Types of Forex Trading

As a Ninja in training, it’s important to know when, where and who to fight, as well as knowing how to fight. But the most important thing to know is when not to fight!!

There are many ways to trade the Forex market. Everyone is different and will find a style to suit them. However, their method will tend to be either based mostly upon Fundamental analysis or Technical analysis. This is because these are the 2 main ways to analyse the Forex market to help determine what is likely to happen next.

Fundamental Analysis

Fundamental Analysis is a way of looking at what’s happening with the currency from an economic point of view, mainly. As mentioned before, economic news is normally scheduled to be released at pre arranged times, as shown on the Forex Calendar. These announcements often move price.

Fundamentalists mainly use this economic data to try and predict which currency will appreciate and which currency will depreciate in value. In simple terms, which currency is going to get stronger and which is likely to get weaker. For example, currencies tend to get stronger when interest rates increase. This is because this currency now attracts savers. These savers can be from anywhere in the world, generally. However, they need to change their money into the currency they wish to save in, where the highest interest rate is. This creates demand for that currency and pushes the value of that currency up. Basic principles of supply and demand.

Fundamental traders do tend to hold their trades for longer as they are looking at a currency gaining or losing strength due to economic conditions. They can hold trades for days/weeks or even months. They can also take short term position of just a few minutes. These tend to be News traders and this can be a highly risky strategy and not recommended for a new trader.

However, most traders visiting this site are Technical traders.

Technical Traders

Technical Analysis is a way of seeing what’s happening with the currency purely by looking at past price. Technical traders believe that all information is priced into the currency. Therefore, the chart has all the information for you. For this reason, Technical Analysts are also known as Chartists.

By looking at how the chart moved in the past they use this to determine how it is likely to move in the future. These past movements can give indications of where the currency will get stuck; at areas of support/resistance. It can also show patterns which will give an indication of market sentiment. Chart patterns will be covered later.

Chartists tend to be in a trade for a shorter period of time than the average Fundamentalist trader. They tend to prefer to jump in and out at significant price levels as dictated by the past price performance of the chart. Technical traders are all about the timing of the entry of the trade.

Fundamental versus Technical Analysis

It is not possible to say which is better as it is probably best you have an understanding of both. An understanding of both is necessary because even if you are a Technical trader the news can still have a major impact on your position. Ever looked back on a chart and wondered why there was a gap or a huge spike in price. Well that could have been news based.

And if you are a trader that trades based on economic data then technical traders can affect your position. They can affect your position because although the economic data suggests that this currency will weaken, for some reason if continues to climb. This could be because it just passed a significant price level and Technical traders have just piled into the market taking long positions. They have just changed the supply and demand dynamics in the market. The currency will probably weaken but it may not be straightaway.

So if you want to be a successful FX Ninja you need to learn to balance both aspects. A Ninja learns to attack and defend and you have to do the same with your trading.

If you are a Technical trader (as the majority of people on the site are) then you need to learn to attack by looking at the chart and timing your entry into the market. But you also need to defend against other threats, by being aware of new events being released which can affect your trade. For this reason, most Technical traders will trade with the Forex Calendar open, and, if a major announcement is due then they wait for a set period, after the news, to take the trade, or they may not take the trade at all. This is because the news can cause unpredictable results, especially when it is initially announced. To protect against losses, you need to know both methods of trading.