It is not necessary to justify the importance of having a good strategy if you want to become a successful FOREX trader. At the same time it must be said that there is no common strategy that does not work for everyone. An individual approach is what is best for every investor. In order to build a strategy, an investor needs to make an analysis. Analyses are of two kinds in the stock market fundamental and technical. Either one of them could be used. However, enterprising investors would use a combination of both the analyses to get a better standpoint of the market trends and plot the entry and exit points.
In technical analysis, the market trends are the deciding factors. The fluctuations in the prices are based on the trends. Investment gurus have developed their own studies of patterns of the market fluctuations over several years. This is how they can arrive at a good trading strategy.
For those who find understanding the market movements difficult, there are many tools available. However, an initial study of these tools is in order. Only then can one begin applying them to the market. Even if a single one of these tools is understood to a workable level, then it can be used; and the others could be studied further. Every tool helps to reinforce the other tools.
In making FOREX trading strategies, there are both support and resistance levels that are used. The support is actually the price level that is at the bottom. When this price reaches this level, then only any upswing can occur. While resistance levels are the upper limit prices. These are the prices beyond which the trading rarely takes place. Hence, support and resistance prices are the limits that are set for trading within a specified period of time.
In case the prices break the support or the resistance levels, then the prices would continue to move in that direction. So if the price reaches the previous support level, then it would be seen as bearish; i.e. the price should continue to fall.
In order to estimate the support and resistance levels, the price charts should be analyzed. Support and resistance levels are decided on the market trends over a period of time. Hence the longer timeframe of the charts analyzed; the better it is to determine the price and support levels. Once the support and resistance levels are determined, the traders could use this to find out when to exit or to enter a transaction.
Investors use moving averages as another tool to make their trading strategies. The simple moving average (SMA) is an indicator of the average price in a given period of time over a specific period of time. These can be plotted on a graph and used by the investors to determine whether the prices have a tendency to rise or to fall. If the prices cross above the SMA, then they keep on rising.
Trading strategies can be used individually as well as in combination. It is better if the investor has several trading tools at his/her disposal, so that an effective use of those can be made. Using many tools in conjunction would help the investor to make better decisions than if only a single tool was to be used.
Each analysis helps to supplement the other. Technical analysis can make fundamental analysis more complete, and vice-versa. A trading strategy would be built up taking several analysis factors into consideration.
The trading strategy would tell when a trader should enter the trade, how many profits to expect and when to exit the trade. This could be very helpful guidelines to the amateur trader, as well as make the decision-making process easier for the professional trader.