How to build a currency trading strategy

1. Understanding technical analysis

Technical analysis involves using price charts and indicators to analyze market direction. Technical analysis helps you identify possible entry and exit points for your trading positions.
 

Contrary to fundamental analysis, technical analysis mainly focuses on market patterns and prices. Fundamental analysis, on the other hand, is about the factors that drive the market prices. These two analytical methods can be used independently or combined.
 

Technical analysis focuses on timing and price patterns, that’s why it is often considered a neutral tool. To find currency trading opportunities based on technical analysis, you need to analyse the current market price and identify possible target levels. While technical analysis does not guarantee outcomes, it provides a calculation of the possibilities for different market moves.

 

2.Importance of technical analysis

The majority of traders use technical analysis in determining the expected market direction. Market movements are not entirely random. When traders see an emerging pattern, there is a good chance that a lot of other people are also aware of it. You can consider the trend as something that is almost self-fulfilling. In that sense, you can say that traders help create the patterns found in market prices.

For an in-depth look into technical analysis, read our comprehensive technical analysis course.

 

4. Fundamental factors that affect currency prices

1. Natural disasters

Natural disasters like hurricanes, tsunamis and flooding can greatly impact a currency’s fundamental strength and weakness. A good example is the tsunami that hit Japan in 2010. It debilitated the country’s manufacturing sector and significantly disrupted the production of automakers and the mobile technology industry.
 

2. International trade

When demand for products and services from a specific country increases, the demand for that country’s currency also increases.
 

3. Economic output and growth

The country’s GDP is among the most important indicators of economic growth. It sums up the production of goods and services in the country providing information on the country’s performance and economic strength.
 

4. Inflation – This factor has two key indicators:

   1. Consumer Price Index – This measures the change in average cost of goods and services to consumers.

   2. Producer Price Index – This measures the change in the cost to produce goods and services for producers.
       

5. Interest rates
   Prevailing interest rates are probably one of the key factors that determine the value of a currency, because they determine the flow of global capital in and out of a country or economic region.  
    

6. Political conditions
   Usually, political instability impacts the demand for the country’s currency negatively. Investors tend to avoid countries and currencies in political turmoil.
    

7. Fiscal policies
   A country’s fiscal policies, including government spending, budget planning and taxation can influence investors’ decision on whether to invest or not.
    

8. Monetary policy
   Whatever monetary policies central banks adopt, they have a significant impact on short-term currency demands.

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