Forex Trading System

To succeed at Forex you need to have a Forex trading system that will tell you when the time is right for entering and exiting trades.

There is no "best" Forex trading system - each Forex trader needs to develop his or her own trading system based on past experience. There are a few general guidelines, however, to get you started with your own Forex trading system.

Finding a Forex Trading System

There are two basic types of Forex trading systems - technical analysis and fundamental analysis. Some Forex traders rely exclusively on one or the other while other traders combine both types of analysis.

Fundamental analysis examines economic conditions and government policy changes for predicting how a particular currency will be effected. Technical analysis uses past market conditions as a predictor for future movements. Both types of analysis can be used together to strengthen a decision to enter or exit a position.

Technical Analysis - The Trend is Your Friend

A common precept in many Forex trading systems is that the market will repeat itself. Market movements have been studied over the years and certain patterns have been identified. The application of these pattern is the basis of technical analysis.

Many Forex traders develop a Forex trading system based on support and resistance. In a nutshell, this means that currency prices tend to remain within a certain range, rarely going above the resistance (high) level or below the support (low) level. When a currency "breaks out" by going above or below these levels it can be signal of continued movement in that same direction.

A commonly used Forex trading system watches market movement for these breakouts and uses them as a signal to enter or exit a position.

Historical price charts are used to plot support and resistance levels. The time frame of these charts can be any period but longer time frames indicate stronger support/resistance levels which can indicate major changes in the value of the currency when they are breached.

Moving Averages

Moving averages are another tool for developing a Forex trading strategy. The Simple Moving Average (SMA) shows the average price of a currency in a particular time period. The SMA smoothes out short term price fluctuations. When it is plotted on a currency price chart it can indicate future price changes. For example, when prices cross above the SMA they have a tendency to keep on rising. Prices which fall below the SMA have a tendency to continue dropping.

Developing your own Forex Trading System

These examples show you just a few of the tools that are available to the Forex trader. It is important to try out several different analysis systems to judge which is appropriate for your style of trading.

Most successful Forex traders have a Forex trading system that combines several indicators, and may use fundamental analysis to shore up a long term investment strategy. When several different indicators are all pointing to the same trend the Forex trader has more assurance that he or she is making the correct decision about entering or exiting a position.