Forex Trading: Trading Methods

Forex Trading: Types of Trading Methods

When it comes to Forex Trading, different traders swear by different methods. Some have make significant profits relying on the news, while some prefer analysing the market and spotting repeating patterns; thereby capitalizing on these repeating patterns to profit from the forex market. What are some of these methods and are they for me? In this blog post, we will discuss about some of these methods, for you to assess its suitability in your approach to forex trading.

Fundamental Analysis is a trading method that evaluates financial information by analysing underlying economic, financial and industry factors. For example, a trader that trades using fundamental analysis would analyse the interest rates, unemployment rates and even their GDP to assess the countries’ overall economic health, and make a trade based on that evaluation. Geopolitical events like wars and natural disasters can also significantly impact markets, and these events are also analysed by traders using fundamental analysis to determine the trade that they are going to make. While it seems reliable, price movements are still not easy to predict as markets can overreact to certain news. Moreover, we do not get the first hand news as retail traders, and thus might have already missed out on making a trade as bigger financial institutions could have had the jump on you already.

Another type of trading method would be Technical Analysis, which encompasses a large range of methods to predict future price movements. Technical Analysis refers to the methodology of evaluating financial markets by analysing past price and volume data, searching for patterns and trends that can potentially predict future price movements. The underlying basis is that as there is a constant flow of buying and selling of currencies going on, certain patterns and trends will repeat and become more defined. Technical analysis captures these patterns and trades using these patterns.

One of these concepts would be support and resistance. Support refers to a price level where traders are interested to buy should price reach that level, and resistance refers to a price level where traders are more likely to sell, should price reach that level. Traders using this form of technical analysis identifies these levels and uses them to make trading decisions. Should price break past any of these levels, previous support and resistance levels can act as future resistance and support levels respectively, where traders are hesitant after facing difficulties at those levels.

Another concept of technical analysis would be using candlestick patterns, where traders analyse candlestick patterns to anticipate market movement and formulate trading strategies. Common chart patterns like the head and shoulders pattern and double tops / bottoms signify a particular reversal or continuation, and traders use these patterns to make their decision. When it comes to candlestick patterns, there are a large range of patterns that could involve single or multiple candlesticks. There is information online providing the percentage accuracy rate of each pattern, for the trader to make their assessment on the feasibility of that candlestick pattern.

Last but not least, another type of trading method would be the order flow analysis. The order flow analysis method analyses the flow of buy and sell orders in the market to understand where investors are placing their trades. This can be done by monitoring large orders through specialized data providers and traders using this method will identify the trending orders to make their trading assessments. These information offers insights into the sentiments of the professional traders and helps identify potential areas of strong support and resistance. However, as access to this information is relatively hard to obtain, traders must weigh the costs and benefits before diving into using the method.

The above talks about only a few types of trading analysis you can use to make decision when it comes to trading. It is important for you to read up more on the different types of methods to choose your method of choice. This article seeks to help you understand that there are many types of methods out there, and that one should be careful to do their own research as to what is the best for themselves.