What is the key to success in forex trading? Only two words: trading strategy.
A forex trading strategy gives clear guidelines on when to enter a trade, expectations on market movement, when to exit a trade, and how much loss can be tolerated. The successful forex traders have all learned that a trading strategy does help in maximizing profits and minimizing losses, especially minimizing losses.
A forex strategy would not be a strategy if it is not based on a combination of analytics tools that would help the average forex trader predict the outcome of a particular strategy.
These analytics tools are categorized under technical analysis or "trend spotting" in forex trading. Although you can rely solely on them, many successful forex traders use them in combination with fundamental analysis to get a bigger picture of the market and to plot entry and exit points in a trade.
There are many analytics tools in forex, and it would pay if you study each one, and to use them in drawing up a forex trading strategy.
One of these tools is the Support/Resistance Levels. In this case, "support" refers to price levels that are repeatedly seen at the bottom while "resistance" is the price level at the top - a currency seldom trades beyond this level. Support and resistance levels show price movements for a given time period.
When the price of a currency breaks through the support or resistance level, the price is expected to continue in that direction. If, for example, the price rises above the resistance level, it is thought of as bullish, and the price will continue to rise.
To identify support and resistance levels, price charts have to be analyzed for un-broken price/resistance levels. A longer timeframe have more significant price and resistance levels, and forex traders can use them to know when to enter or exit a trade.
The simple moving average (SMA) is another analytics tool. It shows the average price of a currency over a period of time. The SMA gives a clearer picture of forex price movements by eliminating prices fluctuations that happened in the short-term. In general, if a forex price crosses above the SMA, it tends to continue to rise. Conversely, a price below the SMA will continue to go downward.
The Support/Resistance Levels and the SMA are just some of the tools that forex traders can consider when formulating a forex trading strategy. There are other tools, and it would be wise if a forex trader acquaints himself in all of them.