitable strategies to make consistent profit forex market. Fibopips has a group of professional and innovative traders and analyst who research the market and economic data round the clock and find out profitable trading ideas to provide forex signals and trade copier service. Fibopips has also individual fund management team with years of experience in the respected field.
Conclusion: Though entry into the forex market is easy with a small investment, sustaining in the market and enjoying the success is very difficult. This needs a conscious, dedicated and a religious strategic approach. Even though there are many strategies and techniques, each one of them is different in their own respects. Not all strategies and techniques apply to every situation. Applying the appropriate technique and strategy to the appropriate market situation is again a learning experience.
Though the forex trade yields high returns it also has several risk factors to deal with.You may also end up losing all your investment if you do not tread