Establishing a Forex trading system is crucial if you want to make steady profit in the market. What you should understand however is that there is no ‘perfect’ system available today. Thanks to the volatility of the market, every trader generates profit differently. The good news is that for the most part, all of them make use of the same basics when generating their Forex trading system:
Most traders lean on technical analysis when it comes to system formulation. As the name suggests, it takes into account different technical tools supported by statistics, numbers, trends, charts, graphs, and various other quantitative data.
A pretty common factor utilized in systems would be the ‘trend following’ which essentially finds patterns or trends overtime. For example, traders may find that during certain times of the year, a particular currency enjoys a steady rise before dropping back again at the start of a specific month.
Technical analysis also includes the use and comparison of GDP, price index, demand and supply, and even the political situation of a country to fully comprehend how the currency will fare for the next trading session or overtime.
As opposed to technical, fundamental analysis takes into account other factors that are equally logical. For the most part however, fundamentals focus on supply and demand as the primary driving factors of the Forex market.
This system also puts weight on a sentiment-driven market. This refers to the ‘mood’ of the big investors when it comes to the market. Hence, if the big fish are leaning towards are a particular currency, then this significantly affects the ‘supply and demand’ of the said currency, thereby affecting how the Forex market stands. The ‘mood’ is the sentiment of the majority of investors to which a private investor must look at to ascertain their next move.
Long Term and Short Term
Now the question is: do both techniques apply for short-term and long-term trading? The answer is: yes. It doesn’t matter if you’re a day trader or there for the long haul – technical and fundamental analysis remain relevant factors in the process.
The best Forex trading system however,would be a combination of technical and fundamental analysis with more attention given to the former. Although Fundamental Analysis has been proven to work, the statistics offered by Technical tends to produce better and more accurate results overtime. The good news is that in some instances, these two analysis options overlap, which should make your trading process easier.