To begin with, you should forget about miracles: there are no wonders in Forex.
There was a regularity noticed: the way forex traders win differs from trader to trader, however, the way traders lose is always the same. The main reason for that is the huge variety of different tools improving your strategy and lack of clues on avoiding Forex mistakes.
You probably already know, that the strategy is the foundation of successful performance on Forex market. You have to determine the way you can earn money on Forex, find the most profitable Forex system for you. Every performance consists of 50% strategy and 50% of your capability of following the strategy. The vast majority of traders lose because of their strategy ignoring, not the strategy shortages. Patience, consistency and self-confidence are of huge importance when it goes about following the Forex strategy.
Building Your Own Best Forex System
Exploring the rich variety of different tools and methods available on Forex, a trader discovers the huge field for creativity. In most of the cases, a trader builds the strategy, following his own path; he is trying to find a set of best solutions for himself, facing different difficult choices and making mistakes. It is also possible to borrow a strategy and adjust it to your needs, making it a strategy that fits you the best. Overall, the strategy is changing together with the trader, who is acquiring new skills and knowledge.
The main purpose of this article is to demonstrate and describe all the Forex tools and profitable Forex systems on the market available. We divided them into two main groups and defined. It is necessary for you to study them thoroughly, so you will be aware of the whole pallet and be able to use the indicators in your strategy and find your personal most profitable FX system. As a result, you will come to the strategy that will help you to make the most profit.
Best Forex Trading Indicators
As one of the Dow Theory postulates say, the market reflects everything. Any factor that has an influence on demand or supply will be immediately reflected in the charts, and, as a matter of fact, in the price log.
The price charts are presented in a time-price table, where in most of the cases the price changes are reflected in form of Japanese candles. This method of noting the prices is widely used and not only on the Forex market. It was created around three hundred years ago. There are a lot of trading strategies based on reading the candles only, however, their credibility has been often asked. There is too much space left for ambiguous interpretation.
These strategies are universal and can be used in many markets and many time frames. Moreover, candlesticks representation is very simple in reading and analyzing, though pretty weak in precision. Nevertheless, we suggest this analysis being one of your fundamental arguments while making decisions.
No matter, if you are a day trader or a night trader: you always start with charts analysis and its interpretation. In fact, you also have to decide for yourself, whether you are a loose trader in terms of charts interpretation or the strict one, who is always following an algorithm and leaves no space for ambiguous statements. However, it is worth mentioning, that it is much safer for beginners to follow the set of rules, while analysing the charts and drawing the conclusions from that.
Most Profitable Forex Analysis Techniques
One of the foundations of the price analysis theory is that prices have their own special points, where they change the direction or, vice versa, strengthen and consolidate. Therefore, many traders avoid making transactions in close proximity to these points. These ranges are considered most unpredictable. The theory was named after the name of these price levels: support and resistance levels theory.
There is one common rule in support and resistance level trading formulated: if the price is breaking through and the candle closes far beyond the level, it tells us that the trend is definitely going to move further in line with the direction of breaking point.
In addition to support and resistance levels recognition approach, there are many different techniques and profitable Forex systems that are of much use in trading. Among them are: Fibonacci retracements technique, which compensates S&R theory; various chart patterns, point and figure analyses, market trends, Elliott waves and much more.
The fact that traders analyzing the same chart pattern notice different figures and, therefore, make different conclusions is also noticeable. This is something that makes technical analysis more art than science.
Experienced traders say that the tool, which employs more than 25 per cent of unexplained data (independent from any fundamental or technical theories), is too doubtful and cannot be counted among the most profitable FX systems. Taking an Elliott wave theory as a basis for your strategy we suggest not to explain the sequence of the waves by Fibonacci ratios. It is more than obvious, that after a big wave, there is another one coming with a smaller diapason. Everybody is able to notice a consistent pattern, but sometimes your mind might play a malicious trick with you. It probably happened to everyone, when you see a cloud in form of elephant head or a cliff with a human face. You see, what you want to see and your mind is helping with fulfilling the real picture. Sometimes it can lead to wrong conclusions. To summarize it up, we would like to warn you and suggest approaching these techniques with a distance.
Trends are Good
Tastes differ. The same applies to traders: all of them have their own specific favorite techniques and currency pairs, personal favorite time frames, and trading platforms. However, all Forex traders agree on one postulate: trends are good.
There are two Dow postulates, considered to be the fundamental principles of technical analysis: the market has a trend and it is the trend unless the price is reversing its direction. The trend itself is a constant price movement in one direction for a certain period of time. Due to their love to trend, Forex traders were given a lot of measuring tools: MACD, averages or stochastic were all created to help you in defining trend and its strength.
Traders basing their strategies on trend always buy, when the price goes up and sell when it goes down. However, they never make a transaction on the very peaks. The tools, mentioned above cannot recognize the trend in the very beginning, they need time to determine, whether it is a swing of a new trend or just a backwash of the previous one.
A horizontal trend or, in other words, a ranging market does not come hand in glove for traders. On the contrary, it makes them uncomfortable with their decisions, as the price in such a situation is ranging in a certain corridor and there is no clear trend. This situation is favorable neither for bears nor for bulls. Therefore, everyone is waiting for the market to break through the corridor and denote a trend without venturing and making a transaction.
