Trading strategies

Types of currency trading strategies.

Currency trading strategies can fall into a couple of basic categories. The main reason is normally the driving force behind the signals that this strategies produce. The type of currency trading strategy that you choose is an entirely personal thing, but should be based upon comfort, and the overall trading results.

One type of currency trading strategy is based completely on the differential of two countries interest rates. What is meant by this is that if the interest rate of Great Britain happens to be 2%, and the interest rate of Japan is 0.5%, the trader would by British Pounds, and sell the Japanese Yen. The thinking behind this is that money tends to flow where it is treated better. With a higher interest rate and Great Britain, it should follow that there will be more investment in that country. As investors flood into the UK, it stands to reason that they will be buying the British Pound.

Another type currency trading strategies based upon the fundamentals of both countries. And while this somewhat ties in with the differential of interest rate type of strategy, it does take into account a much larger picture of economic information. The idea is to buying the currency of the country that is more likely to raise interest rates in the future that another. If you find that the economic numbers out of a particular country are better than another, you will apply that currency and sell the other one. Fundamental trading can be a bit tricky however, as it generally doesn't have a set entry or exit point.

One of the most common types of trading strategies in the currency market are systems that are based on technical analysis. Under this heading, there are literally hundreds and thousands of systems to choose from. These systems tend to incorporate a technical indicator, or group of them, with simple price action. They can be as basic as systems that incorporate support and resistance with trend lines, or a bit more complicated such as a system that incorporates the ADX, MACD and the RSI, along with price action and perhaps moving average or two.

The simple truth is that there is no "one size fits all" type of trading system out there for the currency trader to use. You simply have to try and figure out what works best for you personally. While it takes a little bit of trial and error, and diligent record-keeping, going through the process of finding the perfect system for your situation is the foundation for becoming a profitable trader.