When Trading Forex, one of the main cornerstones of your trading system will be a method or technique that help you select the entry and exit points of all your trades.
To achieve this, many newbies resort to listening to hunches or tips from so-called Forex Gurus whilst others follow price alerts provided by the financial media or their Forex brokers.
However, if you adopt any of these approaches, you could well be making important trading decisions without fully understanding them, and enter trades for all the wrong reasons. This often leads to losses and disappointments.
Many traders overcome this problem by utilizing Technical Analysis to help them evaluate and predict currency movements. This technique does not attempt to measure the intrinsic value of a currency pair, nor does it require a degree in finance and economics. Instead it uses charts to identify patterns that can suggest future activity.
The main functions of Technical Analysis are to identify and then exploit non-random price patterns and trends that are being continuously being created within the Forex market. This study takes advantage of the fact that Forex moves in trends 30% of the time. There are many methods that are used to perform Technical Analysis but the primary ones utilize the study of past price and trading actions. The central concept of Technical Analysis is that price predictions are only extrapolations from historical price patterns.
Technical Analysis provides you with a large number of Technical Indicators that you can use to detect entry and exit points for your trades including Stochastics, RSI, Bollinger Bands, MACD, Moving averages plus many more.
However, most of these Technical Indicators were designed for markets different in nature from Forex (such as stocks) and as such do not cope very well with Forex market volatility. Consequently, they really need to be updated and modified in order to handle these new conditions better. However, unless you are a brilliant mathematically then this is not a plausible solution. Instead, you are better advised to create or use a Forex Trading Strategy, possibly an automated one, that uses your chosen Technical Indicator as its central components.
To improve the detection of entry and exit points, many traders combine Fundamental and Technical Analysis together. Fundamental analysis is the study of political, economy and social influences that can affect the value of a country’s currency against those of other nations. If the economy of the country is strong and the country has a stable government, then the value of that country’s currency can be expected to rise against the currencies of countries with weaker economies. However, if you intend to use a Forex Trading System based on this concept, you will need to constantly stay updated on any global financial or political news. This is definitely not everybody’s cup of tea.
Many experienced traders, who have designed and used successful Forex Trading Systems, have coded them into an automated robot, also called a Forex Expert Advisor. These robots are programmed to alert the user when new entry opportunities arise. They can also be used to trade accounts automatically by performing actions such as sending orders directly to the appropriate broker’s server and adjusting stop loss, trailing stops and taking profits.
Expert Advisors (robots) are programmed to eliminate the emotional trading decisions that cripple novice trading accounts by providing users with a very strict Forex trading system. The system prevents them from falling outside pre-programmed parameters, or falling prey to emotions of greed and fear that causes bad decision making.
In addition, Forex Expert Advisors are able to evaluate more parameters at the same time than humanly possible. However, you still need to proceed with caution as the seller’s claims are quite often widely exaggerated as their systems are unable to cope with the vast variety of trading conditions that Forex can throw at them.
In conclusion, you are advised always to use a well-developed Forex Trading plan or an automated system but it is essential that you examine the performance of the strategy or robot, to see how well it withstands the test of time and market volatility.