Trend following strategies guarantee success without any doubts, they represent most profitable Forex systems. The only requirement is patience. These strategies fully pay off especially in the case of long-term players. Trends last months, some of them even years. It is important that you follow the plan and do not deviate from the trend. In such a case, in theory, following this profitable Forex system your annual return on investment might achieve 10-15%. In order to be a profitable trend following trader, you must be patient and possess significant funds in disposition. You must agree that making 10$ out of 100$ yearly will not satisfy you as much as 1 000$ out of 10 000$ would do.
It might be the case that following trend concept does not appeal to you, as it does not fit your strategy. You might be a short-term trader or just the one who does not want to rely fully on the trend. Even in such a case, we still strongly recommend keeping the trend in mind, reassessing it and making one of your basic indicators. In such a way you will create a most profitable FX system. Keep and the idea of a big picture always in mind, even while considering a short position.
Fundamental Analysis Tools
Fundamental analysis tools are the ones built upon main market mechanisms: supply and demand forces. Forex analysts basing their analyses on fundamental tools claim that prices are formed improperly at first. Only later the financial instrument is valued according to its real price.
Unlike technical analysis, fundamental tools do not involve price log reasoning. However, it still has common indicators with technical analysis, like support and resistance levels or trend following. Naturally, it does not rely on these indicators in the same way or on the same scale. In general, trading is more about technical analysis than a fundamental one. Technical analysis is of much more use and information provided, comparing to the fundamental one. The last one serves a supporting role and dominates as a tool only in some extraordinary strategies. It is impossible to create a profitable Forex system, basing only on fundamental tools.
Profitable Forex Tools
Fundamental analysis gained huge recognition on the stock exchange market long time before someone came up with an idea of price charts analysis and price models building. Of course, there is a huge difference between currency and stock exchange markets. Since in Forex market there are no company’s financial statements or balance sheets, traders have to analyze the overall country’s economy state. And this is where the problem lies. The correlation in stock exchange market is obvious: if the firm is doing well, its stocks’ prices increase while decreasing in the moments of downs or company crisis. The order of things is much more complicated in the case of currency exchange market. If the country’s GDP increases, involving the country’s prosperity, it won’t necessarily increase the relative price of the national currency. The same applies to other welfare signals.
Let us present a couple of examples. Imagine a central bank decreasing interest rates as a respond to a governmental decree issued. As an effect, the price of the currency decreases, stimulating export. The economy improves, though, its currency is getting weaker.
Another example represents an economic situation when the interest rate is near the zero point. In such a case, central bank implements aggressive monetary policy and injects a huge amount of money into a turnover in order to slow down inflation. Consequently, due to speculations on the market, most of the money end up offshore, what leads to deflation, and currency strengthen.
From the examples above, we can easily see that currency value is not that easy to define. There is a number of factors influencing currency price: monetary policy, international relations, global economics and even nature or unpredicted influence, sometimes called as God’s will. It makes fundamental tools unreliable and impossible for traders to base on them fully. Fundamental analysis is considered as an additional review of the market situation. Only together with technical analysis being a basis they create a most profitable Forex system.
Fundamental ideas supporters, however, created some interesting and unusual concepts, used in many strategies, which became most profitable FX systems. We describe a couple of them below.
Let us consider a trader, who is untiringly following financial news releases. He is acting also in accordance with the announced events. As a result, we get seldom transactions on a well-balanced account. The potential of such a trader on a Forex market is huge, especially, if he is an experienced one. This scheme is mostly based on tracking the news and drawing the conclusions from macroeconomic theory, which is a fundamental tool.
Now, imagine a trader, having low yield investments. He is trading on such currency pairs, where one currency has low-interest rates and the opposite has high interest rates. These conditions make the swap positive, allowing earning more in long term, provided that you are patient and feel comfortable with deploying your funds for a long time. This is another example of making money using fundamental tools.
Emotions Based Model
One of the approaches, used widely by fundamentalists on the stock market can find its application on the foreign exchange market, making one of the most profitable Forex systems. If supply and demand is the main driving force of the market, then it must be a considerable player, who is dictating the course of the market. Supply and demand are driven by investors’ mood and attitude, which was named in psychology as market sentiment. There could be bullish and bearish market sentiments, depending on the route of the price.
Due to particular features of the stock exchange and Forex markets, while using the same tools we have to use different approaches. In stock, volume increase together with noticeable decrease of open positions’ number indicates the change of market sentiment direction. While in currency market, it is impossible to track the number of open traders or the trading volume, mainly because of its over-the-counter market nature. Therefore, there was a report created, called Commitment of Traders report. It allows traders to determine the market sentiment, measuring the net amount of open positions. This report is released every week by US Commodity Futures Trading Commission. Following the pieces of advice given, you would not define entry or exit point but would be able to discover the mood of the market. You can easily improve the strategies described, using elements of technical analysis, following the trend or catching the waves.
Best Forex System Conclusion
We cannot tell you, what is the best trading strategy, as it is an extremely personal issue. Aggressive traders cannot deposit money and wait for a couple of months for return on their investments, while careful traders will not be able to make daily 15-minute transactions. Moreover, there are many profitable schemes and strategies and tips for Forex trading and it will definitely take you some time to find yours.
Many beginning traders take a strategy and modify it or create a new one from scratch, or do both. In any case, you have to understand the strategy fully as well as the tools applied. Figuring out your own approach and creating your strategy is an art. You have to use different tools and settings, try different currency pairs and time frames before you find the most profitable for you.
It is not about a profitability of a strategy, it is always about a profitability of a trader.