Various Forex trading strategies have different objectives. Those who eschew Technical Analysis rely upon fundamental analysis and macro-economic acumen in order to accurately predict future currency movements based upon a nation’s economic and political policies. The most famous Forex trade predicated on this strategy type was when George Soros “broke the Bank of England” by heavily shorting the British Pound. His ability to correctly analyze the nuances of the British economy at the time allowed for what some would term obscene profits.

Those who employ Forex trading strategies based upon Fundamental Analysis must be constantly attuned to the economic and political policies of the major nations of the world. Furthermore, they must be of a patient mindset, willing to hold positions for a long duration while waiting for their thesis to play out. Most Forex traders seek quicker profits and must turn to Technical Analysis to formulate their Forex strategies.  Fundamental Analysis cannot predict moment-to-moment volatility.

Technical Analysis seeks to identify what short-term traders are most apt to do in the near-term future. Technical Analysis combines math with psychology and attempts to predict the behavior of crowds. In essence, the Forex market is a large crowd that consequently exhibits behaviors that have been quantified by research conducted by sociologists and psychologists. Technical Analysis involves the ability to quickly read and recognize chart patterns, which serve as signals to either buy or sell a given currency.

Several decades ago, large institutional Forex trading firms decided to employ a large staff of PhD’s to develop and run sophisticated software, which served to constantly analyze both technical indicators as well as fundamental developments. This endeavor cost millions of dollars and was available only to the highest net-worth investors. Over the course of time, the expense of these sophisticated Forex trading software programs has come way down. The best of these software packages, even including names like <product>, are now well within the reach of even the smallest trader.

Forex trading has a diverse range of benefits and can be educational as well as lucrative. By following the various domestic and international events that drive the value of your Forex positions you become a more knowledgeable and worldly individual. Adding a good Forex trading software to the mix prevents you from having to stay glued to the computer screen hour-after-hour; you devise the strategy and let the Forex trading software do the grunt work. The availability of sophisticated software and the convenience of the Internet have created a prime time for individual Forex warriors.

Good Forex trading strategies will yield results over the course of time.  Within a given day’s, week’s or month’s trades, anything can happen.  Smart Forex traders understand this and devise money management parameters that allow them to absorb temporary adverse results retaining sufficient funds to remain in the game.  Money management often proves to be the most critical factor within an overall Forex trading strategy.

A good initial rule of thumb is not to risk more than 3% of your entire account value on any one trade.  As you progress within the Forex arena it is acceptable to increase this threshold to up to 7%.  However, until you develop a higher level of expertise, it is advisable to strictly remain within this 3% limit and avoid the temptation to exceed it no matter how attractive any one Forex trade opportunity appears.

By limiting your exposure for loss to 3% of your portfolio from any one bad trade, you are able to have staying power and emerge from inevitable bad streaks fully able to capitalize on the good streaks, which are always sure to come.  Reckless new participants often risk too much, and after just a few initial bad trades, see their account balance depleted.  Ensure you do not fall victim to this scenario.

The next aspect of money management relates to what is termed as “leverage.”  In Forex trading, leverage can be either your best friend or your worst enemy.  To understand leverage, think of a traditional home mortgage.  Assume you are buying a house for $300,000.  You put down $60,000 down payment and borrow the other $240,000 from the bank.  Further assume you sell this house for $360,000.  You made $60,000 profit, and it was done with only investing $60,000 of your own cash.  This represents a whopping 100% ROI (return on investment).

However, assume that you paid for the house in cash.  In this scenario your $60,000 profit would be return on invested cash of $300,000, thus representing a much lower 20% return on investment.  The same exact phenomenon occurs in Forex trading; however, the levels of leverage that can be employed are much greater than seen in home mortgages.  In Forex trading, some accounts allow you to lever 400:1.  This means you can buy $400,000 worth of a given currency while only investing $1000 of your own cash.

In this scenario, the smallest of gains in the currency you bought can translate to huge profits.  A 1% movement would yield $4000 in profits coming from only a $1000 cash investment.  However, it is critical to analyze the other side of the equation.  A .33% movement to the downside would cause immediate loss of your entire $1000 investment.  Both gains as well as losses are magnified when using leverage.

New Forex traders are strongly urged to use leverage sparingly on initial trades.  Many Forex trading software packages have built in limiters to prevent you from creating too much exposure from any one given trade.  Before you make that first Forex trade, make sure you have fully thought out your money management plan

Fundamental Analysis, as its name suggests, involves scrutiny of the core underlying fundamental factors that impact the worth of a nation’s currency.  There is a long list of these factors, with the primary ones being inflation, unemployment, money supply and GDP.  Take for example a country’s money supply.  The law of supply and demand dictates that when there is more of something, then it is worth less.  If a country prints a large amount of money, then its value as gauged against other currencies will go down.

Fundamental Analysis requires both a deep degree of understanding of macro-economics, along with close attention to developing world economic events.  Political events, natural disasters and the foreign policy of a nation can also dramatically affect the valuation of a currency.  There is no quick money to be made using Fundamental Analysis since the various forces underlying fundamental currency valuation take a long time to play out.  Forex traders relying upon Fundamental Analysis need to be able to hold their positions for months, if not longer.

The second category of “Technical Analysis” does not take into consideration any of the macro economic or political factors upon which fundamental analysis rests.  Forex traders using technical analysis attempt to profit from quick short-term movements of currencies.  These second-to-second movements are not driven by tangible events.  Technical Analysis seeks to notice patterns and signals which, according to past occurrences, portend to a high likelihood of a future event happening.

Technical Analysis relies heavily upon the ability to read charts outlining recent movements of a currency and notice a pattern, which indicates a probability that the currency will move a certain way as it historically has after the given chart pattern emerged.  There are myriad patterns that have been quantified to be either a bearish (bad for the short-term prospects of a currency) or bullish (good for the short-term prospects of a currency) indicators.  The trick is to be able to quickly notice that a pattern or signal has occurred and rapidly act upon it.

The most sophisticated Forex traders have realized that Forex trading software is able to both track fundamental developments, as well as vigilantly be on the lookout for either bullish or bearish signals and patterns.  The human mind can only process so much information at once.  Forex traders who attempt to manually trade often end up missing the brief window that a good technical indicator presents.  Now that the prices associated with even the best of these Forex trading software packages are within anyone’s range, there is no excuse for trying to go it alone in your quest to conquer the currency market.