Most traders who first enter this market are taught that there is only one way to trade properly. This is untrue and for you to make a success of your forex trading career, you need to understand your weaknesses and strengths. Once you have grown into adulthood, the chances of you changing your ways are unlikely. The forex market changes on a constant basis though. This shows that you should find a technique that is in line with your personality, rather than trying to change your style to someone else’s.
Forex Trading Strategies
It is important you find the correct forex trading strategy for your temperament. If you are a patient, methodical person, you may prefer to trade with the trend. If you are an impatient, highly active person who loves the thrill of living, you should look at a technique such as fading. You will appreciate the quick retracements and fast profit making. This does not mean that you have to use these particular strategies if you are of that particular temperament. The most important factor is that you are comfortable with your trading strategy.
The fade versus trend theory leads to another question you need to answer. You need to determine if you would be comfortable trading in long or short-term time frames. Those who trade the trend are generally more comfortable working with longer timelines. This is due to the fact that forex trends do not develop within days, but rather over months. Those who use a fading technique will look for quick movements in the market and will prefer short timeframes.
The shortest time frame to trade in this market is the hourly charts where the average risk to reward target is 30 points. Trades that are smaller than 30 points prove to be ineffective due to the spread calculation.
Fundamentals Long, Technicals Short
The rule of thumb in the forex world is that fundamental analyses have a heavier impact on long-term trades, whilst technical analyses have an impact on short-term trades. Currency prices will react to the major economic events such as interest rates, current account balances and gross domestic product growth over the long term.
For example, during 2005 the US increased the funds rate by 2% to 4.25%. In England they were facing a depressed economy and the UK chose to lower the rates to 4.75%. The interest rate difference between these two currencies levelled out at nearly 0%. It actually reached 0% during 2006. Traders who had predicted on a long-term basis that the UK and the US short-term interest rates would join drew huge profits as the currency pair declined.
Regardless of whether you are a short term technical analysis expert, or a long term fundamental expert, the forex trading market is large enough to accommodate your personal style. The two camps will never agree, but the undeniable fact is that you should use a trading style that is best suited to your personality. If you choose to ignore this one fact, it is unlikely that you will succeed in this market, irrespective of the suitability of your approach to the market.