FOREX Trading System

Develop a strategy to trade the FOREX market.

A FOREX Trading System will determine when you should enter and exit the market. What the trading system really consists of is a strategy that will trigger your trade decisions. You may wonder why you need a trading system. The reason you need a trading system is so you will have a systematic way of determining the appropriate time to trade. When you are trading real money you will find that your emotions will effect your trading, having a trading system will help to eliminate the influence of your emotions. Once you have developed your system you will have a starting point for making improvements to your strategy, you will find yourself always trying to improve your trading results.

Technical analysis and fundamental analysis are the two basic areas of strategy to use when developing a FOREX trading system. Anyone who has traded any equity markets will recognize these terms; they are the same strategies employed in the equity markets. Technical analysis is the strategy most often employed in FOREX trading however, fundamental analysis is also commonly used to confirm trades triggered by technical analysis. We will take a look both forms of analysis and how they directly apply to FOREX Currency Trading:

Fundamental Analysis
Fundamental analysis is used to predict currency price movement based on a country’s report of their economic data. Fundamental analysis of the FOREX market is extremely difficult, and it's usually used only as a means to predict long-term trends. But it is important to mention that some traders do trade short term strictly on news releases. There are a lot of different reports that are released at many different times in the day. Here are a few of them for you to study:

• Non-farm Payrolls – A report estimating the number of payroll jobs at non-farm related businesses.
• Purchasing Managers Index (PMI) – A measure of the health of the manufacturing sector.
• Consumer Price Index (CPI) – An index measuring the change in price of a basket of goods and services to be representative of a typical consumer’s purchases.
• Retail Sales – A report estimating the total sales of goods at retail stores.
• Durable Goods – A report of the total dollar volume of orders, shipments, and unfilled orders of durable goods that are defined as goods with a lifespan of three or more years.

Additionally, these reports and others are not the only factors that must be watched. There are also quite a few different meetings that deliver quotes and commentary that can affect markets just as much as any report. Even changes in how things are worded when they are addressing certain issues such as the Federal Reserve chairman's comments on interest rates; can cause the market to get very volatile.

By reading the previously mentioned reports and examining important meeting commentary, a FOREX fundamental analyst gets a better understanding of any and all long-term market trends and will allow short-term traders to profit from this important news. If you do decide to follow a fundamental strategy, you will want to be sure to keep an economic calendar around you at all times so you know when these reports are released. Most brokers will be able to provide you with real-time access to this kind of information via the Internet. In conclusion, even the trader who is a technical analyst will need to pay attention to the timing of these economic reports due to the volatility the market experiences in anticipation of the release of this economic data.

Technical Analysis
By far the more popular strategy, technical analysis of the FOREX trading market involves analyzing price trends. The only real difference between technical analysis in FOREX and technical analysis in equities is the general time frame that is involved in that FOREX markets are open 24 hours a day. Because of this, some forms of technical analysis that factor in time have to be modified so that they can work directly with the 24-hour FOREX market. Some of the most common forms of technical analysis used in FOREX are:

• Moving Averages
• Stochastics
• Bollinger Bands
• The Elliott Waves
• Fibonacci studies

These are but a few of the many technical indicators/methodology that one can use to develop a basic strategy. Many successful traders use some of the simplest indicators to build a very profitable strategy. Most brokers offer charting packages with these indicators already built into the software. Using the indicators a trader will develop a strategy that will provide trade entry and exit signals. The trader will use historical data to help in evaluating the various indicators and once they have a system developed they will test the FOREX Trading System with a demo account prior to trading real money.